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, 1998
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 (I.R.S. Employer Identification
or organization) 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 12, 1999, was $76,789,064.
3,722,139 shares outstanding as of March 12, 1999
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Corporation's Annual Report to Stockholders for the year ended
December 31, 1998, 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 11, 1999, are incorporated into Part III hereof.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
General
Competition
Loan Commitments
Deposit Concentrations
Employees
Securities Act Guide 3. Statistical
Disclosure by Bank Holding Companies
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
PART II
Item 5. Market for the Bank's Common Stock and
Related Security Holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Bank
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
Signatures
Index to Consolidated Financial Statements
Index to Exhibits
<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 surrounding 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
<PAGE>
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
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 twelve full service offices, nine are located
in Montgomery County, one in the City of Radford, one in the Town of Dublin
and one in Wythe County. One paying and receiving office is located in
Montgomery County.
Refer to the Corporation's 1998 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
six 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,
1998 1997
<S> <C> <C>
Commercial $ 85,536 64,247
Consumer 66,526 66,059
Real estate - commercial 65,165 56,404
Real estate - construction 16,686 8,657
Real estate - mortgage 94,686 95,703
Total loans $ 328,599 291,070
</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.
<PAGE>
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.
Except for unused home equity lines totaling $27,008 at December 31, 1998, and
$14,526 at December 31, 1997, the Corporation may not require collateral or
other security to support the following financial instruments with credit risk
(in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
Contract Amounts
Financial instruments whose contract amounts
represent credit risk:
<S> <C> <C>
Commitments to extend credit $ 86,583 63,194
Standby letters of credit and
financial guarantees written 6,252 4,300
</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 212 full-time equivalent employees as of
December 31, 1998, of which 66 were officers.
Securities Act Guide 3. Statistical Disclosure by Bank Holding Companies. The
following schedules are included:
<PAGE>
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
1998
Average
Average Income/ Yield/
(thousands) Balance Expense Rate
<S> <C> <C> <C>
ASSETS
Loans (Net of unearned income) (1)(2) $ 312,369 29,980 9.60%
Securities:
Taxable 49,206 3,082 6.26
Nontaxable (2) 46,425 3,452 7.44
Total securities 95,631 6,534 6.83
Federal funds sold 9,518 507 5.33
Total interest-earning assets 417,518 37,021 8.87
Allowance for loan losses (4,401)
Cash and due from banks, noninterest-
bearing 10,415
Bank premises and equipment, net 12,642
Other real estate owned 37
Other assets 4,788
Total assets $ 440,999
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposit:
Demand and savings $ 105,744 2,958 2.80%
Time 173,533 9,801 5.65
Certificates of deposit of
$100,000 and over 49,607 2,870 5.79
Total interest-bearing deposits 328,884 15,629 4.75
Federal funds purchased and securities
sold under agreements to repurchase 6,496 261 4.02
Other borrowed funds 22,612 1,283 5.67
ESOP debt 874 76 8.70
Subordinated capital notes 0 0 0.00
Total interest-bearing liabilities 358,866 17,249 4.81
Demand deposits, noninterest-bearing 36,239
Other liabilities 3,539
Stockholders' equity 42,355
Total liabilities and stockholders'
equity $ 440,999
Interest income and rate earned $ 37,021 8.87%
Interest expense and rate paid 17,249 4.81
Interest rate spread 4.06
NET INTEREST INCOME AND NET YIELD
ON AVERAGE EARNING ASSETS $ 19,772 4.74%
</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 1998.
<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 deposits:
Demand and savings $ 96,485 2,823 2.93%
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 and savings $ 91,380 2,675 2.93%
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>
RATE/VOLUME VARIANCE
1998 Compared to 1997 1997 Compared to 1996
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 $ 3,021 3,231 (210) 1,732 2,068 (336)
Securities:
Taxable (559) (417) (142) 643 534 109
Nontaxable (144) (12) (132) (7) 72 (79)
Federal funds sold 163 168 (5) 156 155 1
Total 2,481 2,970 (489) 2,524 2,829 (305)
INTEREST EXPENSE
Demand and savings 135 265 (130) 148 148 0
Time (270) (40) (230) 574 578 (4)
Certificates of deposit
of $100,0000 and over 722 749 (27) 292 262 30
Federal funds purchased
and securities sold
under agreements to
repurchase 11 27 (16) 21 16 5
Other borrowed funds (102) (105) 3 811 840 (29)
ESOP debt (12) (6) (6) (30) (47) 17
Subordinated capital notes 0 0 0 (67) (33) (34)
Total 484 890 (406) 1,749 1,764 (15)
Net interest income $ 1,997 2,080 (83) 775 1,065 (290)
</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) 1998 1997 1996
<S> <C> <C> <C>
U.S. Treasury $ 7,164 8,162 5,647
U.S. Government agencies and
corporations 19,624 47,020 37,989
States and political subdivisions 11,648 3,070 4,047
Other securities 18,796 4,604 7,203
Totals $ 57,232 62,856 54,886
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY AT AMORTIZED COST
December 31,
(thousands) 1998 1997 1996
<S> <C> <C> <C>
U.S. Treasury $ -- -- --
U.S. Government agencies and
corporations -- -- 500
States and political subdivisions 38,322 42,360 42,394
Other securities 30 60 195
Totals $ 38,352 42,420 43,089
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITIES--MATURITY/YIELD SCHEDULE
As of December 31, 1998
Securities Available-for-Sale
Approximate Taxable
Amortized Fair Equivalent
(thousands) Costs Values Yield(1)
<S> <C> <C> <C>
U.S. Treasury:
Within 1 year $ 3,088 3,110 6.27
1 through 5 years 2,001 2,047 6.00
6 through 10 years 2,057 2,092 6.02
Total 7,146 7,249 6.12
U.S. Government
agencies and corporations:
Within 1 year 400 407 8.58
1 through 5 years 4,600 4,619 5.75
6 through 10 years 12,556 12,640 6.74
Over 10 years 1,870 1,873 6.27
Total 19,426 19,539 6.50
State and political
subdivisions:
Within 1 year 100 100 5.59
1 through 5 years 2,729 2,785 7.48
6 through 10 years 5,691 5,783 6.49
Over 10 years 2,917 2,980 6.60
Total 11,437 11,648 6.75
Other securities:
Within 1 year 499 509 10.00
1 through 5 years 15,298 15,292 4.99
6 through 10 years 613 611 6.22
Over 10 years 2,384 2,384 7.05
Total 18,794 18,796 5.43
$ 56,803 57,232 6.15
</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, 1998
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 3,330 3,357 7.10
1 through 5 years 21,977 22,652 7.52
6 through 10 years 12,736 13,316 7.55
Over 10 years 279 286 7.90
Total 38,322 39,611 7.49
Other securities:
Within 1 year 30 30 9.80
1 through 5 years 0 0 0.00
6 through 10 years 0 0 0.00
Over 10 years 0 0 0.00
Total 30 30 9.80
$ 38,352 39,641 7.49
</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,
1998 1997 1996
% of % of % of
(thousands) Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 85,536 26.0 64,247 22.0 56,461 20.7
Consumer 66,526 20.3 66,059 22.7 62,906 23.0
Real estate - commercial 65,165 19.8 56,404 19.4 52,232 19.1
Real estate - construction 16,686 5.1 8,657 3.0 4,926 1.8
Real estate - mortgage 94,686 28.8 95,703 32.9 96,856 35.4
$ 328,599 100.0 291,070 100.0 273,381 100.0
</TABLE>
<TABLE>
<CAPTION>
TYPES OF LOANS
December 31,
1995 1994
% of % of
(thousands) Amount Total Amount Total
<S> <C> <C> <C> <C>
Commercial $ 52,374 20.7 42,237 19.4
Consumer 61,888 24.5 54,155 24.8
Real estate - commercial 52,075 20.6 49,858 22.9
Real estate - construction 9,600 3.8 7,936 3.6
Real estate - mortgage 76,505 30.3 63,831 29.3
$ 252,442 100.0 218,017 100.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOAN MATURITIES AND INTEREST SENSITIVITY
As of December 31, 1998
One
Within Through Over
(thousands) One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial:
Fixed interest rates $ 7,426 19,010 17,883 44,319
Floating interest rates 40,898 319 --- 41,217
Total 48,324 19,329 17,883 85,536
Real estate-commercial:
Fixed interest rates 3,215 5,714 17,649 26,578
Floating interest rates 35,243 2,783 561 38,587
Total 38,458 8,497 18,210 65,165
Real estate-construction:
Fixed interest rates 499 2,213 4,158 6,870
Floating interest rates 9,816 --- --- 9,816
Total 10,315 2,213 4,158 16,686
$ 97,097 30,039 40,251 167,387
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NONPERFORMING ASSETS AND PAST DUE LOANS
December 31,
(thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,109 893 573 1,769 857
Restructured loans -- -- -- -- --
Other real estate owned 30 98 185 387 444
Total nonperforming assets 1,139 991 758 2,156 1,301
Accruing loans past due
90 days $ 161 196 595 43 365
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA/RECORDED INTEREST ON NONACCRUAL LOANS
(thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Pro forma interest-nonaccrual
loans $ 105 92 60 161 90
Recorded interest-nonaccrual
loans $ 1 3 3 1 1
</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) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
AVERAGE LOANS OUTSTANDING $ 312,369 278,824 257,571 234,904 209,668
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $ 4,291 4,179 3,988 3,815 3,471
Provision for loan losses 1,135 550 595 300 360
5,426 4,729 4,583 4,115 3,831
Loans charged off:
Commercial 507 42 122 27 80
Consumer 441 402 402 326 317
Real estate - commercial -- 25 21 12 55
Real estate - construction -- -- -- -- --
Real estate - mortgage 22 159 15 -- 64
Total loans charged off 970 628 560 365 516
Recovery of loans previously
charged off:
Commercial 54 17 29 36 80
Consumer 130 134 125 142 155
Real estate - commercial -- 37 2 24 210
Real estate - construction -- 2 -- -- --
Real estate - mortgage -- -- -- 36 55
Total recoveries 184 190 156 238 500
Net loans charged off 786 438 404 127 16
Balance, end of period $ 4,640 4,291 4,179 3,988 3,815
Net charge-offs to average
loans outstanding 0.25% 0.16 0.16 0.05 0.01
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31,
(thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial $ 2,388 1,218 961 652 603
Consumer 841 792 487 391 208
Real estate - commercial 418 649 738 412 242
Real estate - construction 58 161 28 69 11
Real estate - mortgage 621 688 743 612 248
Unassigned portion of allowance 314 783 1,222 1,852 2,503
$ 4,640 4,291 4,179 3,988 3,815
</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, 1998 is adequate to cover potential
loan losses inherent in the loan portfolio.
