UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-13823
FNB CORP.
(Exact name of registrant as specified in its charter)
North Carolina 56-1456589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Sunset Avenue, Asheboro, North Carolina 27203
(Address of principal executive offices) (Zip Code)
(910) 626-8300
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The registrant had 1,800,296 shares of $2.50 par value common
stock outstanding at April 19, 1996.
Transitional Small Business Disclosure Format (Check One):
Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C> <C>
March 31, December 31,
ASSETS 1996 1995 1995
Cash and due
from banks $ 9,996,374 $ 10,104,157 $ 8,764,539
Federal funds sold - 2,615,000 2,600,000
Investment securities:
Available for sale,
at estimated fair
value(amortized cost
of $24,962,914,
$19,126,126 and
$28,183,155) 24,989,467 18,952,290 28,375,645
Held to maturity
(estimated fair
value of
$60,578,995,
$52,859,384 and
$57,008,236) 60,583,912 53,367,045 56,160,814
Loans 184,190,175 168,265,885 179,922,737
Less: Allowance for
loan losses (1,936,154) (1,748,616) (1,902,640)
Net loans 182,254,021 166,517,269 178,020,097
Premises and
equipment 6,069,085 5,062,624 6,029,541
Other assets 4,273,951 3,470,772 3,727,476
TOTAL ASSETS $288,166,810 $260,089,157 $283,678,112
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing
demand deposits $ 35,647,986 $ 36,476,499 $ 38,590,985
Interest-bearing
deposits:
NOW, savings and
money market
deposits 80,705,479 77,536,821 78,728,366
Time deposits of
$100,000 or more 37,449,538 23,308,267 36,427,161
Other time
deposits 97,304,229 92,839,636 96,397,964
Total deposits 251,107,232 230,161,223 250,144,476
Retail repurchase
agreements 4,214,955 3,729,667 4,641,527
Federal funds
purchased 2,810,000 - -
Other liabilities 3,421,429 2,263,449 2,897,038
TOTAL
LIABILITIES 261,553,616 236,154,339 257,683,041
Shareholders' equity:
Preferred stock -
$10.00 par value;
authorized 200,000
shares, none issued - - -
Common stock -
$2.50 par value;
authorized 5,000,000
shares, issued
shares - 1,800,296,
1,200,000 and
1,797,995 4,500,740 3,000,000 4,494,988
Surplus 65,858 900,000 18,705
Retained earnings 22,029,071 20,151,529 21,354,335
Net unrealized
securities gains
(losses) 17,525 (116,711) 127,043
TOTAL
SHAREHOLDERS'
EQUITY 26,613,194 23,934,818 25,995,071
TOTAL
LIABILITIES
AND
SHAREHOLDERS'
EQUITY $288,166,810 $260,089,157 $283,678,112
</TABLE>
See accompanying notes to consolidated financial statements.
1
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FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1996 1995
<TABLE>
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,043,802 $ 3,697,073
Interest and dividends on
investment securities:
Taxable income 1,209,345 999,144
Non-taxable income 178,169 159,433
Federal funds sold 5,183 13,640
Total interest income 5,436,499 4,869,290
INTEREST EXPENSE:
Deposits 2,316,408 2,026,107
Retail repurchase agreements 45,716 40,080
Federal funds purchased 18,118 12,563
Total interest expense 2,380,242 2,078,750
NET INTEREST INCOME 3,056,257 2,790,540
Provision for loan losses 100,000 95,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,956,257 2,695,540
OTHER OPERATING INCOME:
Service charges on deposit
accounts 348,527 303,601
Annuity and brokerage
commissions 44,220 63,916
Credit card income 68,243 52,403
Other service charges,
commissions and fees 84,892 79,818
Losses on sales of investment
securities - (414,596)
Other income 39,942 31,516
Total other operating
income 585,824 116,658
OTHER OPERATING EXPENSE:
Personnel expense 1,181,195 1,088,626
Net occupancy expense 119,256 118,427
Furniture and equipment
expense 164,750 119,242
Data processing services 214,604 208,124
Restructuring charges - 460,457
Other expense 506,237 691,947
Total other operating
expense 2,186,042 2,686,823
INCOME BEFORE INCOME TAXES 1,356,039 125,375
Income taxes (benefit) 411,259 (7,771)
NET INCOME $ 944,780 $ 133,146
PER SHARE DATA:
Net income $ .53 $ .07
Cash dividends declared .15 .12
Average number of shares
outstanding 1,798,976 1,800,000
</TABLE>
See accompanying notes to consolidated financial statements.
