UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED] 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)
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Registrant's telephone number, including area code: (910) 626-8300
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, par value $2.50 per share
(Title of Class)
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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-B 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-KSB or any amendment to
the Form 10-KSB. [ ]
The registrant's revenues for the year ended December 31, 1995 were $22,431,927.
As of March 10, 1996, the aggregate market value of voting stock held by
nonaffiliates of the registrant, assuming, without admission, that all directors
and officers of the registrant may be deemed affiliates, was $37,622,568.
The registrant had 1,800,296 shares of $2.50 par value common stock outstanding
at March 10, 1996.
Transitional Small Business Disclosure Format (Check One): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1995 are incorporated by reference into Part II.
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 14, 1996 are incorporated by reference into Part
III.
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PART I
Item 1. Description of Business
FNB Corp. (the "Parent Company") is a bank holding company incorporated
under the laws of the State of North Carolina in 1984. On July 2, 1985, through
an exchange of stock, the Parent Company acquired its wholly-owned bank
subsidiary, First National Bank and Trust Company (the "Bank"), a national
banking association founded in 1907. The Parent Company and the Bank are
collectively referred to as the "Corporation".
The Bank, a full-service commercial bank, currently conducts all of its
operations in Randolph, Montgomery and Chatham counties in North Carolina. Four
offices, including the main office, are located in Asheboro. Additional
community offices are located in Archdale (two offices), Biscoe, Ramseur,
Randleman, Seagrove and Siler City. Some of the major services offered include
checking accounts, NOW accounts (including package account versions that offer a
variety of products and services), money market accounts, savings accounts,
certificates of deposit, holiday club accounts, individual retirement accounts,
credit cards and loans, both secured and unsecured, for business, agricultural
and personal use. The Bank also has automated teller machines and is a member of
"Honor", a regional teller machine network that, through arrangements with other
networks, allows access to automated teller machines located in a total of
forty-five states, Washington D.C. and Puerto Rico.
The Bank has a Trust and Investment Services Division that offers
traditional trust and estate settlement services, investment management
programs, brokerage services and tax-deferred annuities. In 1995, the Trust and
Investment Services Division began offering investment products and services
available through "The Wall Street Corner", a division of Liberty Securities.
On December 30, 1993, the Corporation entered into definitive
agreements to acquire two mutual savings banks, Home Savings Bank of Siler City,
SSB of Siler City, North Carolina and Randleman Savings Bank, SSB of Randleman,
North Carolina, 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. Regulatory
applications for approval to consummate the proposed acquisitions were filed in
April 1994. Substantial changes in regulatory policy occurring shortly after the
applications were filed effectively resulted in a moratorium on federal approval
of merger/conversions, and the Corporation subsequently withdrew the
applications to the FDIC and the Federal Reserve and postponed the ultimate
decision to proceed with the acquisitions until it was clear what the regulatory
obstacles might be. 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.
The Corporation incurred certain costs in connection with the proposed
acquisitions. Those costs, which had been deferred, amounted to $186,350 and are
included in other expense in the consolidated statement of income for the year
ended December 31, 1995.
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 existing Bank customers. Credit card
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receivables amounted to $1,524,718 at December 31, 1995. 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 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 will 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 will not occur until 1996.
In 1995, 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, with the expectation that all significant costs were incurred
and paid during that period, 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.
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 at December 31, 1995
amounted to $33,525,143. 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.
Competition
The commercial banking industry within the Bank's marketing area is
extremely competitive. The Bank faces direct competition in Randolph, Montgomery
and Chatham counties from approximately twenty different financial institutions,
including commercial banks, savings institutions and credit unions. Although
none of these entities is dominant, the Bank considers itself one of the major
financial institutions in the area in terms of total assets and deposits.
Further competition is provided by banks located in adjoining counties, as well
as other types of financial institutions such as insurance companies, finance
companies, pension funds and brokerage houses and other money funds.
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Supervision and Regulation
The Parent Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered
as such with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). A bank holding company is required to file with the Federal
Reserve Board annual reports and other information regarding its business
operations and those of its subsidiaries. It is also subject to examination by
the Federal Reserve Board and is required to obtain Federal Reserve Board
approval prior to acquiring, directly or indirectly, ownership or control of any
voting shares of any bank if, after such acquisition, it would own or control,
directly or indirectly, more than five percent of the voting stock of such bank,
unless it already owns a majority of the voting stock of such bank. Furthermore,
a bank holding company, with limited exceptions, is prohibited from acquiring
direct or indirect ownership or control of more than five percent of the voting
stock of any company which is not a bank or a bank holding company and must
engage only in the business of banking or managing or controlling banks or
furnishing services to or performing services for its subsidiary banks. One of
the exceptions to this prohibition is the ownership of shares in a company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Federal Reserve Board has determined that certain activities are
closely related to banking, and that bank holding companies may apply to the
Federal Reserve Board for permission to form, retain or acquire an interest in a
company engaging or proposing to engage in these activities. The permitted
nonbanking activities include, without limitation: (1) making, acquiring or
servicing loans or other extensions of credit such as consumer finance, credit
card, mortgage, commercial finance and factoring companies would make; (2)
acting as an investment or financial advisor; (3) leasing real or personal
property or acting as agent, broker, or advisor in leasing such property if the
lease is to serve as the functional equivalent of an extension of credit to the
lessee of the property and certain other conditions are met; (4) providing
bookkeeping or data processing services under certain circumstances; (5) acting
as an insurance agent or broker with respect to insurance that is directly
related to the extension of credit with other financial services; (6) acting as
an underwriter for credit life insurance and credit accident and health
insurance directly related to extensions of credit by the holding company
system; and (7) providing securities brokerage services and related securities
credit activities.
As a national banking association, the Bank is subject to regulatory
supervision, of which regular bank examinations by the Comptroller of the
Currency are a part. The Bank is a member of the Federal Deposit Insurance
Corporation (the "FDIC") which currently insures the deposits of each member
bank to a maximum of $100,000 per depositor. For this protection, each bank pays
a quarterly statutory assessment and is subject to the rules and regulations of
the FDIC. The Bank is also a member of the Federal Reserve System and is
therefore subject to the applicable provisions of the Federal Reserve Act, which
imposes restrictions on loans by subsidiary banks to a holding company and its
other subsidiaries and on the use of stock or securities as collateral security
for loans by subsidiary banks to any borrower.
The ability of the Parent Company to pay dividends depends to a large
extent upon the amount of dividends the Bank pays to the Parent Company.
Approval of the Comptroller of the Currency, or his designate, will be required
for any dividend to the Parent Company by the Bank if the total of all
dividends, including any proposed dividend, declared by the Bank in any calendar
year exceeds the total of its net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus or a fund for the retirement of any preferred stock.
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Effect of Governmental Policies
The operations and earnings of the Bank and, therefore, of the Parent
Company are affected by legislative changes and by the policies of various
regulatory agencies. In particular, the Bank is affected by the monetary and
fiscal policies of the Federal Reserve Board. The instruments of monetary policy
used by the Federal Reserve Board include its open market operations in U.S.
Government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements on member bank deposits. The actions of the
Federal Reserve Board influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans or paid on deposits.
Employees
As of December 31, 1995, the Parent Company had three officers, all of
whom were also officers of the Bank. On that same date, the Bank had 117
full-time employees and 24 part-time employees. The Bank considers its
relationship with its employees to be excellent. The Bank provides employee
benefit programs, including a noncontributory defined benefit pension plan,
matching retirement/savings plan, group life, health and dental insurance, paid
vacations, sick leave, and health care and life insurance benefits for retired
employees.
Item 2. Description of Property
The main offices of the Bank and the principal executive offices of the
Corporation are located in an office building at 101 Sunset Avenue, Asheboro,
North Carolina. The premises contain approximately 36,500 square feet of office
space. The Bank also has other community offices in Asheboro, Archdale, Biscoe,
Ramseur, Randleman, Seagrove and Siler City, North Carolina. Except as noted
below, all premises are owned by the Bank in fee. The Randolph Mall office in
Asheboro, an automated teller machine location at the Randolph Mall and another
automated teller machine location in Asheboro are under leases expiring December
31, 1999, December 31, 1996 and May 31, 1996, respectively. The Bush Hill office
in Archdale is under a lease expiring January 31, 2002, with lease renewal
options for up to an additional 20-year term. The land on which the Seagrove
Office is situated is under a lease expiring June 30, 2016. At that time, the
land is subject to a purchase option at a fixed price or lease renewal options
for up to an additional 30-year term.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters To A Vote Of Security Holders
Not applicable.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Information with respect to FNB Corp. common stock, appearing under the
headings "Common Stock" and "Market Makers" of the section entitled "General
Information" and under the heading "Table 10 - Quarterly Financial Data" of the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 1995 Annual Report to Shareholders, is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The sections entitled "Five Year Financial History" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1995 Annual Report to Shareholders are incorporated herein by reference.
Item 7. Financial Statements
The consolidated financial statements of the Corporation and its
subsidiary and the opinion of KPMG Peat Marwick LLP, independent certified
public accountants, with respect thereto, are incorporated herein by reference,
as identified below, from the 1995 Annual Report to Shareholders.
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Income, years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity, years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows, years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information with respect to directors, appearing under the heading
"Election of Directors" in the Registrant's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 14, 1996, is incorporated
herein by reference. Information with respect to executive officers, appearing
under the heading "Executive Officers" in the Registrant's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 14, 1996, is
incorporated herein by reference. Information with respect to compliance with
Section 16(a) of the Exchange Act, appearing under the heading "Security
Ownership of Management" in the Registrant's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 14, 1996, is incorporated
herein by reference.
Item 10. Executive Compensation
Information with respect to executive compensation, appearing under the
heading "Executive Compensation" in the Registrant's definitive proxy statement
for the Annual Meeting of Shareholders to be held on May 14, 1996, is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management, appearing under the headings "Voting Securities
Outstanding and Principal Shareholders" and "Security Ownership of Management"
in the Registrant's definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 14, 1996, is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions, appearing under the heading "Indebtedness of Officers and
Directors" in the Registrant's definitive proxy statement for the Annual Meeting
of Shareholders to be held on May 14, 1996, is incorporated herein by reference.
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PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits to this report are listed in the index to exhibits
on pages 10 and 11 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
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SIGNATURES
In accordance with Section 13 or 15(d) 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: March 26, 1996 By:
Michael C. Miller
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
March 26, 1996.
Signature Title
/s/ Michael C. Miller President, Chief Executive
Michael C. Miller Officer and Director
/s/ Jerry A. Little Treasurer and Secretary
Jerry A. Little (Principal Financial and
Accounting Officer)
/s/ James M. Culberson, Jr. Chairman of the Board
James M. Culberson, Jr.
/s/ James M. Campbell, Jr. Director
James M. Campbell, Jr.
/s/ Wilbert L. Hancock Director
Wilbert L. Hancock
/s/ Thomas A. Jordan Director
Thomas A. Jordan
/s/ R. Reynolds Neely, Jr. Director
R. Reynolds Neely, Jr.
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Signature Title
Director
Richard K. Pugh
/s/ J. M. Ramsay III Director
J. M. Ramsay III
/s/ Charles W. Stout, M.D. Director
Charles W. Stout, M.D.
/s/ Earlene V. Ward Director
Earlene V. Ward
/s/ E. C. Watkins, Jr. Director
E. C. Watkins, Jr.
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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 Certi-
ficate, 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.
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Exhibit No. Description of Exhibit
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.
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.