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT MATURITIES
As of December 31, 1998
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 $ 8,481 5,727 18,399 15,937 48,544
All other deposits 102,158 54,392 54,877 126,286 337,713
Total deposits $ 110,639 60,119 73,276 142,223 386,257
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
As of December 31, 1998
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 $ 121,188 91,028 75,996 40,924 329,136
Loans
Securities:
Available-for-sale,
at fair value 4,923 14,913 26,963 10,433 57,232
Held-to-maturity,
at amortized cost 1,608 4,092 25,800 6,852 38,352
Other interest-earning
assets 10,689 -- -- -- 10,689
Total interest-
earning assets $ 138,408 110,033 128,759 58,209 435,409
INTEREST-BEARING LIABILITIES
Certificates of deposit
and other time deposits
of $100M and over $ 15,537 18,715 14,292 -- 48,544
Time 50,857 65,157 56,315 39 172,368
All other deposits 68,097 24,903 33,204 -- 126,204
Securities sold under
agreements to
repurchase 6,650 -- -- -- 6,650
Other borrowed funds 10,283 -- 9,963 1,366 21,612
Total interest-
bearing
liabilities $ 151,424 108,775 113,774 1,405 375,378
Interest sensitivity
gap per period $ (13,016) 1,258 14,985 56,804 60,031
Cumulative interest
sensitivity gap (13,016) (11,758) 3,227 60,031 --
</TABLE>
Refer to the Bank's 1998 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 twelve 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.
11. Wytheville Office, 280 West Main Street, Wytheville, Virginia,
containing 3,000 square feet.
12. South Main Blacksburg Office, 1206 South Main Street, Blacksburg,
Virginia, containing 1,100 square feet.
Paying and Receiving
13. 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, 11, 12 and 13 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.
<PAGE>
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 1998.
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 1,062 stockholders of record as of
December 31, 1998, holding 3,722,139 shares of the authorized 10,000,000
shares. The Corporation's stock began appearing on the Nasdaq Stock Market
under the symbol FNBP on July 7, 1998. Previously, the stock appeared on the
over-the-counter bulletin board under the same symbol. 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 1998 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 1998 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 1998 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.
<PAGE>
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 1998 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 1998
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 1998
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, 1998 and 1997
Consolidated Statements of Income - Years ended December 31, 1998, 1997,
and 1996
Consolidated Statements of Comprehensive Income - Years ended December
31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
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 1999 Annual Meeting of Stockholders under the heading
"Election of Directors."
<PAGE>
Information on executive officers is incorporated by reference from the
Corporation's Proxy Statement for the 1999 Annual Meeting of Stockholders
under the heading "Executive Officers of the Corporation."
Election of Directors. A total of 2,548,241 shares of a possible 3,384,015
shares or 75.3 percent of eligible shares were voted at the May 12, 1998,
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 1999 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, termination, 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 1998 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 1999 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."
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, 1999.
Executive Officers. The persons currently serving as executive officers of
the Corporation and their security ownership, are as follows:
<PAGE>
Percent of
Number Shares Owned Outstanding
Name (Age) Title as of 3/5/99(A)(B) Shares
Samuel H. Chairman & Chief 147,343 3.96
Tollison (66) Executive Officer
Julian D. President & Chief 42,174 1.13
Hardy, Jr. (49) Administrative Officer
(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 1998 Employee Stock Ownership Plan allocation.
Directors. Information on security ownership of directors is incorporated by
reference from the Corporation's Proxy Statement for the 1999 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 1999 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 1998.
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/Julian D. Hardy, Jr.
Julian D. Hardy, Jr.
President & Chief Administrative Officer
By: s/Daniel A. Becker
Daniel A. Becker
Chief Financial Officer
Date: March 29, 1999
<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 29, 1999
Kendall O. Clay
s/Daniel D. Hamrick March 29, 1999
Daniel D. Hamrick
s/Julian D. Hardy, Jr. March 29, 1999
Julian D. Hardy, Jr.
s/Joan H. Munford March 29, 1999
Joan H. Munford
s/Samuel H. Tollison March 29, 1999
Samuel H. Tollison
<PAGE>
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 1998 Annual Report to Stockholders included within this document
as an Exhibit:
Independent Auditors' Report
Consolidated Balance Sheets --
December 31, 1998 and 1997
Consolidated Statements of Income -- Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Comprehensive Income -- Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Changes in
Stockholders' Equity -- Years Ended
December 31, 1998, 1997, and 1996
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)(i) Articles of Incorporation
Registrant's Articles of Incorporation, filed with the Commission
as Exhibit 3.1 to the Annual Report on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
(3)(ii) Registrant's Bylaws
Registrant's Bylaws, filed with the Commission as Exhibit 3.2 to
the Annual Report on Form 10-K for the year ended December 31,
1997, is incorporated herein by reference.
(10) Material Contracts
(10)A 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. This
agreement was terminated under the terms of the Consulting and
Noncompetition Agreement referred to in Exhibit (10)D below.
(10)B 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)C Change in control agreements with eight 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:
<PAGE>
(1) Carol H. Brockmeyer, Senior Vice President, Director,
Relationship Banking, dated July 1, 1998
(2) Darlene S. Lancaster, Senior Vice President, Manager,
Mortgage Loan Department, dated August 25, 1997
(3) R. Bruce Munro, Senior Vice President, Chief Credit
Administration Officer, dated August 25, 1997
(4) Woody B. Nester, Senior Vice President, Cashier, dated
August 25, 1997
(5) Fred L. Newhouse, Jr., Senior Vice President, Branch
Administrator, dated August 25, 1997
(6) Peter A. Seitz, Executive Vice President, dated August 25,
1997
(7) Perry D. Taylor, Senior Vice President, Comptroller, dated
August 25, 1997
(8) Litz H. Van Dyke, Executive Vice President, dated August 25,
1997
(10)D Consulting and Noncompetition Agreement With Put Option dated
January 15, 1999, between Samuel H. Tollison and Registrant.
(13) 1998 Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
CONSULTING AND NONCOMPETITION AGREEMENT
WITH PUT OPTION
THIS AGREEMENT dated January 15, 1999 is by and between FNB Corporation, a
Virginia corporation and bank holding company (the "Corporation") which owns
all of the outstanding stock of First National Bank, a national banking
association headquartered in Christiansburg, Virginia (the "Bank") and
Samuel H. Tollison, who resides at 3180 Fairview Church Road, Riner,
Virginia 24149 (the "Consultant").