2
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FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1996 1995
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 944,780 $ 133,146
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization
of premises and equipment 160,797 102,675
Provision for loan losses 100,000 95,000
Deferred income taxes 12,605 (232,238)
Deferred loan fees and
costs, net (50,309) (12,410)
Premium amortization and
discount accretion of
investment securities, net (10,585) 51,393
Amortization of intangibles 10,963 14,779
Losses on sales of investment
securities - 414,596
Net decrease in loans held
for sale 405,503 -
Decrease (increase) in other
assets (659,163) 63,267
Increase in other liabilities 558,620 528,388
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,473,211 1,158,596
INVESTING ACTIVITES:
Available-for-sale securities:
Proceeds from sales - 5,896,328
Proceeds from maturities 4,299,481 478,592
Purchases (1,099,414) (249,405)
Held-to-maturity securities:
Proceeds from maturities 8,785,367 4,580,000
Purchases (13,173,807) (5,540,477)
Net decrease (increase) in
loans (4,643,584) 31,086
Proceeds from sales of
premises and equipment 9,240 20
Purchases of premises and
equipment (200,341) (140,777)
Other, net 52,292 (16,271)
NET CASH PROVIDED BY
(USED IN)INVESTING
ACTIVITIES (5,970,766) 5,039,096
FINANCING ACTIVITIES:
Net increase in deposits 962,756 235,911
Increase (decrease) in
retail repurchase
agreements (426,572) 203,441
Increase (decrease) in
federal funds purchased 2,810,000 (3,050,000)
Common stock issued 52,905 -
Cash dividends paid (269,699) (216,000)
NET CASH PROVIDED BY
(USED IN)FINANCING
ACTIVITIES 3,129,390 (2,826,648)
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,368,165) 3,371,044
Cash and cash equivalents
at beginning of period 11,364,539 9,348,113
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 9,964,374 $12,719,157
Supplemental disclosure of
cash flow information:
Cash paid during the
period for:
Interest $ 2,346,718 $ 1,856,513
Income taxes 76,900 87,240
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FNB Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FNB Corp. is a one-bank holding company whose wholly-owned
subsidiary is the First National Bank and Trust Company (the
"Bank"). The Bank is an independent community bank that
offers full banking and trust services to consumer and business
customers primarily in the region of North Carolina that includes
Randolph, Montgomery and Chatham counties.
The accompanying consolidated financial statements, prepared
without audit, include the accounts of FNB Corp. and the
Bank (collectively the "Corporation"). All significant
intercompany balances and transactions have been eliminated.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
2. For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds
sold. Generally, federal funds are purchased and sold for
one-day periods.
3. Loans as presented are increased by net deferred expense of
$305,567 and $133,400 at March 31,1996 and December 31, 1995,
respectively, and are reduced by net unearned income of
$602,876 at March 31, 1995.
4. Significant components of other expense were as follows:
Three Months Ended
March 31,
1996 1995
FDIC insurance $ 8,188 $127,974
Stationery, printing
and supplies 74,977 72,109
Deferred acquisition
costs charged to
expense - 113,833
5. In 1995, man agement adopted a comprehensive restructuring
project for the purpose of reengineering Bank operations to
become more competitive and cost-effective in developing
business and servicing customers and to improve long-term
profitability. In connection with this project, certain
positions within the Bank have either been realigned or
eliminated. It is expected that all significant project
costs were incurred in and paid in 1995.
4
<PAGE>
A summary of the restructuring charges, all of which were
incurred or accrued during the three months ended March 31, 1995,
is as follows:
Retirement benefits $256,266
Other personnel costs 44,850
Total personnel costs 301,116
Professional fees related to
restructuring project 159,341
Total restructuring charges $460,457
6. All per share data has been retroactively adjusted to reflect
the three-for-two common stock split effected in the
form of a 50% stock dividend paid in the second quarter of 1995.
7. In the opinion of management, the financial information
furnished in this report includes all adjustments (consisting
of normal recurring accruals) necessary to a fair statement
of the results for the periods presented.
5
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of
Operation
The purpose of this discussion and analysis is to assist in
the understanding and evaluation of the financial condition,
changes in financial condition and results of operations of FNB
Corp. (the "Parent Company") and its wholly-owned subsidiary,
First National Bank and Trust Company (the "Bank"), collectively
referred to as the "Corporation". This discussion should be read
in conjunction with the financial information appearing elsewhere
in this report.
OVERVIEW
The Corporation earned $944,780 in the first quarter of
1996, an increase of over 600% from the same period in 1995.
Earnings per share, adjusted for the three-for-two common stock
split in 1995, increased from $.07 to $.53 in comparing these
first quarter periods. The 1995 results, especially as related
to the operations of the first quarter, were impacted by
restructuring charges and losses on sales of investment
securities discussed in more detail in the "Earnings Review" and
in "Business Development matters".
Total assets were $288,166,810 at March 31, 1996, up 10.8%
from March 31, 1995 and 1.6% from December 31, 1995. Loans
amounted to $184,190,175 at March 31, 1996, increasing 9.5% from
March 31, 1995 and 2.4% from December 31, 1995. Total deposits
grew 9.1% from March 31, 1995 and 0.4% from December 31, 1995 to
$251,107,232 at March 31, 1996.