13 Portions of the Registrant's 1995 Annual
Report to Shareholders, which are
incorporated within this report at the items
so designated.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
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EXHIBIT 10.50
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of the 27th day of December,
1995, by and between FIRST NATIONAL BANK AND TRUST COMPANY, a national banking
corporation (the "Bank"), and MICHAEL C. MILLER (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee has been designated the principal executive
officer of the Bank as of January 1, 1994; and
WHEREAS, the Bank desires to assure the continuing services of the
Employee, and the parties desire to set forth in this Agreement the respective
rights and responsibilities of the Employee and the Bank;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows:
1. Employment. The Employee shall continue as an executive employee of
the Company, at such salary and benefits as shall be mutually agreed upon from
time to time between the Employee and the Board of Directors of the Bank.
2. Term. The term of Employee's employment hereunder shall continue
until either party gives 60 days' prior written notice to the other of its
desire to terminate.
3. Change in Position or Employment Conditions. The Employee may
terminate his employment immediately upon written notice to the Bank following a
"change in control" of the Company of any one of the following events:
(i) The Employee determines within 90 days following a change
in control that he does not wish to continue his employment with the
Bank, or its successor;
(ii) At any time following a change in control if, without his
consent, Employee's authority and/or responsibility are substantially
reduced, or if his salary and/or benefits are reduced, below that which
was in effect immediately prior to the change in control; or
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(iii) At any time following the change in control the Employee
is advised that he must change his residence or principal place of
business from Asheboro, North Carolina.
If the Employee's employment is terminated pursuant to this paragraph
3, the Employee shall be entitled to receive in three equal installments payable
on the date of the termination of his employment hereunder and on the first and
second anniversaries thereof, an aggregate amount equal to 2.99 multiplied by
the average of the Employee's total cash compensation for the five fiscal years
immediately preceding the change in control, PROVIDED, HOWEVER, that if any
portion of these payments, together with any other payments paid or payable to
Employee by the Company, would not be deductible in whole or in part by the
Company in the calculation of its federal income tax by reason of Section 280G
of the Internal Revenue Code or would cause, either directly or indirectly, an
"excess parachute payment" to exist within the meaning of said Section 280G,
such payments shall be reduced until no portion of the payments would fail to be
deductible by reason of being an "excess parachute payment."
For purposes of this paragraph, a change in control shall be deemed to
have occurred upon the occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) (2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") but excluding any employee benefit plan of the Bank or
its parent, FNB Corp. ("FNB"), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Bank or FNB representing 50% or more of the
combined voting power of the Bank's or FNB's outstanding securities
then entitled ordinarily (and apart from rights accruing under special
circumstances) to vote for the election of directors; or
(ii) Individuals who are "Continuing Directors" (as
hereinafter defined) cease for any reason to constitute at least a
majority of the Board of Directors; or
(iii) The Board of Directors shall approve a sale of all or
substantially all of the assets and/or deposit liabilities of the Bank
or FNB; or
(iv) The Board of Directors shall approve any merger,
consolidation, or like business combination or reorganization of the
Bank or FNB the consummation of which would result in the occurrence of
any event described in clause (i) or (ii) above.
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For purposes of the foregoing, "Continuing Directors" shall mean (i)
the directors of the Bank or FNB in office on the date hereof and (ii) any
successor to any such director (and any additional director) who after the date
hereof (y) was nominated or selected by a majority of the Continuing Directors
in office at the time of his nomination or selection and (z) who is not an
"affiliate" or "associate" (as defined in Regulation 12B under the Exchange Act)
of any person who is the beneficial owner, directly or indirectly, of securities
representing 50% or more of the combined voting power of the Bank's or FNB's
outstanding securities then entitled ordinarily to vote for the election of
directors.
4. No Solicitation. The Employee hereby agrees that he will not
solicit, counsel or encourage a change in control without the prior approval of
the Board of Directors of the Bank or of FNB. A violation of this paragraph 4
shall be deemed to constitute a forfeiture by the Employee of all of his rights
under paragraph 3.
5. Covenants Not to Compete.
(a) The Employee hereby promises and agrees that, unless waived in
writing by the Bank, during the term of his employment under this Agreement, or
during the period during which the Employee is receiving payments under Section
3(iii) hereof, or for a period of one year following his termination of
employment, whichever last occurs:
(i) He will not, directly or indirectly, own any interest in,
manage, operate, control, be employed by, render consulting or advisory
services to or participate in or be connected with the management or
control of any business that is then engaged in the operation of a
bank, savings and loan association or similar financial institution
within a 40 mile radius of Asheboro, N.C.
(ii) He will not, directly or indirectly, influence or attempt
to influence any customer of the Bank or FNB to discontinue its use of
the Bank's or FNB's services or to divert such business to any other
person, firm or corporation;
(iii) He will not, directly or indirectly, interfere with,
disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Bank or FNB and any of its respective suppliers,
principals, distributors, lessors or licensers; and
(iv) He will not, directly or indirectly, solicit any employee
of the Bank or FNB, whose base annual salary at the time of the
Employee's
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termination was $20,000 or more, to work for any other
person, firm or corporation.
(b) It is the desire and intent of the parties that the provisions of
paragraph 5(a) shall be enforced to the fullest extend permitted under the laws
and public policies of each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of paragraph 5(a) shall be adjudicated to
be invalid or unenforceable, such adjudication shall apply only with respect to
the operation of that portion in the particular jurisdiction in which such
adjudication is made, and all other portions shall continue in full force and
effect.
(c) It is expressly agreed that the provisions and covenants in this
paragraph 5 shall not apply and shall be of no force or effect in the event that
the Bank fails to honor its obligations hereunder.
6. Injunctive Relief. The Employee acknowledges and agrees that the
Bank would suffer irreparable injury in the event of a breach by him of any of
the provisions of paragraph 5 of this Agreement and that the Bank shall be
entitled to an injunction restraining him from any breach or threatened breach
thereof. Nothing herein shall be construed, however, as prohibiting the Bank
from pursuing any other remedies at law or in equity which it may have for any
such breach or threatened breach of any provision of paragraph 5 hereof,
including the recovery of damages from the Employee.
7. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Employee and his personal representatives,
estate and heirs and to the Bank and its successors and assigns, including
without limitation any corporation or other entity to which the Bank may
transfer all or substantially all of its assets and business (by operation or
law or otherwise) and to which the Bank may assign this Agreement. The Employee
may not assign this Agreement or any part hereof without the prior written
consent of the Bank, which consent may be withheld by the Bank for any reason it
deems appropriate.
8. Entire Agreement. This Agreement, together with any agreements and
similar documents entered into between the Bank and the Employee under any stock
option, stock compensation or similar employee benefit plans maintained by the
Bank, contains the entire agreement of the parties with respect to the
employment of the Employee by the Bank and supersedes and replaces all other
understandings and agreements, whether oral or in writing, if any, previously
entered into by the parties with respect to such employment.
4
<PAGE>
9. Amendment; Waiver. No provision of this Agreement may be amended,
modified or waived unless such amendment, modification or waiver is agreed to in
writing and signed by the Employee and by a duly authorized officer of the Bank.
No waiver by either party of any breach by the other party of any provision of
this Agreement shall be deemed a waiver of any other breach.
10. Notices. All notices or other communications given pursuant to this
Agreement shall be in writing and either delivered personally or by prepaid
registered or certified mail, return receipt requested. Notices and other
communications mailed to the Employee shall be addressed to his last address as
shown on the personnel records of the Bank, and notices and other communications
to the Bank shall be addressed to First National Bank and Trust Company, 101
Sunset Avenue, Asheboro, North Carolina 27203, Attn: Secretary. Either party may
change the address to which notices are to be mailed pursuant to this paragraph
10, by written notice given in accordance herewith. Any notice pursuant to this
paragraph 10 shall be effective for all purposes on the date delivered or mailed
as herein provided.
11. Severability. If any one or more of the provisions contained in
this Agreement shall be invalid, illegal, or unenforceable in any respect under
any applicable law, the validity, legality and enforceability of the remaining
provision shall not in any way be affected or impaired thereby.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws and judicial decisions of the State of North Carolina.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
FIRST NATIONAL BANK AND TRUST COMPANY
By: /s/ James M. Culberson, Jr.
Employee:
/s/ Michael C. Miller (SEAL)
Michael C. Miller
5
<PAGE>
Annual Report
1995
(FNB Corp. logo)
<PAGE>
FIVE YEAR FINANCIAL HISTORY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income............................................ $ 20,606 $ 17,688 $ 17,507 $ 18,594 $ 18,542
Interest expense........................................... 9,002 6,979 6,945 8,083 9,949
Net interest income........................................ 11,604 10,709 10,562 10,511 8,593
Provision for loan losses.................................. 515 220 370 575 330
Net interest income after provision for loan losses........ 11,089 10,489 10,192 9,936 8,263
Losses on sales of securities.............................. (415) -- -- -- --
Other operating income..................................... 2,241 2,075 1,810 1,609 1,385
Restructuring charges...................................... 460 -- -- -- --
Other operating expense.................................... 8,654 8,578 8,306 7,536 6,502
Income before income taxes................................. 3,801 3,986 3,696 4,009 3,146
Income taxes............................................... 1,101 1,159 1,006 1,100 743
Net income................................................. $ 2,700 $ 2,827 $ 2,690 $ 2,909 $ 2,403
PER SHARE DATA (1)
Net income................................................. $ 1.50 $ 1.57 $ 1.49 $ 1.62 $ 1.34
Cash dividends declared.................................... .52 .47 .45 .44 .40
Book value................................................. 14.46 12.99 12.35 11.22 10.09
BALANCE SHEET INFORMATION
Total assets............................................... $283,678 $261,616 $249,698 $245,205 $228,410
Investment securities...................................... 84,536 76,983 78,488 81,020 82,986
Loans...................................................... 179,923 168,328 157,302 147,032 126,756
Deposits................................................... 250,144 229,925 224,260 223,478 208,294
Shareholders' equity....................................... 25,995 23,379 22,223 20,204 18,157
RATIOS (AVERAGES)
Return on assets........................................... 1.00% 1.11% 1.09% 1.24% 1.15%
Return on shareholders' equity............................. 10.93 12.33 12.62 15.16 13.90
Shareholders' equity to assets............................. 9.17 8.98 8.65 8.19 8.27
Dividend payout ratio...................................... 34.62 29.71 30.34 27.23 29.96
Loans to deposits.......................................... 73.10 70.67 66.76 64.47 65.22
Net yield on earning assets, taxable equivalent basis...... 4.84 4.73 4.86 5.17 4.83
</TABLE>
(1) 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.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 consolidated financial statements and
supplemental financial information appearing elsewhere in
this report.
The Corporation earned $2,700,457 in 1995, a 4.5% decrease
in net income from 1994. Earnings
OVERVIEW
per share, adjusted for the three-for-two common stock
split in 1995, decreased from $1.57 in 1994 to $1.50 in
1995. The 1995 results 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
$283,678,112 at December 31, 1995, up 8.4% from year-end
1994. Loans amounted to $179,922,737 at December 31, 1995,
up 6.9% from the prior year. Total deposits grew 8.8% to
$250,144,476 in 1995.
On December 30, 1993, the Corporation entered into
definitive agreements to acquire two mutual savings banks,
Home Savings Bank of Siler City, SSB of Siler City, North
Carolina and Randleman Savings Bank, SSB of Randleman,
North Carolina, 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. Regulatory applications for approval to
consummate the proposed acquisitions were filed in April
1994. Substantial changes in regulatory policy occurring
shortly after the applications were filed effectively
resulted in a moratorium on federal approval of
merger/conversions, and the Corporation subsequently
withdrew the applications to the FDIC and the Federal
Reserve and postponed the ultimate decision to proceed
with the acquisitions until it was clear what the
regulatory obstacles might be. 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.
The Corporation's net income declined $126,409 in 1995,
down 4.5% from 1994. Earnings were
EARNINGS REVIEW
negatively affected in 1995 by restructuring charges of
$460,457 and losses on sales of investment securities of
$414,596, which where charges taken for the strategic
purposes discussed in "Business Development Matters". The
1995 results were further negatively affected by a
$295,000 increase in the provision for loan losses.