W I T N E S S E T H:
WHEREAS, the Consultant has served as a full-time employee of First National
Bank and FNB Corporation, most recently holding the position of President
and Chief Executive Officer of the Corporation;
WHEREAS, the Consultant announced his retirement from Corporation effective
December 31, 1998;
WHEREAS, the Corporation desires to retain the Consultant to perform special
projects for the benefit of the Corporation and/or Bank which the Consultant
is willing to accept on the following terms.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
promises set forth in this Agreement and other good and valuable
consideration, the Consultant and Corporation agree as follows:
1. Termination of Employment Agreement. By execution hereof, the Consultant
resigns his executive employment with the Corporation and the Consultant
and Corporation terminate the Consultant's Employment Agreement dated
September 11, 1997 with the Corporation on the terms set forth therein,
each act effective December 31, 1998. Notwithstanding the foregoing, the
Consultant shall remain a director of the Corporation and the Bank
through May 31, 1999 and he shall retain the titles as Chairman,
President and CEO of the Corporation until such time, unless otherwise
mutually agreed.
2. Engagement and Retention. The Corporation hereby engages and retains the
services of the Consultant, as an independent contractor, to provide
consulting assistance on the duties outlined in this Agreement. The
Consultant accepts his engagement and retention on these terms.
3. Term. This agreement shall take effect on January 1, 1999 and shall
terminate on December 31, 2003, if not sooner as provided hereafter.
<PAGE>
4. Duties of the Consultant. In addition to the other duties imposed on the
Consultant in this Agreement, during the term hereof, the Consultant
shall, upon the request of the Corporation's Chief Executive Officer or
President:
a) Participate in any due diligence analysis required in connection
with a proposed merger, acquisition, branch purchase or sale, or
similar corporate transactions involving the Corporation or the
Bank.
b) Counsel the Corporation or the Bank on strategic planning matters;
c) Assist the Corporation in promoting the stock of FNB Corporation
with market makers, institutional investors and other interested
parties;
d) Any other aid for which the Consultant may be reasonable expected
to have the requisite knowledge and experience to assist the
Corporation or the Bank.
5. Noncompetion. During the term hereof, the Consultant shall not,
directly or indirectly, engage or participate in, become an officer or
director of, or render advisory or other services for, or in connection
with any entity primarily engaging in the delivery of financial services
(including any such services approved for national banks by the
Comptroller of the Currency) in the Corporation's trading area (as
constituted at any time during the Consultant's engagement with FNB).
6. Relationship of the Parties. Nothing contained in this Agreement shall
be construed to constitute the Consultant as an employee of the
Corporation or the Bank. Furthermore, neither party shall have the
authority to bind each other in any respect. The Consultant shall retain
the exclusive authority to manage the manner and means of his performance
hereunder. At such times as the Consultant is not obligated to perform
his duties consistent with the terms of this Agreement, he may render his
services, in such manner and to such persons, firms and corporations as
he deems advisable, subject to the noncompetition provisions hereof.
7. Retainer. For the Corporation's access to the Consultant's time, talent
and services, the Corporation shall pay the Consultant a retainer of
Fifty Thousand ($50,000) Dollars a year during the term of this
Agreement. For the Consultant's agreement to refrain from assisting any
competitor of the Corporation during the term of this agreement, the
Corporation shall pay the Consultant a retainer of Fifty Thousand
($50,000) Dollars a year. Each retainer shall be paid monthly in equal
installments during the term of this Agreement. In addition, the
Corporation shall reimburse the Consultant for any out-of-pocket expenses
incurred by the Consultant in carrying out his duties hereunder.
8. Benefits. The Consultant shall receive no benefits customarily paid to
employees due to his service hereunder. Nevertheless, the Consultant may
receive accrued benefits customarily paid to retired employees of the
Corporation (or Bank).
<PAGE>
9. Automobile. The Corporation shall furnish to the Consultant an
automobile of the Consultant's choosing for his exclusive use during the
term hereof. The Corporation shall transfer title to such automobile to
the Consultant on the termination of this Agreement.
10. Facilities and Support. During the term hereof, the Corporation shall
make available to the Consultant adequate office space to perform his
services. The Corporation shall also provide equipment and staff support
for the Consultant as the Corporation deems reasonably necessary for the
Consultant to complete his duties hereunder. The Consultant may, in his
discretion, utilize his own equipment, support and supplies.
11. Bank Documentation; Confidentiality. The Corporation shall furnish
access to Consultant to confidential and proprietary documentation in
order to carry out his duties hereunder. The Consultant acknowledges the
confidential and proprietary nature of this documentation and shall not,
in any manner, divulge or communicate the substance of the confidential
and proprietary documentation shared with him. The Consultant further
acknowledges that the Corporation will be irreparably harmed by the
disclosure of confidential and proprietary information and specifically
authorizes the Corporation to obtain injunctive relief, among other
remedies, for a breach of this Agreement.
12. Put Option. Should the Consultant desire to sell more than 1000 shares
of the Corporation's stock in any calendar month, the Consultant may
require the Corporation to repurchase the Consultant's stock in the
Corporation for sale (the "put option") at a mutually agreed upon price,
but not less than the price per share for which the last executed trade
which took place as reported by the NASDAQ national market exchange.
Notwithstanding the foregoing, should the Corporation announce a merger,
sale or acquisition of the Corporation (the "Merger Announcement") within
one year after the Consultant's exercise of the put option on any of his
shares of the Corporation, the Consultant shall be entitled to additional
compensation for all shares repurchased by the Corporation within one
year period before the Merger Announcement. This additional compensation
shall equal the difference between the per share sales price of the
Corporation's stock at the end of trading on the first trading day after
the Merger Announcement and per share sales price on the date of each
exercise of the put option times the number of shares repurchased on
each such exercise date. The shares subject to the put option shall
include all shares owned by the Consultant, whether directly, indirectly
or through beneficial ownership (including the ESOP sponsored by the
Corporation).
<PAGE>
13. Termination. This Agreement may be immediately terminated upon the
occurrence of one of the following:
a) If the Consultant is found guilty of a crime involving moral
turpitude;
b) If the Consultant is determined by a bank regulator to be either
temporarily or permanently disqualified from working in the
business of banking;
c) If the Consultant dies;
d) If either party defaults in the performance of any of its
obligations under this Agreement and notice shall be given by the
non-defaulting party to the defaulting party if such default shall
not have been cured within ten (10) days following the receipt of
such notice by the defaulting parties;
e) The mutual execution of a written agreement of the parties hereto,
which termination shall not take effect immediately but at least 30
days after the date of the agreement as the parties provide
therein.
14. Assignment or Delegation of Duties. The Consultant may not assign his
interest or delegate his duties hereunder without the express written
consent of the Corporation.
15. Miscellaneous.
a) Benefit. This Agreement shall bind the Corporation and the
Consultant, their respective successors and assigns.
b) Entire Agreement. This Agreement contains the entire agreement of
the parties and may not be modified except in writing signed by the
party against whom enforcement of any waiver, change, extension,
modification or discharge is sought.
c) Waiver Not Continuing. The waiver by either party of a breach or a
violation of any provision of this Agreement shall not operate as
or be construed as a waiver of any subsequent breach hereof.
d) Notice. Any notice required or permitted to be given hereunder
will be sufficient if furnished in writing, postage prepaid, to the
following addresses:
To FNB Corporation:
Julian D. Hardy, Jr.
FNB Corporation
PO Box 600
Christiansburg, VA 24068
To Samuel H. Tollison:
Samuel H. Tollison
3180 Fairview Church Road
Riner, VA 24149
<PAGE>
e) Governing Law. This Agreement shall be interpreted, construed and
governed according to the laws of the Commonwealth of Virginia.