On December 30, 1993, the Corporation entered into
definitive agreements to acquire two mutual savings banks in
merger/conversion transactions, pursuant to which the savings
banks would convert from mutual to stock form and the Corporation
would simultaneously acquire the shares issued in the
conversions. In 1995, the agreements expired without the
acquisitions having been completed due to changes in federal and
state regulatory policies which strictly limited the
circumstances under which such transactions would be permitted.
EARNINGS REVIEW
The Corporation's net income increased $811,634 or 609.6% in
the first quarter of 1996 compared to the same period of 1995.
Earnings were negatively affected in the 1995 first quarter by
restructuring charges of $460,457 and losses on sales of
investment securities of $414,596, which were charges taken for
the strategic purposes discussed in "Business Development
Matters". Additionally, certain costs, amounting to $113,833,
that had been deferred in connection with the proposed
acquisitions discussed in the "Overview" were charged to expense
in the 1995 first quarter. Earnings were positively impacted in
the 1996 first quarter by an increase of $265,717 or 9.5% in net
interest income.
As discussed in "Other Operating Expense", earnings are
being favorably affected, since the 1995 third quarter, by a
significant reduction in the rate charged for FDIC insurance.
Compared to the same period of 1995, FDIC insurance expense was
$119,786 lower in the first quarter of 1996.
Return on average assets, affected by the restructuring
charges and losses on sales of investment securities in 1995,
improved from 0.20% in the first quarter of 1995 to 1.33% in the
first quarter of 1996. Similarly, return on average
shareholders' equity improved from 2.24% to 14.26% in comparing
the same periods.
6
<PAGE>
Net Interest Income
Net interest income is the difference between interest
income, principally from loans and investments, and interest
expense, principally on customer deposits. Changes in net
interest income result from changes in interest rates and in the
volume, or average dollar level, and mix of earning assets and
interest-bearing liabilities.
Net interest income was $3,056,257 in the first quarter of
1996 compared to $2,790,540 in the same period of 1995. This
increase of $265,717 or 9.5% resulted primarily from a 9.2%
increase in the level of average earning assets coupled with a
slight improvement in the net yield on earning assets, or net
interest margin, from 4.84% in the 1995 first quarter to 4.85% in
the same period of 1996. Following a period of generally lower
interest rates which had ultimately resulted in a decline in the
net interest margin, interest rates began to increase
significantly in 1994, influenced by actions taken by the Federal
Reserve to combat a possible resurgence in inflation. The
interest rate increases in 1994 and early 1995, later offset to
some extent by Federal Reserve action to reduce rates in the
second half of 1995 and in the first quarter of 1996, have
resulted in an improvement in the net interest margin.
Additionally, there had been a continuing negative impact on the
margin from certain variable-rate time deposits with rate floors
in excess of current market rates. Such variable-rate time
deposits were phased out over a two-year period that commenced in
January 1994. On a taxable equivalent basis, the increase in net
interest income in the first quarter of 1996 was $294,000,
reflecting changes in the relative mix of taxable and non-taxable
earning assets.
Table 1 on page 14 sets forth for the periods indicated
information with respect to the Corporation's average balances of
assets and liabilities, as well as the total dollar amounts of
interest income (taxable equivalent basis) from earning assets
and interest expense on interest-bearing liabilities, resultant
rates earned or paid, net interest income, net interest spread
and net yield on earning assets. Net interest spread refers to
the difference between the average yield on earning assets and
the average rate paid on interest-bearing liabilities. Net yield
on earning assets, or net interest margin, refers to net interest
income divided by average earning assets and is influenced by the
level and relative mix of earning assets and interest-bearing
liabilities. Changes in net interest income on a taxable
equivalent basis, as measured by volume and rate variances, are
also analyzed in Table 1. Volume refers to the average dollar
level of earning assets and interest-bearing liabilities.
Changes in the net interest margin and net interest spread
tend to correlate with movements in the prime rate of interest.
There are variations, however, in the degree and timing of rate
changes, compared to prime, for the different types of earning
assets and interest-bearing liabilities.
The prime rate, which had been 6.00% at December 31, 1993,
moved up significantly in 1994 to close the year at 8.50% and,
after certain changes during 1995, remained at that level at
December 31, 1995. The average prime for those three years
amounted to 6.20%, 7.09% and 8.82%, respectively. The prime rate
had declined significantly from 1991 to 1993, but began to
increase in 1994 following steps taken by the Federal Reserve to
combat a possible resurgence in inflation. The prime rate
increased towards the end of the first quarter in 1994 and an
additional four times during the remainder of that year. In the
first quarter of 1995, it increased again to 9.00% and remained
at that level until the second half of the year when, in response
to action taken by the Federal Reserve, it decreased twice. In
the first quarter of 1996 the prime rate decreased again to
8.25%. The average prime was 8.36% in the first quarter of 1996
compared to 8.79% in the same period of 1995. In comparing first
quarter periods, the net interest spread increased by 7 basis
points from 4.03% in 1995 to 4.10% in 1996 due to the fact that
the average total yield on earning assets increased by a
7
<PAGE>
greater amount than the average rate paid on interest-bearing
liabilities, or cost of funds. The yield on earning assets
increased by 15 basis points from 8.27% in 1995 to 8.42% in 1996,
while the cost of funds increased by only 8 basis points in
moving from 4.24% to 4.32%.