Additionally, certain costs, amounting to $186,350, that
had been deferred in connection with the proposed
acquisitions discussed in the "Overview" were charged to
expense in 1995. Earnings were positively impacted in 1995
by an increase of $894,160 or 8.3% in net interest income.
In 1994, earnings increased $136,978 or 5.1% from 1993.
The increase in net income in 1994 primarily resulted from
an increase in net interest income and a $150,000 decrease
in the provision for loan losses. The increase in total
other operating income of $264,544 in 1994 approximately
offset the effect of a $271,724 increase in total other
operating expense.
Return on average assets, affected by restructuring
charges and losses on sales of investment securities in
1995, declined from 1.11% in 1994 to 1.00% in 1995. Return
on average assets improved in 1994 from 1.09% in 1993,
reflecting the effect of a faster rate of growth in net
income than in average total assets. Return on average
shareholders' equity, similarly affected by restructuring
charges and losses on sales of investment securities,
declined to 10.93% in 1995 compared to 12.33% in 1994 and
12.62% in 1993.
5
<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 $11,603,482 in 1995 compared to
$10,709,322 in 1994. The increase of $894,160 or 8.3%
resulted from an improvement in the net yield on earning
assets, or net interest margin, from 4.73% in 1994 to
4.84% in 1995 coupled with a 5.5% increase in the level of
average earning assets. In 1994, there was only a $147,692
or 1.4% increase in net interest income because a decline
of 13 basis points in the net interest margin from 4.86%
in 1993 significantly offset the effect of a 3.6% increase
in average earning assets. The net interest margin,
affected for some period prior to early 1994 by a
significant decline in the interest rate structure, had
generally improved until the second quarter of 1993 as a
result of lower deposit rates and then decreased as the
impact of declining yields on earning assets became more
significant. The interest rate scenario changed
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, 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 above the 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 increases in net interest
income in 1995 and 1994 were $918,000 and $74,000,
reflecting changes in the relative mix of taxable and
non-taxable earning assets in each year.
Table 1 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.
6
<PAGE>
TABLE 1
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
Average Average
Interest Rates Interest Rates Interest
Average Income/ Earned/ Average Income/ Earned/ Average Income/
Balance Expense Paid Balance Expense Paid Balance Expense
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (1)(2)................................ $174,139 $15,698 9.01% $161,121 $13,299 8.25 % $149,045 $12,674
Investment securities (1):
Taxable income............................ 65,397 4,418 6.76 66,679 3,911 5.87 69,701 4,317
Non-taxable income........................ 10,610 970 9.14 10,042 1,021 10.17 10,360 1,146
Federal funds sold.......................... 3,042 177 5.82 2,174 91 4.19 2,593 77
Total earning assets.................. 253,188 21,263 8.40 240,016 18,322 7.63 231,699 18,214
Cash and due from banks..................... 9,226 8,625 8,002
Other assets, net........................... 6,884 6,631 6,872
TOTAL ASSETS.......................... $269,298 $255,272 $246,573
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts.............................. $ 32,442 695 2.14 $ 32,521 658 2.02 $ 29,953 657
Savings deposits.......................... 29,945 845 2.82 31,820 830 2.61 29,999 852
Money market accounts..................... 16,659 508 3.05 21,261 543 2.55 23,102 597
Certificates and other time deposits...... 122,743 6,773 5.52 106,759 4,850 4.54 106,989 4,836
Retail repurchase agreements................ 3,358 167 4.97 2,101 84 4.00 -- --
Federal funds purchased..................... 239 14 5.77 307 14 4.64 89 3
Total interest-bearing liabilities.... 205,386 9,002 4.38 194,769 6,979 3.58 190,132 6,945
Noninterest-bearing demand deposits......... 36,444 35,614 33,212
Other liabilities........................... 2,765 1,964 1,909
Shareholders' equity........................ 24,703 22,925 21,320
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................. $269,298 $255,272 $246,573
NET INTEREST INCOME AND SPREAD.............. $12,261 4.02% $11,343 4.05 % $11,269
NET YIELD ON EARNING ASSETS................. 4.84% 4.73 %
<CAPTION>
Average
Rates
Earned/
Paid
<S> <C>
EARNING ASSETS
Loans (1)(2)................................ 8.50 %
Investment securities (1):
Taxable income............................ 6.19
Non-taxable income........................ 11.06
Federal funds sold.......................... 2.97
Total earning assets.................. 7.86
Cash and due from banks.....................
Other assets, net...........................
TOTAL ASSETS..........................
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts.............................. 2.19
Savings deposits.......................... 2.84
Money market accounts..................... 2.59
Certificates and other time deposits...... 4.52
Retail repurchase agreements................ --
Federal funds purchased..................... 3.28
Total interest-bearing liabilities.... 3.65
Noninterest-bearing demand deposits.........
Other liabilities...........................
Shareholders' equity........................
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..............................
NET INTEREST INCOME AND SPREAD.............. 4.21 %
NET YIELD ON EARNING ASSETS................. 4.86 %
</TABLE>
(1) 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.
(2) 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.
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 6.00%, 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 actions taken by the Federal Reserve, it
decreased twice. In early 1996, the prime rate decreased
again to 8.25%. In 1995, the net interest spread declined
modestly by 3 basis points from 4.05% in 1994 to 4.02% in
1995 due to the fact that the average total yield on
earning assets increased by slightly less than the average
rate paid on interest-bearing liabilities, or cost of
7
<PAGE>
funds. The yield on earning assets increased by 77 basis
points from 7.63% in 1994 to 8.40% in 1995, while the cost
of funds increased by 80 basis points in moving from 3.58%
to 4.38%. In 1994, the 16 basis points decline in net
interest spread resulted from a 23 basis points decline in
the yield on earning assets from 7.86% to 7.63% versus
only a 7 basis points decline in the cost of funds.
As noted above, the average cost of deposits is receiving
a positive impact from the phasing out of certain
variable-rate time deposits with rate floors above the
current market rates. This phase out began in January 1994
and was completed over a two-year period.
The 1995 and 1994 changes in net interest income on a
taxable equivalent basis, as measured by volume and rate
variances, are analyzed in Table 2. Volume refers to the
average dollar level of earning assets and
interest-bearing liabilities.
TABLE 2
VOLUME AND RATE VARIANCE ANALYSIS
(TAXABLE EQUIVALENT BASIS, IN THOUSANDS)
<TABLE>
<CAPTION>
1995 Versus 1994 1994 Versus 1993
Variance Variance
due to (1) due to (1)
Volume Rate Net Change Volume Rate Net Change
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans (2)................................................. $1,121 $1,278 $2,399 $1,005 $(380) $ 625
Investment securities (2):
Taxable income.......................................... (76 ) 583 507 (180 ) (226) (406)
Non-taxable income...................................... 55 (106) (51) (33 ) (92) (125)
Federal funds sold........................................ 44 42 86 (13 ) 27 14
Total interest income................................. 1,144 1,797 2,941 779 (671) 108
INTEREST EXPENSE
Interest-bearing deposits:
NOW accounts............................................ (2 ) 39 37 54 (53) 1
Savings deposits........................................ (50 ) 65 15 50 (72) (22)
Money market accounts................................... (130 ) 95 (35) (45 ) (9) (54)
Certificates and other time deposits.................... 788 1,135 1,923 (9 ) 23 14
Retail repurchase agreements.............................. 59 24 83 84 -- 84
Federal funds purchased................................... (3 ) 3 -- 10 1 11
Total interest expense................................ 662 1,361 2,023 144 (110) 34
NET INTEREST INCOME......................................... $ 482 $ 436 $ 918 $ 635 $(561) $ 74
</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 related to certain investment securities and loans exempt
from both federal and state income tax or from state income tax alone is
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.
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 year'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. In 1995, earnings
were negatively impacted by an increase in the provision
of $295,000, while in 1994 there was a positive impact
from a $150,000 provision decrease.
8
<PAGE>
OTHER OPERATING INCOME
Total other operating income, or noninterest income,
decreased $248,712 or 12.0% in 1995 due principally to
losses on sales of investment securities in the 1995 first
quarter of $414,596 (see "Business Development Matters").
In 1994, noninterest income increased $264,544 or 14.6%,
reflecting in part the general increase in the volume of
business, a factor that also affected the 1995 results,
exclusive of the losses on sales of securities. The
increase in 1994 was primarily due to commissions from
sales of tax-deferred annuity products, a program which
began in July 1993 and also contributed significantly to
the 1993 level of noninterest income. Partially as a
result of comparatively higher deposit rates through much
of 1995, sales of tax deferred annuity products were
significantly lower in 1995 than in 1994 as reflected by a
$136,218 decrease in annuity and brokerage commissions.
The significant increase in credit card income in both
1995 and 1994 is due to the new credit card operation
discussed in "Business Development Matters".
The increase in service charges on deposit accounts in
1995 resulted primarily from a change in the 1994 fourth
quarter in the method of collecting fees on returned
checks and overdraft items and from the selected increases
in service charge rates that became effective in the 1995
second quarter and included the initial implementation of
daily charges on overdraft balances. Partially offseting
these earnings improvement factors was the negative effect
of higher interest rates on the earnings allowance offset
against service charges on commercial accounts. The 1994
increase in service charges on deposit accounts was due
both to the selected increases in service charge rates
that became effective in the second quarter of 1993 and to
the change in the 1994 fourth quarter in the method of
collecting fees on returned checks and overdraft items.
There was a lower level of "other income" in both 1995 and
1994 compared to 1993 due principally to a reduction in
gains on loan sales. Increases in mortgage loan rates
since 1993 have negatively impacted both mortgage loan
activity and the average level of profitability on loans
actually sold.
OTHER OPERATING EXPENSE
Total other operating, or noninterest, expense increased
$535,678 or 6.2% in 1995 due primarily to restructuring
charges of $460,457 (see "Business Development Matters")
and to certain costs charged to "other expense", amounting
to $186,350, that had been deferred in connection with
proposed acquisitions (see "Overview"). Additionally, the
1995 results were generally impacted by the continuing
effects of inflation. Noninterest expense was favorably
affected in 1995 by a $221,485 reduction in FDIC insurance
expense, reflecting the effect of a rate reduction as
discussed below. In 1994, noninterest expense increased
$271,724 or 3.3% due largely to costs associated with new
or changed operations, increased personnel expense and the
continuing effects of inflation.
The components of other operating expense have been
significantly changed by the Bank's decision in 1994 to
outsource its data processing operations (see "Business
Development Matters"). The conversion of data processing
operations to a service bureau arrangement was completed
in the 1994 fourth quarter. Consequently, the level of
expense for data processing services, which includes trust
and credit card processing costs in addition to basic data
processing operations, has increased significantly in
1995. Personnel and equipment costs are being reduced,
however, as a result of the outsourcing decision. A change
in the credit card operation (see "Business Development
Matters") has also contributed to a higher cost of data
processing services.
Personnel expense, as noted above, has been positively
impacted by the outsourcing of data processing operations
with only a slight offset from the change implemented in
mid-1994 in credit card operations. Additional reductions
in personnel and other expenses are resulting from the
comprehensive project undertaken in 1995 for the
reengineering of bank operations (see "Business
Development Matters"). The restructuring charges noted
above are expected to constitute all significant costs to
be incurred in connection with this project. The number of
full-
9
<PAGE>
time equivalent employees decreased in 1994, reflecting in
particular the outsourcing of data processing operations.
A further decrease has occurred in 1995 as the benefits of
the reengineering project have begun to be realized. As is
the situation for other operating expenses, personnel
expense is subject to the continuing effects of inflation
through normal salary adjustments and higher costs of
fringe benefits.