WITNESS the following signatures and seals:
FNB Corporation
(SEAL)
Julian D. Hardy, Executive Vice President
(SEAL)
Samuel H. Tollison
FNB CORPORATION
ANNUAL REPORT TO STOCKHOLDERS
1998
<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 Comprehensive 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,
1998 1997 1996 1995 1994
Selected income statement data
(in thousands):
<S> <C> <C> <C> <C> <C>
Interest income $ 35,653 33,114 30,526 28,330 24,089
Interest expense 17,249 16,764 15,016 14,081 11,022
Net interest income 18,404 16,350 15,510 14,249 13,067
Provision for loan
losses 1,135 550 595 300 360
Noninterest income 3,001 2,291 2,034 1,869 1,704
Noninterest expense 12,682 11,602 10,254 9,695 9,010
Income tax expense 1,657 1,324 1,491 1,449 1,394
Net income $ 5,931 5,165 5,204 4,674 4,007
Per share data:
Net income $ 1.65 1.45 1.47 1.35 1.17
Cash dividends declared .63 .38 .55 .50 .66
Book value per share 12.32 11.29 10.13 9.22 7.73
Average number of shares
outstanding 3,599,168 3,561,504 3,525,645 3,479,159 3,427,281
Selected balance sheet data at year end
(in thousands):
Total securities $ 95,584 105,276 97,975 87,962 86,013
Loans, net 323,959 286,767 269,145 248,305 213,899
Allowance for loan
losses 4,640 4,291 4,179 3,988 3,815
Total assets 461,916 428,174 395,324 360,533 323,876
Deposits 386,257 352,545 335,402 315,777 286,130
Subordinated capital
notes - - - 937 1,044
Stockholders' equity 44,401 40,213 35,828 32,191 26,777
Selected ratios (in percentages):
Return on average assets 1.34 .26 1.41 1.38 1.29
Return on average equity 14.00 13.59 15.20 15.64 14.93
Dividend pay-out ratio 38.44 26.08 36.99 37.27 56.25
Average equity to average
assets 9.60 9.31 9.26 8.82 8.68
</TABLE>
NOTES: 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 1998.
<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, a bank
holding company, and its wholly-owned subsidiaries (collectively, the
"Corporation"). The primary subsidiary of FNB Corporation is First National
Bank (the "Bank"). 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.
Net Income
Net income for 1998 was $5,931 compared to $5,165 for 1997 and $5,204 for
1996. This amounted to an increase of 14.8% for 1998 compared to a decrease
of 0.8% for 1997. Earnings per share were $1.65 for 1998 compared to $1.45
for 1997 and $1.47 for 1996. The increase in earnings for 1998 was primarily
the result of increases in net interest income, which in turn stemmed
primarily from an increase in volume. 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 per share earnings for 1997 and 1996 have been restated to reflect the
effects of a 10% stock dividend declared in the third quarter of 1998 and a
two-for-one stock split effected in the form of a 100% stock dividend declared
in the second quarter of 1997.
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
1998 was $18,404, up 12.6% from $16,350 for 1997, which was up 5.4% from
$15,510 for 1996. The increases in net interest income in both 1998 and 1997
were primarily the result of growth in average earning assets, partially
offset by growth in interest bearing liabilities. Average earning asset
growth totaled $30,016 or 7.75% for 1998 and $30,842 or 8.71% for 1997. The
largest component of the increase in earning assets was average loans,
reflecting increases of $33,545 or 12.03% for 1998 and $18,741 or 7.28% for
1997. Growth in the loan portfolio was concentrated primarily in commercial
and industrial loans and in loans secured by real estate, reflecting combined
average increases of $32,436 and $19,160 for 1998 and 1997 respectively.
Average securities decreased $6,642 or 6.51% for 1998 and were used to
partially fund the increased loan demand. Average securities increased $9,192
or 9.91% for 1997 and were used as an alternative investment for funds in
excess of loan demand.
Average interest-bearing liabilities increased $20,172 or 5.96% for 1998 and
$32,278 or 10.62% for 1997. The largest component of the increase in
interest-bearing liabilities was average deposits, reflecting an increase of
$21,450 for 1998 and $19,790 for 1997. Growth in the deposit portfolio was
<PAGE>
concentrated in certificates of deposit of $100 and over with an average
increase of $12,883 for 1998 and $4,505 for 1997 and in demand and savings
deposits with an average increase of $9,259 for 1998 and time deposits with an
average increase of $9,969 for 1997.
Increased market penetration in new markets and a concerted effort to obtain
business deposit accounts from our business loan customers accounted for the
increases. Average other borrowed funds increased $12,100 for 1997
representing an increase in advances from the Federal Home Loan Bank of
Atlanta, as the Corporation increasingly utilized this source of funds.
Net interest yield increased to 4.74% for 1998 from 4.59% for 1997 and
decreased from 4.80% for 1996. The yield on average earning assets decreased
4 and 13 basis points for 1998 and 1997, respectively, from the respective
prior years. The cost of interest-bearing liabilities decreased 14 basis
points for 1998 compared to a 3 basis point increase in 1997. Overall, 104.2%
and 137.4% of the net interest income increases in 1998 and 1997,
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 $13,016, which represents 3.0% and 3.5% of total interest earning assets
and interest bearing liabilities at December 31, 1998, respectively. The
sensitivity gap for the period beyond five years is $56,804. Management
considers the interest rate exposure represented by these gaps to be
acceptable.
Provision for Loan Losses
The provision for loan losses was $1,135 for 1998, $550 for 1997 and $595 for
1996. Net charge-offs amounted to $786, $438 and $404 for 1998, 1997 and
1996, respectively. The increase in net charge-offs for 1998 can be
attributed to one commercial customer. The allowance for loan losses was
$4,640, 1.41% of outstanding loans, at December 31, 1998 and $4,291, 1.47% of
outstanding loans, at December 31, 1997. With the increase in 1998 net
charge-offs, the provision for loan losses was also increased and the
allowance for loan losses reflected a corresponding increase. 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 $3,001, $2,291 and $2,034 for 1998, 1997 and 1996, respectively.
The increase in noninterest income for 1998 resulted primarily from an
increase in loan origination fees due to mortgage volume, non-sufficient fund
check charges due to higher pricing and volume, net gains on the disposition
<PAGE>
of securities, trust fees, fees related to a new investment service, a full
year of automated teller machine usage fees, and gain on sale of other real
estate. 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. Increases for both
1998 and 1997 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 $12,682
for 1998, $11,602 for 1997 and $10,254 for 1996. The 1998 net increase in
noninterest expense resulted from increases in several categories, primarily
personnel costs, occupancy and equipment expense, postage and telephone
expense. Personnel costs increased primarily as the result of merit
increases, contributions to a new 401-K plan and additional branch personnel.
The increases in occupancy and equipment expense resulted from an increase
in depreciation expense for buildings and furniture and fixtures, which
was related to the new corporate office facility opened in 1997. 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 increases for
both 1998 and 1997 were partially offset by reductions in other areas.
Income Taxes
Income tax expense as a percentage of pre-tax income was 21.8%, 20.4% and
22.3% in 1998, 1997 and 1996, respectively. The increase in 1998 was due to a
drop in non-taxable interest as a percent of total interest. The decline in
the 1997 rate from 1996 resulted from anticipated income tax refunds recorded
in 1997 related to amendments of prior year tax returns.
Balance Sheet
Total assets of the Corporation at December 31, 1998, were $461,916 compared
to $428,174 at December 31, 1997. Total loans were $328,599 at December 31,
1998, an increase of $37,529 from December 31, 1997. Loan growth was
concentrated in the commercial, real estate-commercial and construction
portfolios and amounted to $38,079. The decline in the real estate-mortgage
portfolio of $1,017 resulted from an increase in the refinancing of home
mortgage loans and their subsequent sale on the secondary market. Federal
Funds sold increased $7,100 and was funded primarily by sales and maturities
of securities which decreased $9,692.
Total deposits at December 31, 1998, were $386,257, an increase of $33,712
from December 31, 1997. Deposit growth was concentrated in the interest-
bearing demand and savings portfolio, and amounted to $26,481. All other
deposit portfolios experienced increases of varying amounts, except the time
deposits portfolio which decreased $1,751. New interest-bearing demand and
savings deposits account for approximately $12,936 of the increase. Interest
bearing public fund demand deposits increased $12,544 excluding new accounts.
Competition for deposits among local financial institutions continues to be
strong.
<PAGE>
Other borrowed funds at December 31, 1998, were $21,612, a decrease of $4,481
from December 31, 1997. Other borrowed funds is composed primarily of
advances from the Federal Home Loan Bank of Atlanta and is used to provide
partial funding for earning asset growth.
The Employee Stock Ownership Plan (ESOP) debt was $901 at December 31, 1997.
This debt, as well as an additional $1,400 of new debt issued by the ESOP in
the first quarter of 1998, is not reflected in the balance sheet as of
December 31, 1998, because of the repurchase of the ESOP loans by the banking
subsidiary of FNB Corporation. The ESOP debt and the related loans have been
eliminated in consolidation. The new debt financed the purchase by the ESOP
of $1,400 of newly issued stock of the Corporation.
