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, 1996
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)
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)
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, 1996 were $24,691,387.
As of March 10, 1997, 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 $45,126,666.
The registrant had 1,811,104 shares of $2.50 par value common stock outstanding
at March 10, 1997.
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,
1996 are incorporated by reference into Part II.
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 13, 1997 are incorporated by reference into Part
III.
<PAGE>
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
two national teller machine networks, Cirrus and Plus, and one regional network,
Honor.
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
through "FNB Investors Services", a service provided by 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 acquisition 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
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marketing efforts were undertaken in 1995, primarily to Bank customers.
Credit card receivables amounted to $2,257,204 and $1,524,718 at
December 31, 1996 and 1995, respectively. Additionally, the merchant aspect
of credit card operations has been shifted to an in-house basis from the
prior correspondent arrangement.
In a significant 1994 development, the Bank elected to outsource all of
its data processing, item capture and statement rendering operations. The
conversion to a service bureau arrangement was completed in the 1994 fourth
quarter. The major items of data processing equipment that were no longer needed
by the Bank were acquired by the new processor. While the Bank does not
currently plan to resume any major data processing operations, the level of
computer equipment was significantly increased in 1995 through expanded use of
personal computer networks. The new networks allow for a more direct input of
basic loan and deposit account information to the data files maintained by the
service bureau. Capital expenditures in 1995, which totaled $1,302,230, related
primarily to the increase in computer equipment. Since most of this equipment
was not placed into service until late in 1995, the full effect on annual
depreciation expense was not recognized until 1996. Approximately one-third of
1996 capital expenditures, which totaled $1,019,109, also related to personal
computer networks.
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 were either realigned or eliminated. Total restructuring
charges, all of which were incurred and paid in 1995, 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, 1996 and
1995 amounted to $20,355,367 and $33,525,143, respectively. 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 nineteen 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, 1996, the Parent Company had three officers, all of
whom were also officers of the Bank. On that same date, the Bank had 121
full-time employees and 22 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
Parent Company 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 is under a lease expiring December 31, 1999. 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 1996 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
1996 Annual Report to Shareholders are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of FNB Corp. and 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 1996 Annual Report to Shareholders.
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Income, years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity, years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows, years ended
December 31, 1996, 1995 and 1994
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 13, 1997, 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 13, 1997, 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 13, 1997, 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 13, 1997, 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 13, 1997, 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 13, 1997, 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, 1997 By: /s/ Michael C. Miller
---------------------
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, 1997.
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
/s/ Richard K. Pugh 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
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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
Certificate, incorporated herein by
reference to Exhibit 4 to Amendment No. 1 to
the Registrant's Form S-14 Registration
Statement (No. 2-96498) filed April 19,
1985.
10.10 Form of Split Dollar Insurance Agreement
dated as of November 1, 1987 between First
National Bank and Trust Company and certain
of its key employees and directors,
incorporated herein by reference to Exhibit
19.20 to the Registrant's Form 10-Q
Quarterly Report for the Quarter ended June
30, 1988.
10.11 Form of Amendment to Split Dollar Insurance
Agreement dated as of November 1, 1994
between First National Bank and Trust
Company and certain of its key employees and
directors, incorporated herein by reference
to Exhibit 10.11 to the Registrant's Form
10-KSB Annual Report for the fiscal year
ended December 31, 1994.
10.20 Copy of Split Dollar Insurance Agreement
dated as of May 28, 1989 between First
National Bank and Trust Company and James M.
Culberson, Jr., incorporated herein by
reference to Exhibit 10.30 to the
Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1989.
10.30 Copy of Stock Compensation Plan adopted May
11, 1993, incorporated herein by reference
to Exhibit 10.40 to the Registrant's Form
10-QSB Quarterly Report for the quarter
ended June 30, 1993.
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Exhibit No. Description of Exhibit
10.31 Form of Incentive Stock Option Agreement
between FNB Corp. and certain of its key
employees, pursuant to the Registrant's
Stock Compensation Plan, incorporated herein
by reference to Exhibit 10.31 to the
Registrant's Form 10-KSB Annual Report for
the fiscal year ended December 31, 1994.
10.32 Form of Nonqualified Stock Option Agreement
between FNB Corp. and certain of its
directors, pursuant to the Registrant's
Stock Compensation Plan, incorporated herein
by reference to Exhibit 10.32 to the
Registrant's Form 10-KSB Annual Report for
the fiscal year ended December 31, 1994.