Provision for Loan Losses
This provision is the charge against earnings to provide an
allowance or reserve for possible future losses on loans. The
amount of each period's charge is affected by several
considerations including management's evaluation of various risk
factors in determining the adequacy of the allowance (see "Asset
Quality"), actual loan loss experience and loan portfolio growth.
Earnings were negatively impacted in the first quarter of 1996
compared to the same period in 1995 by a $5,000 increase in the
provision.
Other Operating Income
Total other operating income, or noninterest income,
increased $469,166 or 402.2% in the first quarter of 1996
compared to the same period in 1995 due principally to the
recognition in the 1995 first quarter of losses on sales of
investment securities of $414,596 (see "Business Development
Matters"). The 1996 increase also reflected in part the general
increase in the volume of business. The increase in service
charges on deposit accounts resulted primarily from the selected
increases in service charge rates that became effective in the
1995 second quarter and included the implementation of daily
charges on overdraft balances. Annuity and brokerage commissions
declined because of a reduction in sales of tax-deferred annuity
products. Credit card income increased due to the continuing
development of the new credit card operation discussed in
"Business Development Matters".
Other Operating Expense
Total other operating expense, or noninterest expense,
decreased $500,781 or 18.7% in the first quarter of 1996 compared
to the same period of 1995 due primarily to the recognition in
the 1995 first quarter of restructuring charges of $460,457 (see
"Business Development Matters") and of certain costs charged to
"other expense", amounting to $113,833, that had been deferred in
connection with proposed acquisitions (see "Overview").
Additionally, the 1996 results were generally impacted by the
continuing effects of inflation.
FDIC insurance expense decreased $119,786 or 93.6%,
reflecting the effect of a rate reduction as discussed below.
The levels of certain expenses, including personnel, are being
favorably affected by the comprehensive project undertaken in
1995 for the reengineering of Bank operations (see "Business
Development Matters"). There has been a decrease in the number
of full-time equivalent employees. As is the situation for other
operating expenses, however, personnel expense is subject to the
continuing effects of inflation through normal salary adjustments
and higher cost of fringe benefits. Personnel expense is also
being impacted in 1996 by changes in the incentive compensation
program. Furniture and equipment expense has increased due to a
higher level of depreciation charges associated primarily with
computer equipment purchases in 1995 (see "Business Development
Matters").
Because of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) enacted in 1989, FDIC insurance expense
was increased substantially, with the Bank's expense amounting to
$503,379 in the year ended December 31, 1995 and $127,974 in the
first quarter of 1995. The FDIC has two separate insurance
funds, which are the Bank Insurance Fund (BIF) and the Savings
Association Insurance Fund (SAIF). When each fund reaches the
1.25 percent reserve ratio required by FDICIA, then the
corresponding
8
<PAGE>
insurance assessment rates can be lowered starting within that
semiannual period. While the SAIF fund has not yet reached the
mandated reserve ratio, the BIF fund was found in the third
quarter of 1995 to have reached this level by the end of May
1995. Accordingly, the BIF rate was reduced effective June 1,
1995 and currently there is only a minimum annual charge of
$2,000 for the majority of financial institutions with BIF-insured
deposits. Since most of the Bank's deposits are insured
through BIF, the Bank experienced a significant reduction in FDIC
insurance expense commencing in the 1995 third quarter when the
effect of the rate adjustment was initially recorded.
Consequently, FDIC insurance expense for the entire 1995 year
amounted to only $281,894 with the 1996 first quarter expense
amounting to $8,188.
Under legislation now being considered in connection with
the SAIF fund, the FDIC insurance rate on SAIF deposits could be
lowered to match that on BIF deposits. As part of this
legislation, financial institutions would be charged a special,
one-time assessment at the rate of 85 to 90 basis points on their
SAIF deposits. The Bank's maximum, one-time assessment for its
SAIF deposits at March 31, 1996, under the proposed legislation
as described, would be $140,000.
Income Taxes
Based on the interaction of the significantly lower level of
pre-tax income and the normal level of tax-exempt income, there
was an income tax benefit recorded in the first quarter of 1995.
The effective income tax rate of 30.3% in the first quarter of
1996 is more comparable to the 28.7% rate in the same period of
1994 and tends to vary from the 1994 rate due to an increase in
the ratio of taxable to tax-exempt income.
LIQUIDITY
Liquidity refers to the continuing ability of the Bank to
meet deposit withdrawals, fund loan and capital expenditure
commitments, maintain reserve requirements, pay operating
expenses and provide funds to the Parent Company for payment of
dividends, debt service and other operational requirements.