Stockholders' Equity
Stockholders' equity was $44,401 at December 31, 1998, compared to $40,213 at
December 31, 1997. This increase of $4,188 was the net result of earnings
retention, dividends paid to shareholders, an improvement in net unrealized
gain or loss (net-of-tax) on securities available-for-sale, and principal
repayments on ESOP debt. In the third quarter of 1998, the Corporation
declared and paid a 10% stock dividend. This resulted in a transfer of $9,130
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 on
a consolidated basis as of December 31, 1998 were 12.3% and 13.5%,
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 on a consolidated basis as of December 31, 1998 was 9.7% 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. 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, 1998. 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, 1998 totaled $161 compared to
$196 at December 31, 1997. In addition, nonaccrual loans and other real
estate owned totaled $1,139 at December 31, 1998, compared to $991 at December
31, 1997. The increase in nonaccrual loans can be attributed to one
commercial customer. A portion of this customer's loans is guaranteed by the
United States Department of Agriculture. The New River Valley economy remains
strong.
Liquidity and Capital Resources
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 $39,000 of the Corporation's
borrowing capacity under an existing agreement with the FHLB remains unused as
of December 31, 1998, based on the level of qualifying portfolio mortgage
loans available for securitization. Secondary sources of liquidity are
available should the need arise, including approximately $35,000 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 1999 dividends (unless prior regulatory
approval is obtained) to $7,467 plus year-to-date 1999 net profits as of the
declaration date. This limitation had no effect on the liquidity of the
holding company in 1998 and it is not expected to have any material impact in
1999. During 1998, the bank paid $7,578 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
During the first quarter of 1998 the Corporation adopted Statement of
Financial Accounting Standards (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" is comprised of net income as reported in
the Statement of Income as well as "other comprehensive income," which is
comprised of certain items and events that have been reflected only in
stockholders' equity without impacting the Statement of Income. Currently
the only items included in FNB Corporation's financial statements that are
required to be reflected in other comprehensive income are the unrealized
gains and losses on securities classified as available-for-sale under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
The adoption of SFAS No. 130 resulted in the presentation of the accompanying
Consolidated Statements of Comprehensive Income for the years ended December
31, 1998, 1997 and 1996. Amounts reported in the accompanying Consolidated
Statements of Income, Balance Sheets, Statements of Cash Flows and Statements
of Changes in Stockholders Equity were not impacted by the adoption of SFAS
No. 130.
Year 2000 Readiness Disclosure
A number of electronic systems utilize a two-digit field for year references,
e.g., "98" for "1998." Such systems may interpret the year reference "00" as
referring to the Year 1900 rather than the Year 2000. If these systems are
not corrected prior to December 31, 1999, many processing failures could
result. This section describes the status of the Corporation's efforts to
correct these systems deficiencies.
State of Readiness. The Corporation has committed personnel and resources to
resolve potential year 2000 issues, both internally and externally (with
respect to the Corporation's service providers, vendors and customers) for
both information technology assets and non-information technology assets. The
Corporation has identified year 2000 dependencies in its systems, equipment,
and processes and is implementing changes to such systems, updating or
replacing such equipment, and modifying such processes to make them Year 2000
compliant. The Corporation has completed its assessment of internal Year 2000
issues and is in the process of remediation of the critical systems.
The Corporation does not employ computer programmers and relies heavily on
outside vendors to make the necessary software and hardware changes for Year
2000 compliance. All mission-critical service providers delivered Year 2000
upgrades to the Corporation before December 31, 1998. Plans are in place to
test these systems before June 30, 1999, by entering various critical future
dates into the systems in an off line mode. The Corporation anticipates that
all of its systems will be substantially compliant by June 30, 1999.
<PAGE>
The Corporation is also assessing the operability of other devices after 1999,
including vaults, fax machines, stand-alone personal computers, security
systems and elevators and addressing deficiencies, if necessary. These
efforts are currently underway and we anticipate compliance to be achieved in
1999.
Costs. In order to achieve and confirm Year 2000 readiness, significant costs
are being incurred to test and modify or replace computer software and
hardware, as well as a variety of other items, such as automated teller
machines. The Corporation had an estimated capital outlay of $1,000 in 1997
and $800 during 1998 on hardware and software equipment. Approximately $55 in
related expenses has been recognized through December 31, 1998, in the
Statement of Income. Estimated outlays during 1999 for computer hardware and
software approximate $75 with an additional $25 for related expenses.
Risks. If the Corporation's mission-critical applications are not compliant
by 2000, it may not be able to correctly process transactions in a reasonable
period of time. This scenario could result in a wide variety of claims
against the Corporation for improper handling of its assets as well as
deposits and other borrowings from its customers. For example, the
Corporation's ability to process interest payments on deposits and other
liabilities could be impaired. The Corporation is also at risk if the credit
worthiness of a few of its large borrowers or a significant number of its
small borrowers, were to deteriorate quickly and severely as a result of their
inability to conduct business operations after December 31, 1999, for whatever
reason. Such risks would include a potential negative impact on earnings and
financial position to the extent that a significant amount of loans were not
repaid based on contractual terms. The Corporation is presently monitoring
existing and assessing new large credit customers' Year 2000 plans to
ascertain the sufficiency of their remediation efforts and the implication of
their actions on their credit worthiness. The Corporation explicitly
disclaims, however, any obligation or liability for the completeness, or lack
thereof, of its customers' Year 2000 remediation plans or actions.
Contingency Plans. The Corporation is in the process of developing
contingency plans in the event that the remediation plan is not completed in
time or fails for reasons that are not presently foreseen. In the event of
such a failure, these plans will outline the steps that will be taken to deal
with the situation to minimize the effect on customers and losses to the
Corporation.
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 Nasdaq Stock Market under the symbol FNBP on
July 7, 1998. Previously the stock appeared on the OTC Bulletin Board under
the same symbol. Shares were occasionally bought and sold by private
individuals, firms or corporations, and in many instances FNB Corporation did
not have knowledge of the purchase price or the terms of the purchase. The
information below, prior to July 7, 1998, 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
<PAGE>
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 10% stock dividend in
August 1998 and a two-for-one stock split effected in the form of a 100% stock
dividend in June 1997. As of December 31, 1998, there were 1,062 holders of
record of FNB Corporation Common Stock.
<TABLE>
<CAPTION>
Trading Value Dividends
1998 High Low Per Share
<S> <C> <C> <C>
First Quarter $ 25.25 22.00 0.15
Second Quarter 27.00 24.00 0.16
Third Quarter 28.75 22.73 0.15
Fourth Quarter 25.00 23.13 0.17
</TABLE>
<TABLE>
<CAPTION>
Trading Value Dividends
1997 High Low Per Share
<S> <C> <C> <C>
First Quarter $ 20.23 18.18 --
Second Quarter 19.09 17.95 0.09
Third Quarter 20.91 18.18 0.14
Fourth Quarter 21.59 19.55 0.15
</TABLE>
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.
<PAGE>
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.