10.40 Copy of FNB Corp. Savings Institutions
Management Stock Compensation Plan adopted
May 10, 1994, incorporated herein by
reference to Exhibit 10.40 to the
Registrant's Form 10-QSB Quarterly Report
for the quarter ended June 30, 1994.
10.50 Copy of Employment Agreement dated as of
December 27, 1995 between First National
Bank and Trust Company and Michael C.
Miller.
13 Portions of the Registrant's 1996 Annual
Report to Shareholders, which are
incorporated into 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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FIVE YEAR FINANCIAL HISTORY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income............................................ $ 22,248 $ 20,606 $ 17,688 $ 17,507 $ 18,594
Interest expense........................................... 9,612 9,002 6,979 6,945 8,083
Net interest income........................................ 12,636 11,604 10,709 10,562 10,511
Provision for loan losses.................................. 490 515 220 370 575
Net interest income after provision for loan losses........ 12,146 11,089 10,489 10,192 9,936
Losses on sales of securities.............................. -- (415) -- -- --
Other operating income..................................... 2,444 2,241 2,075 1,810 1,609
Restructuring charges...................................... -- 460 -- -- --
Other operating expense.................................... 9,077 8,654 8,578 8,306 7,536
Income before income taxes................................. 5,513 3,801 3,986 3,696 4,009
Income taxes............................................... 1,676 1,101 1,159 1,006 1,100
Net income................................................. $ 3,837 $ 2,700 $ 2,827 $ 2,690 $ 2,909
PER SHARE DATA (1)
Net income................................................. $ 2.13 $ 1.50 $ 1.57 $ 1.49 $ 1.62
Cash dividends declared.................................... .66 .52 .47 .45 .44
Book value................................................. 15.92 14.46 12.99 12.35 11.22
BALANCE SHEET INFORMATION
Total assets............................................... $307,134 $283,678 $261,616 $249,698 $245,205
Investment securities...................................... 90,316 84,536 76,983 78,488 81,020
Loans...................................................... 195,273 179,923 168,328 157,302 147,032
Deposits................................................... 271,380 250,144 229,925 224,260 223,478
Shareholders' equity....................................... 28,767 25,995 23,379 22,223 20,204
RATIOS (AVERAGES)
Return on assets........................................... 1.32% 1.00% 1.11% 1.09% 1.24%
Return on shareholders' equity............................. 13.97 10.93 12.33 12.62 15.16
Shareholders' equity to assets............................. 9.41 9.17 8.98 8.65 8.19
Dividend payout ratio...................................... 31.02 34.62 29.71 30.34 27.23
Loans to deposits.......................................... 72.87 73.10 70.67 66.76 64.47
Net yield on earning assets, taxable equivalent basis...... 4.90 4.84 4.73 4.86 5.17
</TABLE>
(1) All per share data in 1995 and prior years 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.
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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 $3,837,304 in 1996, a 42.1%
increase in net income from 1995. Earnings
OVERVIEW
per share, adjusted for the three-for-two common stock
split in 1995, increased from $1.50 in 1995 to $2.13 in
1996. 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
$307,134,477 at December 31, 1996, up 8.3% from year-end
1995. Loans amounted to $195,272,683 at December 31, 1996,
up 8.5% from the prior year. Total deposits grew 8.5% to
$271,380,065 in 1996.
On December 30, 1993, the Corporation entered into
definitive agreements to acquire two mutual savings banks
in merger/conversion transactions, pursuant to which the
savings banks would convert from mutual to stock form and
the Corporation would simultaneously acquire the shares
issued in the conversions. In 1995, the agreements expired
without the acquisitions having been completed due to
changes in federal and state regulatory policies which
strictly limited the circumstances under which such
transactions would be permitted.
The Corporation's net income increased $1,136,847 in 1996,
up 42.1% over 1995. Earnings were
EARNINGS REVIEW
positively impacted in 1996 by an increase of $1,032,830
or 8.9% in net interest income. The comparison to 1995
results is affected by the fact that there were certain
nonrecurring changes in 1995, including restructuring
charges of $460,457 and losses on sales of investment
securities of $414,596, which were charges taken for the
strategic purposes discussed in "Business Development
Matters". 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.