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, 1994. 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 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 and should be significantly lower in 1996.
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 December 31,
1995, under the proposed legislation as described, would
be $140,000.
INCOME TAXES
The effective income tax rate of 29.0% in 1995 did not
significantly change from the 29.1% rate in 1994. The
effective income tax rate increased from 27.2% in 1993 to
29.1% in 1994 due to both the effect of state income tax
expense recognition in 1994 but not in 1993 and an
increase in the ratio of taxable to tax-exempt income.
Liquidity refers to the continuing ability of the Bank to
meet deposit withdrawals, fund loan and
LIQUIDITY
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 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 core of local deposits and the
Bank's 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.
10
<PAGE>
One of the primary objectives of asset/liability
management is to maximize net interest margin
ASSET/LIABILITY MANAGE-while minimizing the earnings risk associated with
MENT AND INTEREST RATE changes in interest rates. One method used
SENSITIVITY 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
$78,728,000 as of December 31, 1995. These types of
deposits historically have not repriced coincidentally
with or in the same proportion as general market
indicators.
Table 3 presents information about the periods in which
the interest-sensitive assets and liabilities at December
31, 1995 will either mature or be subject to repricing in
accordance with market rates, and the resulting
interest-sensitivity gaps. This table shows the
sensitivity of the balance sheet at one point in time and
is not necessarily indicative of what the sensitivity will
be on other dates.
TABLE 3
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1995
Rate Maturity In Days Beyond
1-90 91-180 181-365 One Year Total
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans........................................................... $ 77,552 $ 6,236 $ 13,432 $82,703 $179,923
Investment securities........................................... 3,230 3,746 8,073 69,487 84,536
Federal funds sold.............................................. 2,600 -- -- -- 2,600
Total earning assets.......................................... 83,382 9,982 21,505 152,190 267,059
INTEREST-BEARING LIABILITIES
NOW accounts.................................................... 32,407 -- -- -- 32,407
Savings deposits................................................ 30,092 -- -- -- 30,092
Money market accounts........................................... 16,229 -- -- -- 16,229
Time deposits of $100,000 or more............................... 14,481 12,807 7,484 1,655 36,427
Other time deposits............................................. 28,509 19,120 20,020 28,749 96,398
Retail repurchase agreements.................................... 4,642 -- -- -- 4,642
Federal funds purchased......................................... -- -- -- -- --
Total interest-bearing liabilities............................ 126,360 31,927 27,504 30,404 216,195
INTEREST SENSITIVITY GAP.......................................... $(42,978) $(21,945) $ (5,999) $121,786 $ 50,864
Cumulative gap.................................................... $(42,978) $(64,923) $(70,922) $50,864 $ 50,864
Ratio of interest-sensitive assets to interest-sensitive
liabilities..................................................... 66% 31% 78% 501 % 124%
</TABLE>
11
<PAGE>
Under guidelines established by the Federal Reserve Board,
capital adequacy is currently
CAPITAL ADEQUACY
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
December 31, 1995, the Corporation had a Tier 1 capital
ratio of 13.77% and a total capital ratio of 14.78%.
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 December
31, 1995, the Corporation had a leverage ratio of 9.16%.
Asset and deposit growth was higher in 1995 than in 1994.
Total assets increased $22,062,000 or
BALANCE SHEET REVIEW
8.4% in 1995 compared to $11,918,000 or 4.8% in 1994.
Deposits grew $20,219,000 or 8.8% and $5,665,000 or 2.5%,
respectively, in the same periods. A new retail repurchase
agreements program that commenced in the second quarter of
1994 generated $4,642,000 of the asset increase at
December 31, 1995 and $3,526,000 at December 31, 1994. The
average asset growth rates were 5.5% in 1995 and 3.5% in
1994. The corresponding average deposit growth rates were
4.5% and 2.1%.
As discussed in Note 1 to Consolidated Financial
Statements, the Corporation adopted State-
INVESTMENT SECURITIES ment of Financial Accounting Standards (SFAS) No. 115 as
of December 31, 1993 and transferred certain debt and
equity securities at that time to the available-for-sale
category. Also, as further discussed in Note 1 and
permitted on a one-time basis by the Financial Accounting
Standards Board in an implementation guide for SFAS No.
115, certain investment securities that had been included
in the held-to-maturity category were transferred in
December 1995 to the available-for-sale category.
Investments are carried on the consolidated balance sheet
at estimated fair value for available-for-sale securities
and at amortized cost for held-to-maturity securities.
Table 4 presents information, on the basis of selected
maturities, about the composition of the investment
securities portfolio for each of the last three years.
12
<PAGE>
TABLE 4
INVESTMENT SECURITIES PORTFOLIO ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1995
Estimated Taxable 1994 1993
Amortized Fair Equivalent Carrying Carrying
Cost Value Yield (1) Value Value
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury:
One to five years....................................... $ 4,999 $ 5,038 7.11% $ 7,256 $ 5,334
Five to ten years....................................... 4,440 4,526 6.67 509 254
Total................................................. 9,439 9,564 6.91 7,765 5,588
U.S. Government agencies and corporations:
Within one year......................................... 2,050 2,060 6.96 -- --
One to five years....................................... 6,104 6,129 6.07 -- --
Five to ten years....................................... 450 452 6.03 -- --
Total................................................. 8,604 8,641 6.28 -- --
Mortgage-backed securities................................ 9,996 10,020 6.63 12,108 18,920
Total debt securities..................................... 28,039 28,225 6.62 19,873 24,508
Equity securities......................................... 144 150 4,696 4,810
Total available-for-sale securities................... $28,183 $28,375 $24,569 $29,318
HELD TO MATURITY
U.S. Treasury:
Within one year......................................... $ -- $ -- -- $ 4,954 $ 8,303
One to five years....................................... -- -- -- 2,748 3,957
Total................................................. -- -- -- 7,702 12,260
U.S. Government agencies and corporations:
Within one year......................................... 2,854 2,861 6.51 3,151 5,503
One to five years....................................... 23,800 24,032 6.93 26,294 17,543
Five to ten years....................................... 17,022 17,193 8.00 4,916 3,328
Over ten years.......................................... 300 301 8.64 -- --
Total................................................. 43,976 44,387 7.33 34,361 26,374
State, county and municipal:
Within one year......................................... 1,203 1,214 11.63 2,081 1,831
One to five years....................................... 2,590 2,691 9.85 3,017 4,483
Five to ten years....................................... 4,959 5,189 8.52 4,909 3,535
Over ten years.......................................... 3,433 3,527 8.25 344 542
Total................................................. 12,185 12,621 9.03 10,351 10,391
Total debt securities..................................... 56,161 57,008 7.70 52,414 49,025
Other securities.......................................... -- -- -- 145
Total held-to-maturity securities..................... $56,161 $57,008 $52,414 $49,170
</TABLE>
(1) Yields are stated on a fully taxable equivalent basis, assuming a 34%
federal income tax rate and applicable state income tax rate, reduced by the
nondeductible portion of interest expense.
13
<PAGE>
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. Because of a growth rate in total assets
exceeding that for loans, the level of investment
securities was increased $7,553,000 or 9.8% in 1995. In
1994, however, when loan growth was at a much higher rate
than that for either total assets or deposits, there was a
reduction in the level of investment securities, amounting
to $1,505,000 or 1.9%. 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.
The Corporation's primary source of revenue and largest
component of earning assets is the
LOANS
loan portfolio. Loans experienced growth of $11,595,000 or
6.9% in 1995 and $11,026,000 or 7.0% in 1994. Average
loans increased $13,018,000 or 8.1% and $12,076,000 or
8.1%, respectively. The ratio of average loans to average
deposits increased from 70.7% in 1994 to 73.1% in 1995.
Part of this increase is due to the effect of the new
retail repurchase agreements program which began
generating additional funds in 1994 that can be used for
loan growth and other purposes. The ratio of loans to
deposits at December 31, 1995 was 71.9%.
Table 5 sets forth the major categories of loans and
information regarding residential mortgage loans held for
sale for each of the last five years. The maturity
distribution and interest sensitivity of selected loan
categories at December 31, 1995 are presented in Table 6.
TABLE 5
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
Amount % Amount % Amount % Amount % Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and agricultural............. $ 47,317 26.3 $ 41,777 24.8 40,858 26.0 34,630 23.5 27,600
Real estate -- construction............. 759 .4 1,331 .8 2,163 1.4 1,313 .9 1,956
Real estate -- mortgage................. 85,467 47.5 79,169 47.0 69,782 44.3 61,269 41.7 53,836
Consumer................................ 46,380 25.8 46,051 27.4 44,499 28.3 49,820 33.9 43,364
Total loans........................... $179,923 100.0 $168,328 100.0 $157,302 100.0 $147,032 100.0 $126,756
Residential mortgage loans held for
sale.................................. $ 406 $ -- $ 1,090 $ 101 $ --
<CAPTION>
%
<S> <C>
Commercial and agricultural............. 21.8
Real estate -- construction............. 1.5
Real estate -- mortgage................. 42.5
Consumer................................ 34.2
Total loans........................... 100.0
Residential mortgage loans held for
sale..................................
</TABLE>
TABLE 6
SELECTED LOAN MATURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1995
One Year One to Over
or Less Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial and agricultural............................................... $40,755 $5,059 $1,503 $47,317
Real estate -- construction............................................... 759 -- -- 759
Total selected loans.................................................... $41,514 $5,059 $1,503 $48,076
Sensitivity to rate changes:
Fixed interest rates.................................................... $ 1,690 $5,059 $1,503 $ 8,252
Variable interest rates................................................. 39,824 -- -- 39,824
Total................................................................... $41,514 $5,059 $1,503 $48,076
</TABLE>
14
<PAGE>
The residential construction and mortgage loan portfolio
accounted for slightly more than half
of the 1995 loan increase. The Bank is qualified as a
seller and servicer of mortgage loans for the Federal
National Mortgage Association (Fannie Mae) and, due to
favorable market conditions in 1993, had brisk mortgage
loan activity in that year and sold a substantial portion
of the loans originated to Fannie Mae. Increased mortgage
loan rates in 1994 and 1995 have led to a decline in
originations. Because of a reduction in the level of
profitability on sales to Fannie Mae, however, the Bank
has increased the percentage of loans added to its own
portfolio.
Commercial loan growth also added significantly to the
1995 increase in loans. 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".
Management considers the Bank's asset quality to be of
primary importance. A formal loan
ASSET QUALITY
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 change.
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.
15
<PAGE>
Table 7 presents an analysis of the changes in the
allowance for loan losses and of the level of
nonperforming assets for each of the last five years.
Information about management's allocation of the allowance
for loan losses by loan category is presented in Table 8.