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, 1998. 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:
<PAGE>
<TABLE>
<CAPTION>
Percentage Increase (Decrease) in Fair Value
200 Basis Point Increase 200 Basis Point Decrease
<S> <C> <C>
Total Securities (5.12)% 4.84%
Total Loans (2.78)% 2.82%
Total Deposits (1.36)% 1.20%
Repurchase Agreements and
Other Borrowed Funds (1.23)% 1.25%
</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 reprices daily, including federal funds
purchased and sold. 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, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
McLEOD & COMPANY
Roanoke, Virginia
February 19, 1999
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 and 1997
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 11,875 14,406
Federal funds sold 10,600 3,500
Securities available-for-sale, at fair value 57,232 62,856
Securities held-to-maturity, at amortized cost 38,352 42,420
Mortgage loans held for sale 1,646 1,159
Loans:
Commercial 85,536 64,247
Consumer 66,526 66,059
Real estate- commercial 65,165 56,404
Real estate - construction 16,686 8,657
Real estate - mortgage 94,686 95,703
Total loans 328,599 291,070
Less unearned income -- 12
Loans, net of unearned income 328,599 291,058
Less allowance for loan losses 4,640 4,291
Loans, net 323,959 286,767
Bank premises and equipment, net 12,977 12,518
Other real estate owned 30 98
Other assets 5,245 4,450
Total assets $ 461,916 428,174
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand deposits $ 39,141 35,279
Interest-bearing demand and savings deposits 126,204 99,723
Time deposits 172,368 174,119
Certificates of deposit of $100,000 and over 48,544 43,424
Total deposits 386,257 352,545
Securities sold under agreements to repurchase 6,650 5,460
Other borrowed funds 21,612 26,093
Other liabilities 2,996 2,962
ESOP debt - 901
Total liabilities 417,515 387,961
Stockholders' equity:
Common stock, $5.00 par value. Authorized
10,000,000 shares; issued and outstanding
3,722,139 shares in 1998 and 3,323,800
in 1997 18,611 16,619
Surplus 19,320 10,782
Unearned ESOP shares (117,660 and 77,811
shares in 1998 and 1997, respectively) (2,120) (1,208)
Retained earnings 8,307 13,793
Accumulated other comprehensive income 283 227
Total stockholders' equity 44,401 40,213
Total liabilities and stockholders'
equity $ 461,916 428,174
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,1998, 1997 and 1996
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 29,786 26,754 24,962
Interest on securities:
Taxable 3,082 3,642 2,998
Nontaxable 2,278 2,374 2,378
Interest on federal funds sold 507 344 188
Total interest income 35,653 33,114 30,526
Interest expense:
Interest on interest-bearing demand
and savings deposits 2,958 2,823 2,675
Interest on time deposits 9,801 10,070 9,497
Interest on certificates of deposit of
$100,000 and over 2,870 2,148 1,856
Interest on securities sold under
agreements to repurchase 261 250 229
Interest on other borrowed funds 1,283 1,385 574
Interest on subordinated capital notes - - 67
Interest on ESOP debt 76 88 118
Total interest expense 17,249 16,764 15,016
Net interest income 18,404 16,350 15,510
Provision for loan losses 1,135 550 595
Net interest income after
provision for loan losses 17,269 15,800 4,915
Noninterest income:
Service charges on deposit accounts 1,156 990 957
Loan origination fees 393 205 223
Other service charges and fees 481 375 332
Other income 813 740 517
Securities gains (losses), net 158 (19) 5
Total noninterest income 3,001 2,291 2,034
Noninterest expense:
Salaries and employee benefits 6,570 6,193 5,745
Occupancy and equipment expense, net 2,166 1,786 1,285
Credit card expense 613 560 572
Supplies expense 503 456 371
FDIC assessment expense 42 41 2
Other expenses 2,788 2,566 2,279
Total noninterest expense 12,682 11,602 10,254
Income before income tax expense 7,588 6,489 6,695
Income tax expense 1,657 1,324 1,491
Net income $ 5,931 5,165 5,204
Net income per share $ 1.65 1.45 1.47
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
1998 1997 1996
<S> <C> <C> <C>
Net income $ 5,931 5,165 5,204
Other comprehensive income, before tax:
Unrealized holding gains (losses)
arising during period on
securities 227 382 (369)
Less: reclassification adjustment
for (gains) losses included in
net income (142) 20 (5)
Other comprehensive income (loss)
before tax 85 402 (374)
Income tax effect of items of other
comprehensive income (29) (137) 127
Other comprehensive income (loss),
net of tax 56 265 (247)
Comprehensive Income $ 5,987 5,430 4,957
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF
CASH FLOWS
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,931 5,165 5,204
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 1,135 550 595
Depreciation and amortization
of bank premises and
equipment 1,098 902 549
ESOP compensation 488 302 604
Provision for deferred income taxes 132 130 64
Loss (gain) on sales of securities
available-for-sale, net (142) 20 (5)
Amortization of premiums and
accretion of discounts, net 230 71 73
Gain on calls of securities
held-to-maturity, net (16) (1) 0
Loss (gain) on sale of other real
estate and fixed assets (34) (32) (47)
Proceeds from sales of mortgage
loans held for sale 33,298 13,751 11,843
Origination of mortgage loans
held for sale (33,785) (14,580) (11,356)
Decrease (increase) in other
assets (795) 179 (401)
(Decrease) increase in other
liabilities 34 (681) 251
Net cash provided by operating
activities 7,574 5,776 7,374
Cash flows from investing activities:
Net decrease (increase)in federal funds
sold (7,100) (1,000) 2,930
Proceeds from sales of securities
available-for-sale 617 6,060 9,462
Proceeds from calls and maturities of
securities available-for-sale 39,232 13,269 10,895
Proceeds from calls and maturities of
securities held to maturity 4,066 2,640 3,037
Purchases of securities
available-for-sale (34,196) (26,963) (27,834)
Purchase of securities held-to-maturity (15) (1,994) (6,047)
Net increase in loans (40,535) (18,673) (21,739)
Proceeds from sale of other real
estate owned 228 155 449
Recoveries on loans previously charged off 184 190 156
Bank premises and equipment expenditures (1,561) (3,130) (6,203)
Net cash used in investing
activities (39,080) (29,446) (34,894)
Cash flows from financing activities:
Net increase (decrease) in demand
deposits 30,343 8,603 (330)
Net increase in time deposits and
certificates of deposit 3,369 8,540 19,955
Net increase in securities sold
under agreements to repurchase 1,190 665 853
Net increase (decrease) in other
borrowed funds (4,481) 11,689 12,036
Principal payments on ESOP debt (488) (302) (604)
Sale of stock to ESOP 1,400 - -
Principal payments on subordinated
capital notes - - (937)
Dividends paid (2,280) (1,347) (1,924)
Dividends on unallocated ESOP shares (78) (49) (70)
Net cash provided by financing
activities 28,975 27,799 28,979
Net increase (decrease) in cash and
due from banks (2,531) 4,129 1,459
Cash and due from banks at beginning
of year 14,406 10,277 8,818
Cash and due from banks at end of year $ 11,875 14,406 10,277
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
(in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Unearned Compre-
Common ESOP Retained hensive
Stock Surplus Shares Earnings Income Total
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 $ 8,310 10,782 (2,115) 15,006 208 32,191
Net income - - - 5,204 - 5,204
Cash dividends, $0.54
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, $0.38
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
Net income - - - 5,931 - 5,931
Cash dividends, $0.63
per share - - - (2,280) - (2,280)
ESOP shares allocated
upon loan repayment - - 488 - - 488
10% stock dividend 1,691 7,439 - (9,137) - (7)
Change in net unrealized
gains (losses) on
securities available
for sale, net
of tax effect of $29 - - - - 56 56
Sale of 60,215 shares
of stock to ESOP 301 1,099 (1,400) - - -
Balances at December 31,
1998 $ 18,611 19,320 (2,120) 8,307 283 44,401
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998
(in thousands, except share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The reporting entity is comprised of FNB Corporation, a bank
holding company, and its wholly-owned subsidiaries
(collectively the "Corporation"). The primary subsidiary of
FNB Corporation is First National Bank (the "Bank"). The
accounting and reporting policies of 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.
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.
(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:
<PAGE>
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.
(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 less 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.
<PAGE>
(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 (3,599,168, 3,561,504, and 3,525,645 in 1998,
1997 and 1996, respectively, as restated). The weighted
average shares outstanding do not include average
unearned shares held by the Employee Stock Ownership
Plan (ESOP) totaling 114,969, 94,676 and 130,535 shares
for 1998, 1997 and 1996, 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. As a result, the total number
of shares outstanding doubled. Par value per share did
not change. During the third quarter of 1998, the
Corporation declared a 10% stock dividend. Earnings per
share, dividends per share and weighted average shares
for periods prior to the split and the stock dividend
have been restated to reflect the change in shares
outstanding as though the split and the stock dividend
had occurred at the beginning of the earliest period
presented.
(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 1998 presentation.
(3) RESTRICTIONS ON CASH
Federal reserve regulations require the Bank to maintain
certain average balances as cash reserves. The reserve
requirements approximated $1,113 and $4,285 at December 31,
1998 and 1997, respectively.
(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, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 1998 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,062 102 - 7,164
U.S. Government agencies
and corporations 19,511 120 (7) 19,624
States and political
subdivisions 11,436 231 (19) 11,648
Other securities 18,794 16 (14) 18,796
Totals $ 56,803 469 (40) 57,232
</TABLE>
<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>
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, 1998 Costs Values
<S> <C> <C>
Due in one year or less $ 4,087 4,126
Due after one year through
five years 24,628 24,743
Due after five years through
ten years 20,917 21,126
Due after ten years 7,171 7,237
Totals $ 56,803 57,232
</TABLE>
Realized gains and losses on securities available-for-sale
were not material in 1997 or 1996. In 1998, realized gains
and losses totaled $147 and $5, respectively.
The carrying value of securities available-for-sale pledged to
secure public and trust deposits and securities sold under
agreements to repurchase, and for other purposes as required
or permitted by law, was $17,887 at December 31, 1998 and
$16,371 at December 31, 1997.