In 1995, earnings declined $126,409 or 4.5% from 1994. The
negative factors affecting net income in 1995, as noted
above, more than offset the benefit of an increase of
$894,160 or 8.3% in net interest income.
Return on average assets, affected in 1995 by the negative
factors noted above, increased from 1.00% in 1995 to 1.32%
in 1996. Return on average assets declined in 1995 from
1.11% in 1994, again reflecting the effect of the negative
factors in 1995. Similarly, return on average
shareholders' equity, increased to 13.97% in 1996 after
declining to 10.93% in 1995 from 12.33% in 1994.
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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 $12,636,312 in 1996 compared to
$11,603,482 in 1995. The increase of $1,032,830 or 8.9%
resulted from an improvement in the net yield on earning
assets, or net interest margin, from 4.84% in 1995 to
4.90% in 1996 coupled with a 8.3% increase in the level of
average earning assets. In 1995, there was a $894,160 or
8.3% increase in net interest income reflecting both an
improvement in the net interest margin from 4.73% in 1994
and a 5.5% increase in average earning assets. Following a
period of generally lower interest rates, which had
ultimately resulted in a reduction in the net interest
margin, interest rates began to increase significantly in
1994, influenced by actions taken by the Federal Reserve
to combat a possible resurgence in inflation. The interest
rate increases in 1994 and early 1995, later offset to
some extent by Federal Reserve action to reduce rates in
the second half of 1995 and first quarter of 1996, have
resulted in an improvement in the net interest margin.
Additionally, there had been a continuing negative impact
on the margin from certain variable-rate time deposits
with rate floors 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 1996 and 1995 were $1,183,000 and $918,000,
respectively, 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>
1996 1995 1994
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)................................ $186,937 $16,777 8.96% $174,139 $15,698 9.01 % $161,121 $13,299
Investment securities (1):
Taxable income............................ 71,297 4,985 6.99 65,397 4,418 6.76 66,679 3,911
Non-taxable income........................ 14,282 1,205 8.44 10,610 970 9.14 10,042 1,021
Federal funds sold.......................... 1,688 89 5.27 3,042 177 5.82 2,174 91
Total earning assets.................. 274,204 23,056 8.40 253,188 21,263 8.40 240,016 18,322
Cash and due from banks..................... 9,423 9,226 8,625
Other assets, net........................... 8,161 6,884 6,631
TOTAL ASSETS.......................... $291,788 $269,298 $255,272
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts.............................. $ 35,021 666 1.90 $ 32,442 695 2.14 $ 32,521 658
Savings deposits.......................... 30,147 756 2.50 29,945 845 2.82 31,820 830
Money market accounts..................... 16,067 444 2.76 16,659 508 3.05 21,261 543
Certificates and other time deposits...... 138,993 7,525 5.40 122,743 6,773 5.52 106,759 4,850
Retail repurchase agreements................ 4,118 178 4.32 3,358 167 4.97 2,101 84
Federal funds purchased..................... 764 43 5.63 239 14 5.77 307 14
Total interest-bearing liabilities.... 225,110 9,612 4.26 205,386 9,002 4.38 194,769 6,979
Noninterest-bearing demand deposits......... 36,296 36,444 35,614
Other liabilities........................... 2,921 2,765 1,964
Shareholders' equity........................ 27,461 24,703 22,925
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................. $291,788 $269,298 $255,272
NET INTEREST INCOME AND SPREAD.............. $13,444 4.14% $12,261 4.02 % $11,343
NET YIELD ON EARNING ASSETS................. 4.90% 4.84 %
<CAPTION>
Average
Rates
Earned/
Paid
<S> <C>
EARNING ASSETS
Loans (1)(2)................................ 8.25 %
Investment securities (1):
Taxable income............................ 5.87
Non-taxable income........................ 10.17
Federal funds sold.......................... 4.19
Total earning assets.................. 7.63
Cash and due from banks.....................
Other assets, net...........................
TOTAL ASSETS..........................
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts.............................. 2.02
Savings deposits.......................... 2.61
Money market accounts..................... 2.55
Certificates and other time deposits...... 4.54
Retail repurchase agreements................ 4.00
Federal funds purchased..................... 4.64
Total interest-bearing liabilities.... 3.58
Noninterest-bearing demand deposits.........
Other liabilities...........................
Shareholders' equity........................
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..............................