TABLE 7
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of year.............................................. $1,720 $1,745 $1,766 $1,484 $1,323
Charge-offs:
Commercial and agricultural............................................. 84 16 57 159 64
Real estate -- construction............................................. -- -- -- -- --
Real estate -- mortgage................................................. -- 1 24 34 12
Consumer................................................................ 393 419 486 228 221
Total charge-offs..................................................... 477 436 567 421 297
Recoveries:
Commercial and agricultural............................................. 8 6 8 24 48
Real estate -- construction............................................. -- -- -- -- --
Real estate -- mortgage................................................. 3 5 7 1 2
Consumer................................................................ 134 180 161 103 78
Total recoveries...................................................... 145 191 176 128 128
Net loan charge-offs...................................................... 332 245 391 293 169
Provision for loan losses................................................. 515 220 370 575 330
Balance at end of year.................................................... $1,903 $1,720 $1,745 $1,766 $1,484
NONPERFORMING ASSETS, AT END OF YEAR
Nonaccrual loans.......................................................... $ 26 $ -- $ -- $ 68 $ 791
Accruing loans past due 90 days or more................................... 317 118 136 388 72
Total nonperforming loans............................................. 343 118 136 456 863
Foreclosed assets......................................................... 64 78 134 159 --
Other real estate owned................................................... -- -- -- 52 52
Total nonperforming assets............................................ $ 407 $ 196 $ 270 $ 667 $ 915
RATIOS
Net loan charge-offs to average loans..................................... .19% .15% .26% .21% .14%
Net loan charge-offs to allowance for loan losses......................... 17.45 14.25 22.43 16.59 11.40
Allowance for loan losses to year-end loans............................... 1.06 1.02 1.11 1.20 1.17
Total nonperforming loans to year-end loans............................... .19 .07 .09 .31 .68
</TABLE>
TABLE 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial and agricultural................................................. $ 572 $ 490 $ 451 $ 418 $ 454
Real estate -- construction................................................. 9 14 25 23 20
Real estate -- mortgage..................................................... 384 346 281 261 250
Consumer.................................................................... 695 651 569 343 286
Unallocated................................................................. 243 219 419 721 474
Total allowance for loan losses........................................... $1,903 $1,720 $1,745 $1,766 $1,484
</TABLE>
16
<PAGE>
The level and mix of deposits is affected by various
factors, including general economic
DEPOSITS
conditions, the particular circumstances of local markets
and the specific deposit strategies employed. In general,
broad interest 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 $4,642,000 at December
31, 1995 and $3,526,000 at December 31, 1994. Further, the
level of public funds on deposit fluctuates, amounting to
$24,412,000, $10,940,000 and $10,636,000 at December 31,
1995, 1994 and 1993, respectively.
Table 9 shows the year-end and average deposit balances
for the years 1995, 1994 and 1993 and the changes in 1995
and 1994.
TABLE 9
ANAYLSIS OF DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
Change from Change from
Prior Year Prior Year 1993
Balance Amount % Balance Amount % Balance
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR-END BALANCES
Interest-bearing deposits:
NOW accounts...................................... $ 32,407 $ 505 1.6 $ 31,902 $ 157 .5 $ 31,745
Savings deposits.................................. 30,092 (828 ) (2.7) 30,920 34 .1 30,886
Money market accounts............................. 16,229 (3,350 ) (17.1) 19,579 (2,330 ) (10.6) 21,909
Total........................................... 78,728 (3,673 ) (4.5) 82,401 (2,139 ) (2.5) 84,540
Certificates and other time deposits.............. 132,825 22,583 20.5 110,242 5,160 4.9 105,082
Total interest-bearing deposits................. 211,553 18,910 9.8 192,643 3,021 1.6 189,622
Noninterest-bearing demand deposits................. 38,591 1,309 3.5 37,282 2,644 7.6 34,638
Total deposits.................................. $250,144 $20,219 8.8 $229,925 $5,665 2.5 $224,260
AVERAGE BALANCES
Interest-bearing deposits:
NOW accounts...................................... $ 32,442 $ (79 ) (.2) $ 32,521 $2,568 8.6 $ 29,953
Savings deposits.................................. 29,945 (1,875 ) (5.9) 31,820 1,821 6.1 29,999
Money market accounts............................. 16,659 (4,602 ) (21.6) 21,261 (1,841 ) (8.0) 23,102
Total........................................... 79,046 (6,556 ) (7.7) 85,602 2,548 3.1 83,054
Certificates and other time deposits.............. 122,743 15,984 15.0 106,759 (230 ) (.2) 106,989
Total interest-bearing deposits................. 201,789 9,428 4.9 192,361 2,318 1.2 190,043
Noninterest-bearing demand deposits................. 36,444 830 2.3 35,614 2,402 7.2 33,212
Total deposits.................................. $238,233 $10,258 4.5 $227,975 $4,720 2.1 $223,255
</TABLE>
17
<PAGE>
As discussed in the "Overview" and in Note 15 to
Consolidated Financial Statements, the
BUSINESS DEVELOPMENT Corporation had entered into definitive agreements to
acquire two mutual savings banks. In MATTERS
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. Credit card receivables amounted to
$1,524,718 at December 31, 1995. 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
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 will 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 will not occur until 1996.
In 1995, as discussed in Note 14 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, with the expectation that
all significant costs were incurred and paid during that
period, 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.
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
at December 31, 1995 amounted to $33,525,143. 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.
18
<PAGE>
In March 1995, the Financial Accounting Standards Board
(the "FASB") issued Statement of
ACCOUNTING Financial Accounting Standards (SFAS) No. 121, "Accounting
PRONOUNCEMENT for Impairment of Long-Lived
MATTERS Assets and for Long-Lived Assets to be Disposed Of", which
establishes accounting standards
for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those
assets to be held and used and for those to be disposed
of. This statement requires that long-lived assets and
certain intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying value may not be recoverable. SFAS No. 121 is
effective for fiscal years beginning after December 15,
1995. At this time, management has not determined what
effect, if any, that adoption of SFAS No. 121 will have on
the consolidated financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement
No. 65". SFAS No. 122 amends FASB Statement No. 65 to
require that the rights to service mortgage loans for
others, however those servicing rights are acquired, be
recognized as separate assets, eliminating the previously
existing accounting distinction between servicing rights
acquired through purchase transactions and those acquired
through loan originations. SFAS No. 122 is required to be
adopted and applied prospectively for fiscal years
beginning after December 15, 1995 to transactions
involving the sale or securitization of mortgage loans
with servicing rights retained. At this time, management
estimates that adoption of SFAS No. 122 will not have a
significant effect on the consolidated financial
statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 defines a fair
value based method of accounting for an employee stock
option or similar equity instrument. However, it also
allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to
Employees". Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and, if presented, earnings per
share, as if the fair value based method of accounting
defined in SFAS No. 123 had been applied. The accounting
requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after
December 15, 1995, though they may be adopted on issuance.
At this time, management estimates that adoption of SFAS
No. 123 will not have a significant effect on the
consolidated financial statements.
The operations of the Bank and therefore of the
Corporation are subject to the effects of
EFFECTS OF INFLATION
inflation through interest rate fluctuations and changes
in the general price level of noninterest operating
expenses. Such costs as salaries, fringe benefits and
utilities have tended to increase at a rate comparable to
or even greater than the general rate of inflation.
Broadly speaking, all operating expenses have risen to
higher levels as inflationary pressures have increased.
Management has responded to this situation by evaluating
and adjusting fees charged for specific services and by
emphasizing operating efficiencies.
The level of interest rates is also considered to be
influenced by inflation, rising whenever inflationary
expectations and the actual level of inflation increase
and declining whenever the inflationary outlook appears to
be improving. Management constantly monitors this
situation, attempting to adjust both rates received on
earning assets and rates paid on interest-bearing
liabilities in order to maintain the desired net yield on
earning assets.
19
<PAGE>
TABLE 10
QUARTERLY FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
1995
Interest income.................................................................... $4,870 $5,062 $5,230 $5,444
Interest expense................................................................... 2,079 2,193 2,317 2,413
Net interest income................................................................ 2,791 2,869 2,913 3,031
Provision for loan losses.......................................................... 95 125 130 165
Net interest income after provision for loan losses................................ 2,696 2,744 2,783 2,866
Losses on sales of securities...................................................... (415) -- -- --
Other operating income............................................................. 531 552 561 597
Restructuring charges.............................................................. 460 -- -- --
Other operating expense............................................................ 2,227 2,128 2,083 2,216
Income before income taxes......................................................... 125 1,168 1,261 1,247
Income taxes (benefit)............................................................. (8) 368 375 366
Net income......................................................................... $ 133 $ 800 $ 886 $ 881
Per share data (1):
Net income....................................................................... $ .07 $ .44 $ .49 $ .49
Cash dividends declared.......................................................... .12 .12 .13 .15
Common stock price (2):
High........................................................................... 16.67 18.00 21.00 24.00
Low............................................................................ 15.33 15.33 16.50 18.50
1994
Interest income.................................................................... $4,159 $4,311 $4,515 $4,703
Interest expense................................................................... 1,662 1,650 1,762 1,905
Net interest income................................................................ 2,497 2,661 2,753 2,798
Provision for loan losses.......................................................... 35 50 30 105
Net interest income after provision for loan losses................................ 2,462 2,611 2,723 2,693
Other operating income............................................................. 546 546 462 521
Other operating expense............................................................ 2,078 2,117 2,192 2,191
Income before income taxes......................................................... 930 1,040 993 1,023
Income taxes....................................................................... 267 310 283 299
Net income......................................................................... $ 663 $ 730 $ 710 $ 724
Per share data (1):
Net income....................................................................... $ .37 $ .41 $ .39 $ .40
Cash dividends declared.......................................................... .11 .11 .12 .12
Common stock price (2):
High........................................................................... 13.33 16.00 16.67 16.67
Low............................................................................ 12.67 12.67 14.67 15.67
</TABLE>
(1) 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.
(2) FNB Corp. common stock began trading on the NASDAQ National Market System on
June 14, 1994, and stock price data from that date forward reflects actual
sales prices. Prior to June 14, 1994, the stock was traded on an
over-the-counter basis and bid quotations are reported. Such bid quotations
reflect interdealer prices without retail mark-up, mark-down or commissions
and may not represent actual transactions.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FNB Corp.
We have audited the accompanying consolidated balance sheets of FNB Corp. and
subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FNB Corp. and
subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for investments to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", at December 31, 1993.