(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, 1998 and 1997 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 1998 Costs Gains Losses Values
<S> <C> <C> <C> <C>
States and political
subdivisions $ 38,322 1,289 - 39,611
Other securities 30 - - 30
Totals $ 38,352 1,289 - 39,641
</TABLE>
<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>
The amortized costs and approximate fair values of securities
held-to-maturity at December 31, 1998 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, 1998 Costs Values
<S> <C> <C>
Due in one year or less $ 3,360 3,387
Due after one year through
five years 21,977 22,652
Due after five years through
ten years 12,736 13,316
Due after ten years 279 286
Totals $ 38,352 39,641
</TABLE>
Realized gains and losses on calls and maturities of
securities held-to-maturity were not material in 1998, 1997 or
1996. The carrying value of securities held-to-maturity
pledged to secure public and trust deposits and securities
sold under agreements to repurchase, and for other purposes as
required or permitted by law, was $18,386 and $16,381 at
December 31, 1998 and 1997, respectively.
(6) LOANS
At December 31, 1998 and 1997, there were direct loans to
officers and directors of $6,167 and $5,595, respectively.
During 1998, new direct loans to officers and directors
amounted to $1,188 and repayments amounted to $616. In
addition, there were loans of $6,324 and $5,957 at December
31, 1998 and 1997, respectively, which were endorsed by
directors or had been made to companies in which directors had
an equity interest.
At December 31, 1998 and 1997, the Corporation had sold
without recourse to financial institutions and other customers
of the Corporation participations in various loans in the
amount of $37,994 and $30,000, respectively.
<PAGE>
(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, 1998 and 1997, the investment in impaired
loans approximated $2,252 and $1,256, respectively. The
December 31, 1998 and 1997 allowances for loan losses includes
allowances of $338 and $183, respectively, for these loans.
Impaired loans averaged $1,754, $1,694 and $2,933 during 1998,
1997 and 1996, 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>
<CAPTION>
Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of
year $ 4,291 4,179 3,988
Provisions for loan losses 1,135 550 595
Loan recoveries 184 190 156
Loan charge-offs (970) (628) (560)
Balance at end of year $ 4,640 4,291 4,179
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
<S> <C> <C> <C>
Nonaccrual loans $ 1,109 893 573
Other real estate owned 30 98 185
Total nonperforming assets $ 1,139 991 758
</TABLE>
There were no material commitments to lend additional funds to
customers whose loans were classified as nonperforming at
December 31, 1998.
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, 1998 1997 1996
<S> <C> <C> <C>
Cash basis interest -
impaired loans $ 50 64 122
Recorded interest -
impaired loans $ 48 7 131
</TABLE>
<PAGE>
(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, 1998 1997
<S> <C> <C>
Land $ 1,515 1,359
Buildings 9,355 9,820
Furniture and equipment 7,641 6,461
Leasehold improvements 428 383
Construction in progress 613 -
19,552 18,023
Less accumulated depreciation
and amortization (6,575) (5,505)
Totals $ 12,977 12,518
</TABLE>
In 1997, a total of $22 of interest was capitalized related to
the construction of a new headquarters facility.
(9) DEPOSITS
At December 31, 1998 and 1997, there were deposits from
officers and directors of $2,338 and $2,066, respectively.
Time deposits and certificates of deposit of $100,000 and over
as of December 31, 1998 mature as follows:
<TABLE>
<S> <C>
1999 $ 129,843
2000 60,861
2001 10,119
2002 6,720
2003 11,662
Thereafter 1,707
$ 220,912
</TABLE>
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS
Advances from the Federal Home Loan Bank of Atlanta were $21.3
million and $22.6 million on December 31, 1998 and 1997,
respectively. The fixed interest rates on the advances as of
December 31, 1998 range from 5.3 to 6.7 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, 1998, $10 million matures in 2000 and $10
million matures in 2001. The remainder matures after 2001.
Securities sold under agreements to repurchase (repurchase
agreements) at December 31, 1998 were collateralized by
investment securities controlled by the Corporation with a
book value of approximately $11.7 million. The maximum amount
of repurchase agreements outstanding during 1998 was $7.6
million, and the average amount outstanding during 1998 was
$6.4 million.
<PAGE>
(11) EMPLOYEE BENEFIT PLAN
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.
The purchase of some of the shares held by the ESOP has been
financed by borrowings by the ESOP. In February 1998, the
Corporation sold 60,215 shares to the ESOP for $23.25 per
share. The ESOP borrowed $1,400 from another financial
institution to finance the purchase. The ESOP's obligation to
repay these and prior borrowings is guaranteed by the
Corporation and secured by the stock acquired;
therefore, the unpaid balance of the borrowings as of
December 31, 1997 has been reflected in the accompanying
balance sheet as of that date as a liability. During the
third quarter of 1998, First National Bank purchased all ESOP
loans from the outside financial institution which had
originally financed them. Consequently, in the December 31,
1998 consolidated balance sheet, the loans and the related
liability have been eliminated. The amounts representing
unearned employee benefits have been recorded as reductions in
stockholders' equity as unearned ESOP shares. These amounts
are reduced and compensation expense is recorded as the ESOP
debt is curtailed and shares are released from collateral.
Shares released are allocated to plan participants as of the
end of the Plan's year based on an allocation formula
specified in the Plan. The ESOP is repaying the loans (plus
interest) using employer contributions and dividends received
on the shares of common stock held by the ESOP. Dividends on
allocated ESOP shares are recorded as a reduction of retained
earnings. Dividends on unallocated shares are recorded as a
reduction of ESOP debt to the extent used for debt service,
and as compensation expense to the extent expected to be
allocated to participants' accounts as additional
compensation. ESOP compensation expense of $488, $302 and
$604 and related ESOP interest expense of $76, $88 and $118
were recorded for 1998, 1997 and 1996, respectively.
ESOP shares as of December 31, 1998 consisted of 737,149
allocated shares and 117,660 unreleased and unearned shares
as restated for the 1997 100% stock dividend and the 1998 10%
stock dividend. Based on quoted trading and bid prices, the
fair value of the unreleased and unearned shares at December
31, 1998 was $24 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 $121 and $26 for 1998 and 1997,
respectively.
(12) INCOME TAXES
Total income taxes are allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Income $ 1,657 1,324 1,491
Stockholders' equity, for net
unrealized gains and losses
on securities available-for-sale
recognized for financial reporting
purposes 30 136 (127)
Totals $ 1,687 1,460 1,364
</TABLE>
<PAGE>
The components of federal income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Current $ 1,525 1,194 1,427
Deferred 132 130 64
Total $ 1,657 1,324 1,491
</TABLE>
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>
<CAPTION>
Years Ended December 31, 1998 1997 1996
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 $ 2,580 34.0% 2,206 34.0% 2,276 34.0%
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (979) (12.9) (970) (15.0) (1,007) (15.0)
Nondeductible interest
expense 135 1.8 142 2.2 140 2.1
Other, net (79) (1.1) (54) (0.8) 82 1.2
Reported tax expense at
effective rate $ 1,657 21.8% 1,324 20.4% 1,491 22.3%
</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, 1998 1997
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance
for loan losses and unearned fees $ 1,232 1,145
Accrued post-retirement benefits
due to accrual for financial
reporting purposes in excess of
actual contributions 160 150
Other 17 22
Total gross deferred tax assets 1,409 1,317
Less valuation allowance - -
Net deferred tax assets 1,409 1,317
Deferred tax liabilities:
Bank premises and equipment, due
to differences in
depreciation 251 72
Securities, due principally to
valuation allowance 146 116
Investment securities, due to
differences in discount accretion 107 106
Prepaids, due to advance payments 113 69
Total gross deferred tax liabilities 617 363
Net deferred tax asset, included in
other assets $ 792 954
</TABLE>
<PAGE>
The Corporation has determined that a valuation allowance for
gross deferred tax assets is not necessary at December 31,
1998 or 1997 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 to date of income for the holding company
has been 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 1999 without the approval of the Comptroller
totals $7,467 plus year-to-date 1999 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 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, 1998, that the Corporation meets
all capital adequacy requirements to which it is subject. The
table below sets forth the ratios for the Bank for December
31, 1998 and 1997. On a consolidated basis, at December 31,
1998 the Corporation's ratios of total capital, Tier 1 capital
to risk weighted assets, and Tier 1 capital to average assets
were 13.5%, 12.3% and 9.7%, respectively. For 1999 the
consolidated ratios were substantially the same as those for
the Bank.
As of December 31, 1998, 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, 1998:
Minimum Requirements
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) $43,236 12.0% 28,856 8.0% 36,070 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 38,726 10.7% 14,428 4.0% 21,642 6.0%
Tier 1 Capital
(to Average
Assets) 38,726 8.5% 18,138 4.0% 22,673 5.0%
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997:
Minimum Requirements
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>
(14) SUPPLEMENTAL CASH FLOW INFORMATION
The Corporation paid $17,090, $16,325 and $14,899 for interest
and $1,604, $1,057, and $1,413 for income taxes in 1998, 1997
and 1996, respectively. Noncash investing activities included
$30, $98, and $343 of loans transferred to other real estate
owned in 1998, 1997 and 1996, respectively, and $599 of non-
operating real estate transferred from bank premises and
equipment to other assets in 1998.