Liquidity is immediately available from three major sources: (a)
cash on hand and on deposit at other banks, (b) the outstanding
balance of federal funds sold and (c) the available-for-sale
securities portfolio. While additional liquidity is readily
obtainable by purchasing federal funds from other banks, the Bank
has not found it necessary to utilize this resource to any
substantial extent in recent years. Further, while
available-for-sale securities are intended to be a source of immediate
liquidity, the entire investment securities portfolio is managed
to provide both income and a ready source of liquidity. The
average portfolio life of debt securities is approximately four
and one-half years, resulting in a substantial level of
maturities each year. All debt securities are of investment
grade quality and, if the need arises, can be promptly liquidated
on the open market or pledged as collateral for short-term
borrowing.
In line with its approach to liquidity, the Bank as a matter
of policy does not solicit or accept brokered deposits for
funding asset growth. Instead, loans and other assets are based
on a solid core of local deposits and the Bank's strong capital
position. To date, the steady increase in deposits, retail
repurchase agreements and capital has been adequate to fund loan
demand in the Bank's market area, while maintaining the desired
level of immediate liquidity and a substantial investment
securities portfolio available for both immediate and secondary
liquidity purposes.
9
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ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
One of the primary objectives of asset/liability management
is to maximize net interest margin while minimizing the earnings
risk associated with changes in interest rates. One method used
to manage interest rate sensitivity is to measure, over various
time periods, the interest rate sensitivity positions, or gaps;
however, this method addresses only the magnitude of timing
differences and does not address earnings or market value.
Therefore, management uses an earnings simulation model to
prepare, on a regular basis, earnings projections based on a
range of interest rate scenarios in order to more accurately
measure interest rate risk.
The Bank's balance sheet is liability-sensitive, meaning
that in a given period there will be more liabilities than assets
subject to immediate repricing as market rates change. Because
immediately rate sensitive interest-bearing liabilities exceed
rate sensitive assets, the earnings position could improve in a
declining rate environment and could deteriorate in a rising rate
environment, depending on the correlation of rate changes in
these two categories. Included in interest-bearing liabilities
subject to rate changes within 30 days are NOW, savings, and
money market deposits totaling $80,705,000 as of March 31, 1996.
These types of deposits historically have not repriced
coincidentally with or in the same proportion as general market
indicators.
CAPITAL ADEQUACY
Under guidelines established by the Federal Reserve Board,
capital adequacy is currently measured for regulatory purposes by
certain risk-based capital ratios, supplemented by a leverage
ratio. The risk-based capital ratios are determined by
expressing allowable capital amounts, defined in terms of Tier 1
and Tier 2, as a percentage of risk-adjusted assets, which are
computed by measuring the relative credit risk of both the asset
categories on the balance sheet and various off-balance sheet
exposures. Tier 1 capital consists primarily of common
shareholders' equity and qualifying perpetual preferred stock,
net of goodwill and other disallowed intangible assets. Tier 2
capital, which is limited to the total of Tier 1 capital,
includes allowable amounts of subordinated debt, mandatory
convertible securities, preferred stock and the allowance for
loan losses. Under current requirements, the minimum Tier 1
capital ratio is 4% and the minimum total capital ratio,
consisting of both Tier 1 and Tier 2 capital, is 8%. At March
31, 1996, the Corporation had a Tier 1 capital ratio of 13.97%
and a total capital ratio of 14.99%.
The leverage ratio, which serves as a minimum capital
standard, considers Tier 1 capital only and is expressed as a
percentage of average total assets for the most recent quarter,
after reduction of those assets for goodwill and other disallowed
intangible assets at the measurement date. The required ratio
ranges from 3% to 5%, subject to federal bank regulatory
evaluation of the organization's overall safety and soundness.
At March 31, 1996, the Corporation had a leverage ratio of 9.34%.
BALANCE SHEET REVIEW
Total assets at March 31, 1996 were higher than at March 31,
1995 and December 31, 1995 by $28,078,000 or 10.8% and $4,489,000
or 1.6%, respectively; deposits were ahead by $20,946,000 or 9.1%
and $963,000 or 0.4%. Average assets increased $24,471,000 or
9.4% in the first quarter of 1996 compared to the same period in
1995, while average deposits increased $19,519,000 or 8.5%.
10
<PAGE>
Investment Securities
Additions to the investment securities portfolio depend to a
large extent on the availability of investable funds that are not
otherwise needed to satisfy loan demand. During the twelve-month
period ended March 31, 1996, when the growth in total assets
significantly exceeded that for loans, the level of investment
securities was increased $13,254,000 or 18.3%. Of this total
increase, $1,037,000 occurred during the first quarter of 1996.
Investable funds not otherwise utilized are temporarily invested
on an overnight basis as federal funds sold, the level of which
is affected by such considerations as near-term loan demand and
liquidity needs. Based on funds requirements, the Bank was a net
purchaser of federal funds at March 31, 1996.
Loans
The Corporation's primary source of revenue and largest
component of earning assets is the loan portfolio. Loans
increased $15,924,000 or 9.5% during the twelve-month period
ended March 31, 1996. The net loan increase during the first
quarter of 1996 was $4,267,000 or 2.4%. Average loans were
$14,081,000 or 8.4% higher in the first quarter of 1996 than in
the same period of 1995. The ratio of average loans to average
deposits, in comparing first quarter periods, was 73.2% in each
period. The ratio of loans to deposits at March 31, 1996 was
73.4%.