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
February 2, 1996
21
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
ASSETS 1995 1994
Cash and due from banks............................................................. $ 8,764,539 $ 9,348,113
Federal funds sold.................................................................. 2,600,000 --
Investment securities:
Available for sale, at estimated fair value (amortized cost of $28,183,155 in 1995
and $25,713,359 in 1994)........................................................ 28,375,645 24,569,036
Held to maturity (estimated fair value of $57,008,236 in 1995 and $50,809,510 in
1994)........................................................................... 56,160,814 52,414,194
Loans............................................................................... 179,922,737 168,327,821
Less: Allowance for loan losses................................................... (1,902,640) (1,719,717)
Net loans....................................................................... 178,020,097 166,608,104
Premises and equipment.............................................................. 6,029,541 5,024,522
Other assets........................................................................ 3,727,476 3,651,740
TOTAL ASSETS.................................................................... $283,678,112 $261,615,709
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits............................................... $ 38,590,985 $ 37,282,808
Interest-bearing deposits:
NOW, savings and money market deposits.......................................... 78,728,366 82,400,774
Time deposits of $100,000 or more............................................... 36,427,161 20,191,213
Other time deposits............................................................. 96,397,964 90,050,517
Total deposits................................................................ 250,144,476 229,925,312
Retail repurchase agreements........................................................ 4,641,527 3,526,226
Federal funds purchased............................................................. -- 3,050,000
Other liabilities................................................................... 2,897,038 1,735,041
Total Liabilities............................................................. 257,683,041 238,236,579
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 1,797,995
shares
in 1995 and 1,200,000 shares in 1994............................................ 4,494,988 3,000,000
Surplus........................................................................... 18,705 900,000
Retained earnings................................................................. 21,354,335 20,234,383
Net unrealized securities gains (losses).......................................... 127,043 (755,253)
Total Shareholders' Equity.................................................... 25,995,071 23,379,130
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $283,678,112 $261,615,709
Commitments (Note 12)
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1995 1994 1993
INTEREST INCOME
Interest and fees on loans............................................. $15,638,486 $13,228,841 $12,610,672
Interest and dividends on investment securities:
Taxable income....................................................... 4,170,724 3,722,957 4,095,951
Non-taxable income................................................... 619,480 645,224 723,372
Federal funds sold..................................................... 177,071 91,034 77,128
Total interest income.............................................. 20,605,761 17,688,056 17,507,123
INTEREST EXPENSE
Deposits............................................................... 8,821,404 6,880,389 6,942,569
Retail repurchase agreements........................................... 167,076 84,094 --
Federal funds purchased................................................ 13,799 14,251 2,924
Total interest expense............................................. 9,002,279 6,978,734 6,945,493
NET INTEREST INCOME...................................................... 11,603,482 10,709,322 10,561,630
Provision for loan losses.............................................. 515,000 220,000 370,000
Net Interest Income After Provision for Loan Losses...................... 11,088,482 10,489,322 10,191,630
OTHER OPERATING INCOME
Service charges on deposit accounts.................................... 1,356,083 1,218,066 1,153,374
Annuity and brokerage commissions...................................... 182,091 318,309 95,110
Credit card income..................................................... 263,678 100,816 38,692
Other service charges, commissions and fees............................ 284,994 270,280 240,438
Losses on sales of investment securities............................... (414,596) -- --
Other income........................................................... 153,916 167,407 282,720
Total other operating income....................................... 1,826,166 2,074,878 1,810,334
OTHER OPERATING EXPENSE
Personnel expense...................................................... 4,479,773 4,902,442 4,807,246
Net occupancy expense.................................................. 461,992 447,645 455,991
Furniture and equipment expense........................................ 452,094 503,296 529,228
Data processing services............................................... 881,757 297,670 113,255
Restructuring charges.................................................. 460,457 -- --
Other expense.......................................................... 2,377,553 2,426,895 2,400,504
Total other operating expense...................................... 9,113,626 8,577,948 8,306,224
Income Before Income Taxes............................................... 3,801,022 3,986,252 3,695,740
Income taxes............................................................. 1,100,565 1,159,386 1,005,852
NET INCOME............................................................... $ 2,700,457 $ 2,826,866 $ 2,689,888
Net income per share..................................................... $ 1.50 $ 1.57 $ 1.49
Average number of shares outstanding..................................... 1,798,717 1,800,000 1,800,000
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK RETAINED SECURITIES
SHARES AMOUNT SURPLUS EARNINGS GAINS (LOSSES)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992.......................... 1,200,000 $3,000,000 $900,000 $16,373,629 $ (70,000)
Net income, 1993.................................... -- -- -- 2,689,888 --
Cash dividends declared, $.453 per share............ -- -- -- (816,000) --
Reversal of unrealized loss on mutual
fund investment................................... -- -- -- -- 70,000
Recognize net unrealized gain on
available-for-sale securities..................... -- -- -- -- 75,916
BALANCE, DECEMBER 31, 1993.......................... 1,200,000 3,000,000 900,000 18,247,517 75,916
Net income, 1994.................................... -- -- -- 2,826,866 --
Cash dividends declared, $.467 per share............ -- -- -- (840,000) --
Change in net unrealized gains (losses) on
available-for-sale securities..................... -- -- -- -- (831,169)
BALANCE, DECEMBER 31, 1994.......................... 1,200,000 3,000,000 900,000 20,234,383 (755,253)
Net income, 1995.................................... -- -- -- 2,700,457 --
Cash dividends declared, $.52 per share............. -- -- -- (935,017) --
Three-for-two stock split effected in the form of a
50% stock dividend................................ 599,968 1,499,920 (900,000) (599,920) --
Cash paid for fractional shares..................... -- -- -- (768) --
Common stock issued through dividend
reinvestment plan................................. 1,227 3,068 18,705 -- --
Common stock repurchased............................ (3,200) (8,000) -- (44,800) --
Change in net unrealized gains (losses) on
available-for-sale securities..................... -- -- -- -- 882,296
BALANCE, DECEMBER 31, 1995.......................... 1,797,995 $4,494,988 $ 18,705 $21,354,335 $ 127,043
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1995 1994 1993
OPERATING ACTIVITIES
Net income........................................................... $ 2,700,457 $ 2,826,866 $ 2,689,888
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment............ 397,979 408,730 415,971
Provision for loan losses.......................................... 515,000 220,000 370,000
Deferred income taxes.............................................. 36,206 295,558 (57,690)
Deferred loan fees and costs, net.................................. (130,477) (504,202) 12,986
Premium amortization and discount accretion of investment
securities, net.................................................. 157,127 417,395 571,730
Losses on sales of investment securities........................... 414,596 -- --
Amortization of intangibles........................................ 59,115 78,107 100,171
Net decrease (increase) in loans held for sale..................... (405,503) 1,089,594 (989,094)
Decrease (increase) in other assets................................ (557,531) (273,155) 93,412
Increase (decrease) in other liabilities........................... 732,884 320,447 (109,077)
Net Cash Provided By Operating Activities........................ 3,919,853 4,879,340 3,098,297
INVESTING ACTIVITIES
Available-for-sale securities:
Proceeds from sales................................................ 5,896,328 -- --
Proceeds from maturities........................................... 2,659,634 6,690,357 --
Purchases.......................................................... (249,405) (3,400,725) --
Held-to-maturity securities:
Proceeds from maturities........................................... 21,184,527 18,249,914 34,125,117
Purchases.......................................................... (36,279,578) (21,708,597) (31,966,917)
Net increase in loans................................................ (11,376,742) (11,743,814) (9,684,761)
Proceeds from sales of premises and equipment........................ 2,718 183,292 8,265
Purchases of premises and equipment.................................. (1,302,230) (239,939) (503,150)
Other, net........................................................... (26,031) (213,423) (66,493)
Net Cash Used In Investing Activities............................ (19,490,779) (12,182,935) (8,087,939)
FINANCING ACTIVITIES
Net increase in deposits............................................. 20,219,164 5,665,256 781,846
Increase in retail repurchase agreements............................. 1,115,301 3,526,226 --
Increase (decrease) in federal funds purchased....................... (3,050,000) 1,250,000 1,800,000
Common stock issued.................................................. 21,773 -- --
Common stock repurchased............................................. (52,800) -- --
Cash dividends and fractional shares paid............................ (666,086) (840,000) (816,000)
Net Cash Provided By Financing Activities........................ 17,587,352 9,601,482 1,765,846
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 2,016,426 2,297,887 (3,223,796)
Cash and cash equivalents at beginning of year......................... 9,348,113 7,050,226 10,274,022
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 11,364,539 $ 9,348,113 $ 7,050,226
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................... $ 8,233,042 $ 6,911,446 $ 7,050,559
Income taxes....................................................... 1,075,350 749,993 1,318,848
Noncash investing and financing activity -- Transfer of investment
securities to available-for-sale category............................ 11,353,710 -- 29,318,080
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS/CONSOLIDATION
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 consolidated financial statements 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.
CASH AND CASH EQUIVALENTS
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.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 addresses
the reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. These
investments are to be categorized and accounted for as follows:
(Bullet) Held-to-maturity securities -- Debt securities that the Corporation
has the positive intent and ability to hold to maturity. Reported at
amortized cost.
(Bullet) Trading securities -- Debt and equity securities bought and held
principally for the purpose of being sold in the near future.
Reported at fair value, with unrealized gains and losses included in
earnings.
(Bullet) Available-for-sale securities -- Debt and equity securities not
classified as either held-to-maturity securities or trading
securities. Reported at fair value, with unrealized gains and
losses, net of related tax effect, excluded from earnings and
reported as a separate component of shareholders' equity.
Effective December 31, 1993, the Corporation adopted SFAS No. 115 and
classified certain debt and equity securities as available-for-sale
securities. As a result of this change in accounting principle, the carrying
value of the securities so classified was increased by a fair value
adjustment of $115,025, representing the net unrealized gain at December 31,
1993. In related adjustments, shareholders' equity and deferred income tax
liabilities were increased by $75,916 and $39,109, respectively. The
Corporation intends to hold the available-for-sale securities for an
indefinite period of time but may sell them prior to maturity. All other
securities, which the Corporation has the positive intent and ability to hold
to maturity, are classified as held-to-maturity securities.
In November 1995, the FASB issued an implementation guide for SFAS No. 115.
The FASB stated that the transition provisions included in the guide permit a
one-time opportunity for companies to reconsider their ability and intent to
hold the securities accounted for under SFAS No. 115 to maturity and allow
entities to transfer securities from the held-to-maturity category without
tainting their remaining held-to-maturity securities. The FASB emphasized
that this would be a one-time event and that any transfers from the
held-to-maturity category to the available-for-sale category under this
provision must be made by December 31, 1995. The Corporation transferred
$11,353,710 in investment securities from the held-to-maturity category to
the available-for-sale category as allowed under the provisions of the
implementation guide. On the date of the transfer, the held-to-maturity
securities were recorded as available-for-sale securities at their current
fair value, which resulted in the recognition of an unrealized gain of
$54,908 being recorded, net of the related tax effect, as an addition to
shareholders' equity.
Interest income on debt securities is adjusted using the level yield method
for the amortization of premiums and accretion of discounts. The adjusted
cost of the specific security is used to compute gains or losses on the
disposition of securities.
Prior to December 31, 1993, a mutual fund investment was carried at the lower
of cost or market. An adjustment to the valuation of this investment had been
established by a charge to shareholders' equity. In conjunction with the
adoption of SFAS No. 115, the valuation adjustment was reversed.
26
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures". Under SFAS No. 114, the 1995
allowance for loan losses relating to loans that are determined to be
impaired is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. The Corporation previously measured loan impairment in a
method generally comparable to the methods prescribed in SFAS No. 114.
Accordingly, no additional provisions for loan losses were required as a
result of the adoption of SFAS No. 114.
Unearned income on certain installment loans is recognized as income over the
life of the loans by the sum-of-the-months'-digits method which is not
materially different from the interest method. Interest on all other loans is
calculated by using the constant yield method based on the daily outstanding
balance. The recognition of interest revenue, including interest income on
impaired loans, is discontinued when, in management's opinion, the collection
of all or a portion of interest becomes doubtful.
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. Residential mortgage loans held for sale are
valued at the lower of cost or market as determined by outstanding
commitments from investors or current investor yield requirements, calculated
on the aggregate loan basis.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents an amount considered adequate to
absorb loan losses inherent in the portfolio. Management's evaluation of the
adequacy of the allowance is based on a review of individual loans,
historical loan loss experience, the value and adequacy of collateral, and
economic conditions in the Bank's market area. Losses are charged and
recoveries are credited to the allowance for loan losses. 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 change.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize changes to the
allowance based on their judgments about information available to them at the
time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using both straight-line and
accelerated methods based on the estimated useful lives of the assets as
follows: buildings and components, 10 to 50 years and furniture and
equipment, 3 to 10 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated life of the improvement
or the term of the lease.
INTANGIBLE ASSETS
Deposit base premiums, arising from deposit and branch purchase acquisitions,
amounted to $143,579 and $202,694 at December 31, 1995 and 1994,
respectively, and are included in other assets. The premium amounts are
amortized on an accelerated basis over ten-year periods.
INCOME TAXES
Income tax expense includes both a current provision based on the amounts
computed for income tax return purposes and a deferred provision that results
from application of the asset and liability method of accounting for deferred
taxes. Under the asset and liability method, deferred tax assets and
liabilities are established for the temporary differences between the
financial reporting basis and the tax basis of the Corporation's assets and
liabilities at enacted tax rates expected to be in effect when such amounts
are realized 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.
EMPLOYEE BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all
full-time employees. Pension costs, which are actuarially determined using
the projected unit credit method, are charged to current operations. Annual
funding contributions are made up to the maximum amounts allowable for
Federal income tax purposes.
27
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Medical and life insurance benefits are provided by the Corporation on a
postretirement basis under defined benefit plans covering substantially all
full-time employees. Postretirement benefit costs, which are actuarially
determined using the attribution method and recorded on an unfunded basis,
are charged to current operations and credited to a liability account on the
consolidated balance sheet.