(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.
<PAGE>
(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 unused home equity lines totaling $27,008 at
December 31, 1998, and $14,526 at December 31, 1997, the
Corporation may not require collateral or other security to
support the following financial instruments with credit risk:
<TABLE>
<CAPTION>
Contract Amounts
December 31, 1998 1997
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 86,583 63,194
Standby letters of credit 6,252 4,300
</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 1998, the Corporation
originated $33,785 and sold $33,298 to investors, compared to
$14,580 originated and $13,751 sold in 1997. Every contract
with each investor contains certain recourse language. In
<PAGE>
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 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 $50 million and $55 million of loans to
individuals for household, family and other personal
expenditures at December 31, 1998 and 1997. 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
<PAGE>
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.
(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, 1998 and 1997, 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, 1998 1997
Approximate Approximate
Carrying Fair Carrying Fair
Amounts Values Amounts Values
<S> <C> <C> <C> <C>
Financial assets:
Cash and due
from banks $ 11,875 11,875 14,406 14,406
Federal funds sold 10,600 10,600 3,500 3,500
Securities available
-for-sale 57,232 57,232 62,856 62,856
Securities held-to-
maturity 38,352 39,641 42,420 43,430
Loans, net 323,959 327,599 286,767 289,832
Total financial
assets $ 442,018 446,947 409,949 414,024
Financial liabilities:
Deposits $ 386,257 387,931 352,545 353,418
Securities sold
under agreements
to repurchase and
other borrowed
funds 28,262 28,498 31,553 31,559
ESOP debt - - 901 901
Total financial
liabilities $ 414,519 416,429 384,999 385,878
</TABLE>
<PAGE>
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.
(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, 1998 December 31, 1997
<S> <C> <C>
Assets
Securities available for sale,
at fair value $ 5,369 -
Investment in bank subsidiary 39,016 39,699
Receivable from bank subsidiary 1,682 514
Other assets 88 -
Total Assets $ 46,155 40,213
Liabilities
ESOP debt $ 1,754 -
Total Liabilities $ 1,754 -
Stockholders' Equity
Common stock and surplus $ 37,931 27,401
Retained earnings 8,307 13,793
Other (1,837) (981)
Total Stockholders' Equity 44,401 40,213
Total Liabilities & Stockholders' Equity $ 46,155 40,213
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Income
July 6, 1996 to
1998 1997 December 31, 1996
<S> <C> <C> <C>
Net interest income $ 24 - -
Non interest income 465 - -
Non interest expense (489) - (1)
Equity in earnings of bank
subsidiary 5,931 5,165 2,570
Income before income taxes 5,931 5,165 2,569
Income tax expense - - -
Net income $ 5,931 5,165 2,569
</TABLE>
NOTES:
(1) Cash flows for the parent company during 1997 were not
significant, other than dividends from the Bank. Total dividends paid
by the Bank to the parent company were $7,578, $1,911 and $1,163 in
1998, 1997, and 1996, respectively. In 1998, the parent invested $5.4
million in investment securities. Net cash flows from operations
netted to zero in 1998.
(2) July 6, 1996 represents the inception of operations of the holding
company.
(3) The ESOP debt is held by the Bank and as such is eliminated in
consolidation.
(20) INTERIM FINANCIAL INFORMATION (Unaudited)
Consolidated quarterly results of operations were as follows:
<TABLE>
<CAPTION>
1998
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Interest income $ 8,583 8,777 9,230 9,063
Interest expense 4,358 4,270 4,391 4,230
Provision for loan
losses 110 210 390 425
Noninterest income 669 689 735 908
Noninterest expense 2,971 3,038 3,157 3,516
Income before income
tax expense 1,813 1,948 2,027 1,800
Income tax expense 404 445 456 352
Net income $ 1,409 1,503 1,571 1,448
Net income per
share $ 0.39 0.42 0.44 0.40
</TABLE>
<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 $ 0.35 0.39 0.39 0.32
</TABLE>
<PAGE>
Net income per share in the above tables has been restated to reflect
retroactively a two-for-one stock split effected in the form of a 100%
stock dividend in the second quarter of 1997 and a 10% stock dividend
declared in the third quarter of 1998.
(21) RECENT ACCOUNTING DEVELOPMENTS
During the first quarter of 1998, the Corporation adopted Statement of
Financial Accounting Standards (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" is comprised of net income
as reported in the Statement of Income as well as "other comprehensive
income," which is comprised of certain items and events that have been
reflected only in stockholders' equity without impacting the Statement
of Income. Currently the only items included in FNB Corporation's
financial statements that are required to be reflected in other
comprehensive income are the unrealized gains and losses on securities
classified as available-for-sale under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
The adoption of SFAS No. 130 resulted in the presentation of the
accompanying Consolidated Statements of Comprehensive Income for 1998,
1997 and 1996. Amounts reported in the accompanying Consolidated
Statements of Income, Balance Sheets, Statements of Cash Flows and
Statements of Changes in Stockholders' Equity were not impacted by the
adoption of SFAS No. 130.
(22) YEAR 2000 READINESS DISCLOSURE
A number of electronic systems utilize a two-digit field for year
references, e.g., "98" for "1998". Such systems may interpret the year
reference "00" as referring to the Year 1900 rather than the Year 2000.
If these systems are not corrected prior to December 31, 1999, many
processing failures could result. If the Corporation's mission-critical
applications are not compliant by 2000, it may not be able to correctly
process transactions in a reasonable period of time. This scenario
could result in a wide variety of claims against the Corporation for
improper handling of its assets as well as deposits and other borrowings
from its customers. The Corporation is also at risk if the credit
worthiness of a few of its large borrowers, or a significant number of
its small borrowers, were to deteriorate quickly and severely as a
result of their inability to conduct business operations after December
31, 1999, for whatever reason. Such risks would include a potential
negative impact on earnings and financial position to the extent that a
significant amount of loans were not repaid based on contractual terms.
<PAGE>
The Corporation has committed significant personnel and resources to
resolve potential Year 2000 issues, both internally and externally (with
respect to the Corporation's service providers, vendors and customers)
for both information technology assets and non-information technology
assets. The Corporation has identified Year 2000 dependencies in its
systems, equipment, and processes and is implementing changes to such
systems, updating or replacing such equipment, and modifying such
proctesses to make them Year 2000 compliant. The Corporation is also in
the process of developing contingency plans in the event that the
remediation plan is not completed in time or fails for reasons that are
not presently foreseen.
The Corporation anticipates that all of its systems will be Year 2000
compliant in time to avoid any failures that would have a material
effect on its operations. However, because not all circumstances
affecting this matter have yet been fully addressed and resolved, and
because the impact on the Corporation could be affected by the Year 2000
readiness of outside parties, management's assessment could reasonably
change in the near term.
Exhibit #(21)
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
First National Bank Virginia
FNB Financial Services, Inc. Virginia
FNBO Co., Inc. Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,875
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,232
<INVESTMENTS-CARRYING> 38,352
<INVESTMENTS-MARKET> 39,641
<LOANS> 328,599
<ALLOWANCE> 4,640
<TOTAL-ASSETS> 461,916
<DEPOSITS> 386,257
<SHORT-TERM> 6,958
<LIABILITIES-OTHER> 2,996
<LONG-TERM> 21,304
0
0
<COMMON> 18,611
<OTHER-SE> 25,790
<TOTAL-LIABILITIES-AND-EQUITY> 461,916
<INTEREST-LOAN> 29,786
<INTEREST-INVEST> 5,360
<INTEREST-OTHER> 507
<INTEREST-TOTAL> 35,653
<INTEREST-DEPOSIT> 15,629
<INTEREST-EXPENSE> 17,249
<INTEREST-INCOME-NET> 18,404
<LOAN-LOSSES> 1,135
<SECURITIES-GAINS> 158
<EXPENSE-OTHER> 12,682
<INCOME-PRETAX> 7,588
<INCOME-PRE-EXTRAORDINARY> 7,588
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,931
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 4.74
<LOANS-NON> 1,109
<LOANS-PAST> 161
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,291
<CHARGE-OFFS> 970
<RECOVERIES> 184
<ALLOWANCE-CLOSE> 4,640
<ALLOWANCE-DOMESTIC> 4,326
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 314
</TABLE>