The commercial loan portfolio accounted for nearly half of
the loan increase during the last twelve months, and the
residential construction and mortgage loan portfolio accounted
for nearly one-third. Consumer loan growth related primarily to
credit cards and home equity lines of credit. Changes in the
credit card operation are discussed in "Business Development
Matters". The level of consumer loans may be affected in the
future by management's decision in March 1996 that the Bank would
discontinue the purchase of retail installment loan contracts
from automobile and equipment dealers (see "Business Development
Matters").
Asset Quality
Management considers the Bank's asset quality to be of
primary importance. A formal loan review function, independent
of loan origination, is used to identify and monitor problem
loans. In determining the allowance for loan losses and any
resulting provision to be charged against earnings, particular
emphasis is placed on the results of the loan review process.
Consideration is also given to historical loan loss experience,
the value and adequacy of collateral, and economic conditions in
the Bank's market area. This evaluation is inherently subjective
as it requires material estimates, including the amounts and
timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant charge.
Management's policy in regard to past due loans is
conservative and normally requires a prompt charge-off to the
allowance for loan losses following timely collection efforts and
a thorough review. Further efforts are then pursued through
various means available. Loans carried in a nonaccrual status
are generally collateralized and the possibility of future losses
is considered minimal.
Deposits
The level and mix of deposits is affected by various
factors, including general economic conditions, the particular
circumstances of local markets and the specific deposit
strategies employed. In general, broad interest
11
<PAGE>
rate declines tend to encourage customers to consider alternative
investments such as mutual funds and tax-deferred annuity
products, while interest rate increases tend to have the opposite
effect.
The Bank's level and mix of deposits has been specifically
affected by the following factors. Certain variable-rate time
deposits with minimum rates in excess of current market rates
were phased out over a two-year period that commenced in January
1994. A retail repurchase agreements program, established in the
second quarter of 1994, has tended to transfer funds away from
deposits. The balance of retail repurchase agreements was
$4,215,000 at March 31, 1996 and $3,730,000 at March 31, 1995.
Further, the level of time deposits obtained from governmental
units fluctuates, amounting to $17,478,000, $7,429,000 and
$17,820,000 at March 31, 1996, March 31, 1995 and December 31,
1995, respectively.
BUSINESS DEVELOPMENT MATTERS
As discussed in the "Overview", the Corporation had entered
into definitive agreements to acquire two mutual savings banks.
In 1995, the agreements expired without the acquisitions having
been completed due to changes in federal and state regulatory
policies which strictly limited the circumstances under which
such transactions would be permitted.
During 1994, a new credit card operation was established in
which the Bank carries its own credit card receivables as opposed
to the former fee-based arrangement under which accounts were
generated for and owned by a correspondent bank. As part of the
new credit card strategy, extensive marketing efforts were
undertaken in 1995, primarily to Bank customers. Additionally,
the merchant aspect of credit card operations has been shifted to
an in-house basis from the prior correspondent arrangement.
In a significant 1994 development, the Bank elected to
outsource all of its data processing, item capture and statement
rendering operations. The conversion to a service bureau
arrangement was completed in the 1994 fourth quarter. The major
items of data processing equipment that were no longer needed by
the Bank were acquired by the new processor. While the Bank does
not currently plan to resume any major data processing
operations, the level of computer equipment was significantly
increased in 1995 through expanded use of personal computer
networks. The new networks allow for a more direct input of
basic loan and deposit account information to the data files
maintained by the service bureau. Capital expenditures in 1995,
which totaled $1,302,230, related primarily to the increase in
computer equipment. Since most of this equipment was not placed
into service until late in 1995, the majority of the effect on
annual depreciation expense occurs in 1996.
In 1995, as discussed in Note 5 to Consolidated Financial
Statements, management adopted a comprehensive restructuring
project for the purpose of reengineering Bank operations to
become more competitive and cost-effective in developing business
and servicing customers and to improve long-term profitability.
In connection with this project, certain positions within the
Bank have either been realigned or eliminated. Total
restructuring charges in 1995 (all recorded in the first
quarter), with the expectation that all significant costs were
incurred and paid within that year, amounted to $460,457, of
which $301,116 related to personnel costs and $159,341 to
professional fees. The Bank also decided in March 1995 to
recognize losses of $414,596 from the sales of certain investment
securities held in the available-for-sale portfolio in order to
gain favorable tax treatment for the losses and to take advantage
of reinvestment opportunities at higher coupon rates. While
these actions had a significant adverse impact on 1995 earnings,
management believes these decisions will enhance the long-term
value of the Corporation and strengthen the competitive position
of its community banking operations.
12
<PAGE>
Management decided in March 1996 that the Bank would
discontinue the purchase of retail installment loan contracts
from automobile and equipment dealers, due largely to the
declining yields being experienced in this loan program.