RECLASSIFICATIONS AND RESTATEMENTS
Certain amounts for prior years have been reclassified to conform with the
presentation for 1995. The reclassifications had no effect on shareholders'
equity or net income as previously reported.
Share and per share information in the consolidated financial statements and
related notes thereto have been restated, where appropriate, to reflect the
three-for-two common stock split effected in the form of a 50% stock dividend
paid to shareholders on May 26, 1995.
2. INVESTMENT SECURITIES
Summaries of the amortized cost and estimated fair value of investment
securities and the related gross unrealized gains and losses are presented
below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
DECEMBER 31, 1995
U.S. Treasury....................................... $ 9,439,250 $134,291 $ 8,658 $ 9,564,883
U.S. Government agencies and corporations........... 8,604,302 49,133 12,213 8,641,222
Mortgage-backed securities.......................... 9,995,875 51,692 27,617 10,019,950
Equity securities................................... 143,728 5,862 -- 149,590
Total............................................. $28,183,155 $240,978 $ 48,488 $28,375,645
DECEMBER 31, 1994
U.S. Treasury....................................... $ 8,009,763 $ 1,374 $ 246,699 $ 7,764,438
Mortgage-backed securities.......................... 12,557,862 2,074 451,834 12,108,102
Equity securities................................... 5,145,734 762 450,000 4,696,496
Total............................................. $25,713,359 $ 4,210 $1,148,533 $24,569,036
HELD TO MATURITY
DECEMBER 31, 1995
U.S. Government agencies and corporations........... $43,975,874 $466,103 $ 54,515 $44,387,462
State, county and municipal......................... 12,184,940 447,387 11,553 12,620,774
Total............................................. $56,160,814 $913,490 $ 66,068 $57,008,236
DECEMBER 31, 1994
U.S. Treasury....................................... $ 7,702,064 $ 4,231 $ 92,599 $ 7,613,696
U.S. Government agencies and corporations........... 34,361,214 10,098 1,463,032 32,908,280
State, county and municipal......................... 10,350,916 129,679 193,061 10,287,534
Total............................................. $52,414,194 $144,008 $1,748,692 $50,809,510
</TABLE>
28
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less......................... $ 7,048,463 $ 7,099,115 $ 4,057,491 $ 4,075,193
Due after one year through five years........... 10,545,089 10,655,169 26,390,055 26,723,157
Due after five years through ten years.......... 450,000 451,821 21,980,455 22,381,731
Due after ten years............................. -- -- 3,732,813 3,828,155
Total..................................... 18,043,552 18,206,105 56,160,814 57,008,236
Mortgage-backed securities...................... 9,995,875 10,019,950 -- --
Equity securities............................... 143,728 149,590 -- --
Total investment securities............... $28,183,155 $28,375,645 $56,160,814 $57,008,236
</TABLE>
Debt securities with an estimated fair value of $46,887,507 were pledged to
secure public funds and trust funds on deposit and retail repurchase
agreements at December 31, 1995.
Proceeds from the sale of investment securities classified as
available-for-sale amounted to $5,896,328 in 1995. Gross losses of $414,596
were realized on these sales. There were no securities sales in 1994 and
1993.
3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1995 1994
Commercial and agricultural................................................ $ 47,317,352 $ 41,776,681
Real estate -- construction................................................ 759,263 1,331,342
Real estate -- mortgage:
Loans held in portfolio.................................................. 85,061,216 79,168,845
Loans held for sale...................................................... 405,503 --
Consumer................................................................... 46,379,403 46,050,953
Total loans............................................................ $179,922,737 $168,327,821
</TABLE>
Loans as presented are increased by net deferred expense of $133,400 at
December 31, 1995 and are reduced by net unearned income of $944,168 at
December 31, 1994. Nonaccrual loans at December 31, 1995 amounted to $25,576.
There were no loans on a nonaccrual basis at December 31, 1994. Lost interest
income on nonaccrual loans was not material. Under the criteria of SFAS No.
114, as discussed in Note 1, there were no loans considered to be impaired at
December 31, 1995.
Loans are primarily made in the region of North Carolina that includes
Randolph, Montgomery and Chatham counties. The real estate loan portfolio can
be affected by the condition of the local real estate markets. Included in
loans at December 31, 1995 and 1994 are $33,525,143 and $35,412,788,
respectively, of retail installment loan contracts purchased primarily from
automobile dealers.
29
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans have been made by the Bank to directors and executive officers of the
Corporation and to the associates of such persons, as defined by the
Securities and Exchange Commission. Such loans were made in the ordinary
course of business on substantially the same terms, including rate and
collateral, as those prevailing at the time in comparable transactions with
other borrowers and do not involve more than normal risk of collectibility. A
summary of the activity during 1995 with respect to related party loans is as
follows:
<TABLE>
<S> <C>
Balance, December 31, 1994............................................... $ 7,827,086
New loans during 1995.................................................... 21,865,682
Repayments during 1995................................................... (21,080,548)
Balance, December 31, 1995............................................... $ 8,612,220
</TABLE>
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C>
1995 1994 1993
Balance at beginning of year....................................... $1,719,717 $1,744,820 $1,766,193
Provision for losses charged to operations......................... 515,000 220,000 370,000
Loans charged off.................................................. (476,977) (436,157) (566,791)
Recoveries on loans previously charged off......................... 144,900 191,054 175,418
Balance at end of year............................................. $1,902,640 $1,719,717 $1,744,820
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1995 1994
Land........................................................................... $ 1,003,619 $1,003,619
Buildings and improvements..................................................... 4,045,155 3,986,315
Furniture and equipment........................................................ 4,572,809 3,360,975
Leasehold improvements......................................................... 394,390 394,390
Total.................................................................... 10,015,973 8,745,299
Less accumulated depreciation and amortization................................. 3,986,432 3,720,777
Premises and equipment, net.................................................... $ 6,029,541 $5,024,522
</TABLE>
6. INCOME TAXES
Income taxes as reported in the consolidated income statement included the
following expense (benefit) components:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal.......................................................... $1,045,564 $ 818,773 $1,063,542
State............................................................ 18,795 45,055 --
Total.......................................................... 1,064,359 863,828 1,063,542
Deferred -- Federal................................................ 36,206 295,558 (57,690)
Total income taxes............................................. $1,100,565 $1,159,386 $1,005,852
</TABLE>
30
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income tax expense computed at the statutory Federal
income tax rate to actual income tax expense is presented below:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Amount of tax computed using Federal statutory tax rate of 34%..... $1,292,348 $1,355,326 $1,256,552
Increases (decreases) resulting from:
Effect of tax-exempt loan and investment securities income....... (213,390) (233,114) (253,801)
Other............................................................ 21,607 37,174 3,101
Total.......................................................... $1,100,565 $1,159,386 $1,005,852
</TABLE>
The sources of deferred tax assets and liabilities and the tax effect of each
are as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1995 1994
Deferred tax assets:
Allowance for loan losses...................................................... $473,370 $ 411,177
Net unrealized loss on available-for-sale securities........................... -- 389,070
Accrued expenses, not currently deductible..................................... 326,010 331,794
Other.......................................................................... 73,001 64,158
Total........................................................................ 872,381 1,196,199
Deferred tax liabilities:
Depreciable basis of premises and equipment.................................... 236,963 224,994
Taxable basis of investment securities......................................... 47,066 237,413
Prepaid pension cost........................................................... 250,717 126,770
Net deferred loan fees and costs............................................... 309,318 157,584
Other.......................................................................... 74,587 4,985
Total........................................................................ 918,651 751,746
Net deferred tax assets (liabilities)............................................ $(46,270) $ 444,453
</TABLE>
There is no valuation allowance for deferred tax assets as it is management's
contention that realization of the deferred tax assets is more likely than
not based upon the Corporation's history of taxable income and estimates of
future taxable income.
7. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Corporation has a noncontributory defined benefit pension plan covering
substantially all full-time employees who qualify as to age and length of
service. Benefits are based on the employee's compensation, years of service
and age at retirement. The Corporation's funding policy is to contribute
annually to the plan an amount which is not less than the minimum amount
required by the Employee Retirement Income Security Act of 1974 and not more
than the maximum amount deductible for income tax purposes.
31
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information concerning the funded status of the plan is as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1995 1994
Actuarial present value of benefit obligation:
Vested benefit obligation................................................... $ 4,059,993 $ 3,079,017
Non-vested benefit obligation............................................... 40,180 19,385
Total accumulated benefit obligation...................................... $ 4,100,173 $ 3,098,402
Projected benefit obligation for service rendered............................. $(4,706,895) $(3,793,730)
Plan assets at fair value, primarily marketable securities.................... 4,428,752 3,360,752
Projected benefit obligation in excess of plan assets......................... (278,143) (432,978)
Unrecognized net transition liability......................................... 128,844 150,319
Unrecognized prior service cost............................................... 720,672 800,747
Unrecognized net loss (gain).................................................. 166,029 (145,235)
Prepaid pension cost included on the consolidated balance sheet........... $ 737,402 $ 372,853
</TABLE>
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost -- benefits earned during the period..................... $ 71,275 $ 82,674 $ 96,954
Interest cost on projected benefit obligation......................... 311,432 280,736 269,063
Actual return on plan assets.......................................... (458,088) 101,768 (271,289)
Net amortization and deferral......................................... 290,002 (279,824) 123,188
Net periodic pension cost......................................... $ 214,621 $ 185,354 $ 217,916
</TABLE>
The rates used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Discount rate........................................................................ 7.0% 8.0% 7.5%
Rate of increase in compensation levels.............................................. 6.0 6.0 6.0
Expected long-term rate of return on plan assets..................................... 8.0 8.0 8.0
</TABLE>
OTHER POSTRETIREMENT DEFINED BENEFIT PLANS
The Corporation has postretirement medical and life insurance plans covering
substantially all full-time employees who qualify as to age and length of
service. The medical plan is contributory, with retiree contributions
adjusted whenever medical insurance rates change. The life insurance plan is
noncontributory.
Information reconciling the plans, which are unfunded, with the amount
included on the consolidated balance sheet is as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1995 1994
Accumulated postretirement benefit obligation:
Retirees........................................................................ $(330,919) $(288,503)
Fully eligible active participants.............................................. (25,500) (79,915)
Other active plan participants.................................................. (173,295) (86,610)
Total accumulated postretirement benefit obligation........................... (529,714) (455,028)
Unrecognized net transition liability............................................. 343,720 363,938
Unrecognized prior service cost................................................... 97,673 --
Unrecognized net loss (gain)...................................................... (18,285) 26,124
Accrued postretirement benefit cost included on the consolidated balance
sheet......................................................................... $(106,606) $ (64,966)
</TABLE>
32
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost -- benefits earned during the period.......................... $12,523 $ 6,880 $ 6,727
Interest cost on accumulated postretirement benefit obligation............. 35,998 34,468 35,095
Net amortization and deferral.............................................. 28,239 20,218 20,218
Net periodic postretirement benefit cost............................... $76,760 $61,566 $62,040
</TABLE>
For measurement purposes, the annual rate of increase assumed for the cost of
medical benefits was 15% in 1995, decreasing gradually to 6% in 2004 and
assumed to remain at that level thereafter. Increasing the assumed medical
cost trend rate by one percentage point in each year would not have a
significant effect on either the accumulated postretirement benefit
obligation at January 1, 1995 or the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year
ended December 31, 1995. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.0% in 1995, 8.0% in 1994
and 7.5% in 1993.
MATCHING RETIREMENT/SAVINGS PLAN
The Corporation has a matching retirement/savings plan which permits eligible
employees to make contributions to the plan up to a specified percentage of
compensation as defined by the plan. A portion of the employee contributions
are matched by the Corporation based on the plan formula. The matching
contributions amounted to $77,835 in 1995, $71,484 in 1994 and $75,599 in
1993.