NET INTEREST INCOME AND SPREAD.............. 4.05 %
NET YIELD ON EARNING ASSETS................. 4.73 %
</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. In 1996, after one reduction,
the prime rate closed the year at 8.25%. The average prime
for 1994, 1995 and 1996 amounted to 7.09%, 8.82% and
8.28%, 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, followed by one further
reduction in the first quarter of 1996. In 1996, the net
interest spread increased by 12 basis points from 4.02% in
1995 to 4.14% in 1996, reflecting a decrease in the
average rate paid on interest-bearing liabilities, or cost
of funds. In
7
<PAGE>
1995, the net interest spread declined modestly by 3 basis
points due to the fact that the average total yield on
earning assets increased by slightly less than the cost of
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%.
The 1996 and 1995 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>
1996 Versus 1995 1995 Versus 1994
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)................................................. $1,165 $ (86) $1,079 $1,121 $1,278 $2,399
Investment securities (2):
Taxable income.......................................... 412 155 567 (76 ) 583 507
Non-taxable income...................................... 314 (79) 235 55 (106) (51)
Federal funds sold........................................ (72 ) (16) (88) 44 42 86
Total interest income................................. 1,819 (26) 1,793 1,144 1,797 2,941
INTEREST EXPENSE
Interest-bearing deposits:
NOW accounts............................................ 53 (82) (29) (2 ) 39 37
Savings deposits........................................ 6 (95) (89) (50 ) 65 15
Money market accounts................................... (17 ) (47) (64) (130 ) 95 (35)
Certificates and other time deposits.................... 899 (147) 752 788 1,135 1,923
Retail repurchase agreements.............................. 35 (24) 11 59 24 83
Federal funds purchased................................... 30 (1) 29 (3 ) 3 --
Total interest expense................................ 1,006 (396) 610 662 1,361 2,023
NET INTEREST INCOME......................................... $ 813 $ 370 $1,183 $ 482 $ 436 $ 918
</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 1996, earnings
were positively impacted by a decrease in the provision of
$25,000, while in 1995 there was a negative impact from a
$295,000 provision increase.
OTHER OPERATING INCOME
Total other operating income, or noninterest income,
increased $617,351 or 33.8% in 1996 and decreased $248,712
or 12.0% in 1995 due principally to the effect on 1995
results from the recognition of losses on sales of
investment securities in the 1995 first quarter of
$414,596 (see
8
<PAGE>
"Business Development Matters"). The 1996 increase
reflected 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 1996
gain in annuity and brokerage commissions reflected
increased brokerage commissions. In 1995, there was a
$136,218 decrease in annuity and brokerage commissions due
to a reduction in the sales of tax deferred annuity
products, a situation that reflected the competition from
the higher interest rates available on deposit accounts in
1995 compared to 1994. The significant increase in credit
card income in 1995 was due to the implementation in 1994
of the new credit card operation discussed in "Business
Development Matters". The level of other service charges,
commissions and fees was higher in 1996 due primarily to
the implementation in the 1996 third quarter of a fee
charged to noncustomers for usage of the Bank's automated
teller machines.
The increase in service charges on deposit accounts in
1996 resulted primarily from the implementation of daily
charges on overdraft balances in the second quarter of
1995. The 1995 increase in service charges on deposit
accounts was primarily due to a change in the 1994 fourth
quarter in the method of collecting fees on returned
checks and overdraft items and to 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 offsetting
these earnings improvement factors in 1995 was the
negative effect of higher interest rates on the
calculation of the earnings credit that is used to offset
service charges that would otherwise be assessed on
commercial accounts.
OTHER OPERATING EXPENSE
Total other operating, or noninterest, expense decreased
$36,552 or 0.4% in 1996 and increased $535,678 or 6.2% in
1995 due primarily to the effect on 1995 results of
restructuring charges of $460,457 (see "Business
Development Matters") and of 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, and those in
1996 also, 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 1996, noninterest expense was
favorably affected by a further reduction in FDIC
insurance expense, amounting to $180,273 despite a special
one-time assessment of $74,845 related to new legislation
enacted on September 30, 1996. This cost improvement
factor was more than offset in 1996, however, by increases
in personnel expense and data processing services and by a
higher level of equipment costs related to the expanded
use of personal computer networks.
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, increased significantly in 1995.
Personnel and equipment costs were 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.