Contracts of this nature included in loans amounted to
$33,525,143 at December 31, 1995 and $33,921,895 at March 31,
1996. While there will be no purchases of new contracts, current
plans call for the collection of outstanding loans based on their
contractual terms. It is expected that the funds previously
invested in this loan program will be redeployed, as loan
payments occur, to other loan programs or to the investment
securities portfolio.
13
<PAGE>
TABLE 1
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS
(Taxable Equivalent Basis, Dollars in Thousands)
1996 1995
THREE MONTHS ENDED
MARCH 31 Average
Interest Rates
Average Income/ Earned/ Average
Balance Expense Paid Balance
<TABLE>
<S> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $182,709 $ 4,056 8.90 % $168,628
Investment
securities (2):
Taxable income 72,195 1,290 7.15 65,588
Non-taxable
income 12,692 279 8.79 10,279
Federal funds sold 409 5 5.08 870
Total earning
assets 268,005 5,630 8.42 245,365
Cash and due from
banks 8,579 8,806
Other assets, net 8,152 6,094
TOTAL ASSETS 284,736 $260,265
INTEREST-BEARING
LIABILITIES
Interest-bearing
deposits:
NOW accounts $ 34,361 177 2.07 $ 31,357
Savings deposits 30,138 197 2.62 30,238
Money market
accounts 16,138 112 2.79 19,075
Certificates and
other time
deposits 134,650 1,830 5.45 114,171
Retail repurchase
agreements 4,278 46 4.29 3,215
Federal funds
purchased 1,302 18 5.58 873
Total interest-
bearing
liabilities 220,867 2,380 4.32 198,929
Noninterest-bearing
demand deposits 34,467 35,394
Other liabilities 2,901 2,154
Shareholders'
equity 26,501 23,788
TOTAL
LIABILITIES
AND
SHAREHOLDERS'
EQUITY $284,736 $260,265
NET INTEREST
INCOME AND SPREAD $ 3,250 4.10 %
NET YIELD ON
EARNING ASSETS 4.85 %
</TABLE>
(1) The mix variance, not separately stated, has been
proportionally allocated to the volume and rate variances
based on their absolute dollar amount.
(2) Interest income and yields related to certain investment
securities and loans exempt from both federal and state
income tax or from state income tax alone are stated on a
fully taxable equivalent basis, assuming a 34% federal tax
rate and applicable state tax rate, reduced by the
nondeductible portion of interest expense.
(3) Nonaccrual loans are included in the average loan balance.
Loan fees and the incremental direct costs associated with
making loans are deferred and subsequently recognized over
the life of the loan as an adjustment of interest income.
14a
<PAGE>
TABLE 1
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS
(Taxable Equivalent Basis, Dollars in Thousands)
1995
THREE MONTHS ENDED
MARCH 31 Average 1996 Versus 1995
Interest Rates Interest Variance
Income/ Earned/ due to (1) Net
Expense Paid Volume Rate Change
<TABLE>
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 3,718 8.91 % $ 342 $ (4) $ 338
Investment
securities (2):
Taxable income 1,052 6.42 112 126 238
Non-taxable
income 251 9.76 55 (27) 28
Federal funds sold 14 6.36 (6) (3) (9)
Total earning
assets 5,035 8.27 503 92 595
Cash and due from
banks
Other assets, net
TOTAL ASSETS
INTEREST-BEARING
LIABILITIES
Interest-bearing
deposits:
NOW accounts 166 2.15 17 (6) 11
Savings deposits 217 2.92 (1) (19) (20)
Money market accounts 144 3.06 (20) (12) (32)
Certificates and
other time
deposits 1,499 5.32 291 40 331
Retail repurchase
agreements 40 5.06 12 (6) 6
Federal funds
purchased 13 5.84 6 (1) 5
Total interest-
bearing
liabilities 2,079 4.24 305 (4) 301
Noninterest-bearing
demand deposits
Other liabilities
Shareholders' equity
TOTAL LIABILITIES
AND
SHAREHOLDERS'
EQUITY
NET INTEREST INCOME
AND SPREAD $ 2,956 4.03 % $ 198 $ 96 $ 294
NET YIELD ON EARNING
ASSETS 4.84 %
</TABLE>
(1) The mix variance, not separately stated, has been
proportionally allocated to the volume and rate variances
based on their absolute dollar amount.
(2) Interest income and yields related to certain investment
securities and loans exempt from both federal and state
income tax or from state income tax alone are stated on a
fully taxable equivalent basis, assuming a 34% federal tax
rate and applicable state tax rate, reduced by the
nondeductible portion of interest expense.
(3) Nonaccrual loans are included in the average loan balance.
Loan fees and the incremental direct costs associated with
making loans are deferred and subsequently recognized over
the life of the loan as an adjustment of interest income.
14b
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibits to this report are listed in the index to
exhibits on pages 16 and 17 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended March 31, 1996.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FNB Corp.