8. LEASES
Future obligations for minimum rentals under noncancellable operating lease
commitments, all relating to premises, are as follows:
<TABLE>
<CAPTION>
Year ending December 31
<S> <C>
1996........................................................................................... $ 46,754
1997........................................................................................... 43,581
1998........................................................................................... 43,581
1999........................................................................................... 43,581
2000........................................................................................... 14,100
2001 and later years........................................................................... 49,550
Total minimum lease payments............................................................... $241,147
</TABLE>
Net rental expense for all operating leases amounted to $55,122 in 1995,
$50,908 in 1994 and $51,370 in 1993. One operating lease for real property
contains a purchase option considered to approximate fair market value.
9. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Significant components of other expense were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
FDIC insurance.......................................................... $281,894 $503,379 $494,312
Stationery, printing and supplies....................................... 280,665 304,997 290,810
</TABLE>
33
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. FNB CORP. (PARENT COMPANY) FINANCIAL DATA
The Parent Company's principal asset is its investment in the Bank
subsidiary, and its principal source of income is dividends from that
subsidiary.
Certain regulatory requirements restrict the lending of funds by the Bank to
the Parent Company and the amount of dividends which can be paid to the
Parent Company. In 1996, the maximum amount of dividends the Bank can pay to
the Parent Company, without the approval of the Comptroller of the Currency,
is $3,591,531 plus an additional amount equal to the retained net income in
1996 up to the date of any dividend declaration.
The Parent Company's condensed balance sheets as of December 31, 1995 and
1994, and the related condensed statements of income and cash flows for the
three-year period ended December 31, 1995 are as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1995 1994
Assets:
Cash........................................................................ $ 220,312 $ 201,744
Investment in wholly-owned bank subsidiary.................................. 25,758,036 22,978,009
Other assets................................................................ 286,422 199,377
Total assets.............................................................. $26,264,770 $23,379,130
Liabilities and Shareholders' Equity:
Accrued liabilities......................................................... $ 269,699 $ --
Shareholders' equity........................................................ 25,995,071 23,379,130
Total liabilities and shareholders' equity................................ $26,264,770 $23,379,130
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C>
1995 1994 1993
Income:
Dividends from bank subsidiary................................... $ 936,000 $1,146,000 $ 816,000
Other income (expense)........................................... (315) 1,345 887
Total income................................................... 935,685 1,147,345 816,887
Operating expenses................................................. 201,916 21,017 7,277
Income before income tax benefit and equity in undistributed net
income of bank subsidiary........................................ 733,769 1,126,328 809,610
Income tax benefit................................................. 68,957 6,738 2,173
Income before equity in undistributed net income of bank
subsidiary....................................................... 802,726 1,133,066 811,783
Equity in undistributed net income of bank subsidiary.............. 1,897,731 1,693,800 1,878,105
Net income..................................................... $2,700,457 $2,826,866 $2,689,888
</TABLE>
34
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C>
1995 1994 1993
Operating activities:
Net income..................................................... $ 2,700,457 $ 2,826,866 $ 2,689,888
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of bank subsidiary........ (1,897,731) (1,693,800) (1,878,105)
Other, net................................................... (82,601) (2,245) 6,747
Net cash provided by operating activities.................. 720,125 1,130,821 818,530
Investing activities:
Decrease (increase) in other assets............................ (4,444) (180,112) 62
Financing activities:
Common stock issued............................................ 21,773 -- --
Common stock repurchased....................................... (52,800) -- --
Cash dividends and fractional shares paid...................... (666,086) (840,000) (816,000)
Net cash used in financing activities...................... (697,113) (840,000) (816,000)
Net increase in cash............................................. 18,568 110,709 2,592
Cash at beginning of year........................................ 201,744 91,035 88,443
Cash at end of year.............................................. $ 220,312 $ 201,744 $ 91,035
</TABLE>
11. STOCK OPTIONS
The Corporation has a stock compensation plan that allows for the granting of
incentive and nonqualified stock options to key employees and directors.
Under terms of the plan, options are granted at prices equal to the fair
market value of the common stock on the date of grant. Options become
exercisable after one year in equal, cumulative installments over a five-year
period. No option shall expire later than ten years from the date of grant. A
maximum of 180,000 shares of common stock has been reserved for issuance
under the stock compensation plan.
A summary of stock option activity during 1995, adjusted to reflect the stock
split disclosed in Note 1, is as follows:
<TABLE>
<CAPTION>
Options Option Price
Outstanding Per Share
<S> <C> <C>
Balance, December 31, 1994................................................... 66,000 $ 16.27
Granted...................................................................... 40,000 24.00
Cancelled.................................................................... (8,625) 16.27
Balance, December 31, 1995................................................... 97,375 16.27 - 24.00
Options exercisable.......................................................... 11,475 16.27
</TABLE>
12. COMMITMENTS
In the normal course of business, various commitments are outstanding that
are not reflected in the consolidated financial statements. At December 31,
1995, a summary of significant commitments is as follows:
<TABLE>
<S> <C>
Commitments to extend credit.............................................. $37,737,000
Standby letters of credit................................................. 3,992,000
</TABLE>
In management's opinion, these commitments will be funded from normal
operations with not more than the normal risk of loss.
35
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based on a percentage of deposits. For the reserve maintenance
period in effect at December 31, 1995, the average daily reserve requirement
was $2,923,000.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
for each class of financial instruments.
CASH AND CASH EQUIVALENTS. For cash on hand, amounts due from banks, and
federal funds sold, the carrying value is considered to be a reasonable
estimate of fair value.
INVESTMENT SECURITIES. The fair value of investment securities is based on
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
LOANS. The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
DEPOSITS. The fair value of noninterest-bearing demand deposits and NOW,
savings and money market deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
OTHER INTEREST-BEARING LIABILITIES. The carrying value of retail repurchase
agreements and federal funds purchased is considered to be a reasonable
estimate of fair value.
COMMITMENTS. The fair value of commitments to extend credit is considered to
approximate carrying value, since the large majority of these commitments
would result in loans that have variable rates and/or relatively short terms
to maturity. For other commitments, generally of a short-term nature, the
carrying value is considered to be a reasonable estimate of fair value. The
various commitment items are disclosed in Note 12.
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
<S> <C> <C> <C> <C>
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 11,365 $ 11,365 $ 9,348 $ 9,348
Investment securities:
Available for sale...................................... 28,375 28,375 24,569 24,569
Held to maturity........................................ 56,161 57,008 52,414 50,810
Net loans................................................. 178,020 179,173 166,608 163,250
FINANCIAL LIABILITIES
Deposits.................................................. 250,144 250,795 229,925 229,861
Retail repurchase agreements.............................. 4,642 4,642 3,526 3,526
Federal funds purchased................................... -- -- 3,050 3,050
</TABLE>
The fair value estimates are made at a specific point in time based on
relevant market and other information about the financial instruments.
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 such 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.
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.
36
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. RESTRUCTURING CHARGES
In 1995, 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 been either realigned or eliminated. It is expected that
all significant project costs were incurred and paid in 1995.
A summary of the restructuring charges is as follows:
<TABLE>
<S> <C>
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
</TABLE>
15. ACQUISITIONS
On December 30, 1993, the Corporation entered into definitive agreements to
acquire two mutual savings banks, Home Savings Bank of Siler City, SSB of Siler
City, North Carolina and Randleman Savings Bank, SSB of Randleman, North
Carolina, 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. Regulatory applications for
approval to consummate the proposed acquisitions were filed in April 1994.
Substantial changes in regulatory policy occurring shortly after the
applications were filed effectively resulted in a moratorium on federal approval
of merger/conversions, and the Corporation subsequently withdrew the
applications to the FDIC and the Federal Reserve and postponed the ultimate
decision to proceed with the acquisitions until it was clear what the regulatory
obstacles might be. 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.
The Corporation incurred certain costs in connection with the proposed
acquisitions. Those costs, which had been deferred, amounted to $186,350 and are
included in other expense in the consolidated statement of income for the year
ended December 31, 1995.
37
<PAGE>
GENERAL INFORMATION
CORPORATE HEADQUARTERS
FNB Corp.
101 Sunset Avenue
Post Office Box 1328
Asheboro, North Carolina 27204
COMMON STOCK
FNB Corp. Common stock is traded on the NASDAQ National Market System under the
symbol FNBN. At December 31, 1995, there were 1,049 shareholders of record.
MARKET MAKERS
Interstate/Johnson Lane Corporation
J. C. Bradford & Co., Incorporated
ANNUAL MEETING
The annual Meeting of Shareholders of FNB Corp. will be held at the AVS Banquet
Centre, 2045 North Fayetteville Street, Asheboro, North Carolina, on Tuesday,
May 14, 1996 at 1:00 p.m., preceded by a buffet luncheon beginning at 12:15 p.m.
FORM 10-KSB
Copies of the FNB Corp. Annual Report to the Securities and Exchange Commission
on Form 10-KSB may be obtained by any shareholder upon written request to Jerry
A. Little, Treasurer.
EQUAL OPPORTUNITY EMPLOYER
FNB Corp. and First National Bank and Trust Company are equal opportunity
employers. All matters regarding recruiting, hiring, training, compensation,
benefits, promotions, transfers and all other personnel policies will continue
to be free from all discriminatory practices.
STOCK TRANSFER AGENT AND REGISTRAR
DIVIDEND REINVESTMENT SERVICES
First National Bank and Trust Company
Post Office Box 1328
Asheboro, North Carolina 27204
Attention: Mrs. Susan G. Brown, Assistant Secretary
(910) 626-8300
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Greensboro, North Carolina
<PAGE>
FNB CORP.
P.O. Box 1328
Asheboro, N.C. 27204
EXHIBIT 21
Subsidiaries of the Registrant
The Registrant has one direct, wholly-owned subsidiary as follows:
First National Bank and Trust Company -
National banking association headquartered in the State of
North Carolina.
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
FNB Corp.
We consent to incorporation by reference in the registration statement (No.
33-72686) on Form S-8 of FNB Corp. of our report dated February 2, 1996,
relating to the consolidated balance sheets of FNB Corp. and subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995, which report appears in the December 31, 1995
annual report on Form 10-KSB of FNB Corp. Our report refers to the fact that on
December 31, 1993, FNB Corp. adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
March 29, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,764,539
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,375,645
<INVESTMENTS-CARRYING> 56,160,814
<INVESTMENTS-MARKET> 0
<LOANS> 179,922,737
<ALLOWANCE> 1,902,640
<TOTAL-ASSETS> 283,678,112
<DEPOSITS> 250,144,476
<SHORT-TERM> 4,641,527
<LIABILITIES-OTHER> 2,897,038
<LONG-TERM> 0
<COMMON> 0
4,494,988
0
<OTHER-SE> 21,500,083
<TOTAL-LIABILITIES-AND-EQUITY> 283,678,112
<INTEREST-LOAN> 15,638,486
<INTEREST-INVEST> 4,790,204
<INTEREST-OTHER> 177,071
<INTEREST-TOTAL> 20,605,761
<INTEREST-DEPOSIT> 8,821,404
<INTEREST-EXPENSE> 9,002,279
<INTEREST-INCOME-NET> 11,603,482
<LOAN-LOSSES> 515,000
<SECURITIES-GAINS> (414,596)
<EXPENSE-OTHER> 9,113,626
<INCOME-PRETAX> 3,801,022
<INCOME-PRE-EXTRAORDINARY> 3,801,022
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,700,457
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 4.58
<LOANS-NON> 26,000
<LOANS-PAST> 317,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,720,000
<CHARGE-OFFS> 477,000
<RECOVERIES> 145,000
<ALLOWANCE-CLOSE> 1,903,000
<ALLOWANCE-DOMESTIC> 1,660,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 243,000
</TABLE>