(Registrant)
Date: May 8, 1996 By: /s/ Jerry A. Little
Jerry A. Little
Treasurer and
Secretary
(Principal Financial
and Accounting
Officer)
15
<PAGE>
FNB CORP.
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3.10 Articles of Incorporation of the
Registrant, incorporated herein by
reference to Exhibit 3.1 to the
Registrant's Form S-14 Registration
Statement (No. 2-96498) filed March 16,
1985.
3.11 Articles of Amendment to Articles of
Incorporation of the Registrant,
adopted May 10, 1988, incorporated
herein by reference to Exhibit 19.10
to the Registrant's Form 10-Q Quarterly
Report for the quarter ended June 30,
1988.
3.20 Amended and Restated Bylaws of the
Registrant, adopted May 9, 1995,
incorporated herein by reference to
Exhibit 3.20 to the Registrant's
Form 10-QSB Quarterly Report for the
quarter ended June 30, 1995.
4 Specimen of Registrant's Common Stock
Certificate, incorporated herein
by reference to Exhibit 4 to Amendment
No. 1 to the Registrant's Form S-14
Registration Statement (No. 2-96498)
filed April 19, 1985.
10.10 Form of Split Dollar Insurance Agreement
dated as of November 1, 1987 between
First National Bank and Trust Company
and certain of its key employees and
directors, incorporated herein by
reference to Exhibit 19.20 to the
Registrant's Form 10-Q Quarterly Report
for the Quarter ended June 30, 1988.
10.11 Form of Amendment to Split Dollar
Insurance Agreement dated as of
November 1, 1994 between First National
Bank and Trust Company and certain of
its key employees and directors,
incorporated herein by reference
to Exhibit 10.11 to the Registrant's
Form 10-KSB Annual Report for the
fiscal year ended December 31, 1994.
10.20 Copy of Split Dollar Insurance Agreement
dated as of May 28, 1989 between
First National Bank and Trust Company
and James M. Culberson, Jr.,
incorporated herein by reference to
Exhibit 10.30 to the Registrant's Form
10-K Annual Report for the fiscal year
ended December 31, 1989.
10.30 Copy of Stock Compensation Plan adopted
May 11, 1993, incorporated herein by
reference to Exhibit 10.40 to the
Registrant's Form 10-QSB Quarterly
Report for the quarter ended June 30, 1993.
16
<PAGE>
Exhibit No. Description of Exhibit
10.31 Form of Incentive Stock Option Agreement
between FNB Corp. and certain of its key
employees, pursuant to the Registrant's
Stock Compensation Plan, incorporated
herein by reference to Exhibit 10.31 to
the Registrant's Form 10-KSB Annual
Report for the fiscal year ended
December 31, 1994.
10.32 Form of Nonqualified Stock Option
Agreement between FNB Corp. and certain
of its directors, pursuant to the
Registrant's Stock Compensation Plan,
incorporated herein by reference to
Exhibit 10.32 to the Registrant's
Form 10-KSB Annual Report for the fiscal
year ended December 31, 1994.
10.40 Copy of FNB Corp. Savings Institutions
Management Stock Compensation Plan
adopted May 10, 1994, incorporated
herein by reference to Exhibit 10.40
to the Registrant's Form 10-QSB
Quarterly Report for the quarter ended
June 30, 1994.
10.50 Copy of Employment Agreement dated as of
December 27, 1995 between First National
Bank and Trust Company and Michael C.
Miller, incorporated herein by reference
to Exhibit 10.50 to the Registrant's
Form 10-KSB Annual Report for the fiscal
year ended December 31, 1995.
27 Financial Data Schedule.
17
<PAGE>
/TEXT>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form
10-QSB for the quarterly period ended March 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,996,374
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,989,467
<INVESTMENTS-CARRYING> 60,583,912
<INVESTMENTS-MARKET> 0
<LOANS> 184,190,175
<ALLOWANCE> 1,936,154
<TOTAL-ASSETS> 288,166,810
<DEPOSITS> 251,107,232
<SHORT-TERM> 7,024,955
<LIABILITIES-OTHER> 3,421,429
<LONG-TERM> 0
0
0
<COMMON> 4,500,740
<OTHER-SE> 22,112,454
<TOTAL-LIABILITIES-AND-EQUITY> 288,166,810
<INTEREST-LOAN> 4,043,802
<INTEREST-INVEST> 1,387,514
<INTEREST-OTHER> 5,183
<INTEREST-TOTAL> 5,436,499
<INTEREST-DEPOSIT> 2,316,408
<INTEREST-EXPENSE> 2,380,242
<INTEREST-INCOME-NET> 3,056,257
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,186,042
<INCOME-PRETAX> 1,356,039
<INCOME-PRE-EXTRAORDINARY> 1,356,039
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944,780
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 4.56
<LOANS-NON> 25,000
<LOANS-PAST> 323,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,903,000
<CHARGE-OFFS> 120,000
<RECOVERIES> 53,000
<ALLOWANCE-CLOSE> 1,936,000
<ALLOWANCE-DOMESTIC> 1,693,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 243,000
</TABLE>