The levels of certain expenses are being favorably
affected by the comprehensive project undertaken in 1995
for the reengineering of Bank operations (see "Business
Development Matters"). Despite an increase in the volume
of business, the average number of full-time equivalent
employees in 1996 was approximately equal to that for
1995. As is the situation for other operating expenses,
however, personnel expense is subject to the continuing
effects of inflation through normal salary adjustments and
higher costs of fringe benefits. Personnel expense was
also impacted in 1996 by changes in the incentive
compensation program. Furniture and equipment expense
increased in 1996 due to a higher level of depreciation
9
<PAGE>
charges associated primarily with equipment purchases in
1995 and 1996 related to personal computer networks (see
"Business Development Matters").
Because of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) enacted in 1989, FDIC insurance
expense was increased substantially, with the Bank's
expense amounting to $503,379 in the year ended December
31, 1994. The FDIC has two separate insurance funds, which
are the Bank Insurance Fund (BIF) and the Savings
Association Insurance Fund (SAIF). As provided by FDICIA,
the insurance assessment rate could be lowered once a fund
had reached a mandated 1.25 percent reserve ratio. While
the SAIF fund did not reach 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, resulting in only a minimum annual charge of $2,000
for the majority of financial institutions with
BIF-insured deposits. Since most of the Bank's deposits
are insured through BIF, the Bank experienced a
significant reduction in FDIC insurance expense commencing
in the 1995 third quarter when the effect of the rate
adjustment was initially recorded. Consequently, FDIC
insurance expense for the entire 1995 year amounted to
only $281,894, with total 1996 expense, including the
one-time assessment of $74,845, amounting to $101,621.
The Deposit Insurance Funds Act of 1996 (DIFA) was enacted
on September 30, 1996 and has three main components. The
first included a one-time assessment on SAIF deposits to
capitalize the SAIF fund to the mandated 1.25 percent
ratio. The second is a requirement that the repayment of
the Financing Corporation (FICO) bonds be shared by both
banks and thrifts. The third is the ultimate elimination
of the BIF and SAIF funds by merging them into a new
Deposit Insurance Fund. The one-time assessment on the
Bank's SAIF deposits, which amounted to $74,845, was
determined on the date of enactment and expensed at that
time. Beginning January 1, 1997, FDIC insurance premiums
will be assessed for FICO bond repayment purposes at an
estimated rate of $.0648 per $100 for SAIF deposits and a
rate equal to one-fifth of that, or $.01296 per $100, for
BIF deposits. Additional premiums could be assessed in
order to maintain the BIF and SAIF funds at the required
1.25 percent reserve ratio. Based on the Bank's deposits
at December 31, 1996, the total annual assessment for FICO
bond repayment purposes would amount to approximately
$42,000 in 1997.
INCOME TAXES
The effective income tax rate increased from 29.0% in 1995
to 30.4% in 1996 due principally to an increase in the
ratio of taxable to tax-exempt income. The effective
income tax rate of 29.0% in 1995 did not significantly
change from the 29.1% rate in 1994.
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 five 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
10
<PAGE>
market area, while maintaining the desired level of
immediate liquidity and a substantial investment
securities portfolio available for both immediate and
secondary liquidity purposes.
One of the primary objectives of asset/liability
management is to maximize net interest margin
ASSET/LIABILITY
MANAGEMENT AND INTEREST
RATE SENSITIVITY while minimizing the earnings risk associated with changes
in interest rates. One method used to manage interest
rate sensitivity is to measure, over various time
periods, the interest rate sensitivity positions, or
gaps; however, this method addresses only the magnitude
of timing differences and does not address earnings or
market value. Therefore, management uses an earnings
simulation model to prepare, on a regular basis,
earnings projections based on a range of interest rate
scenarios in order to more accurately measure interest
rate risk.
The Bank's balance sheet is liability-sensitive, meaning
that in a given period there will be more liabilities than
assets subject to immediate repricing as market rates
change. Because immediately rate sensitive
interest-bearing liabilities exceed rate sensitive assets,
the earnings position could improve in a declining rate
environment and could deteriorate in a rising rate
environment, depending on the correlation of rate changes
in these two categories. Included in interest-bearing
liabilities subject to rate changes within 90 days is a
portion of the NOW, savings, and money market deposits.
These types of deposits historically have not repriced
coincidentally with or in the same proportion as general
market indicators.
As a specific asset/liability management tool and as
further discussed in Note 13 to Consolidated Financial
Statements, the Bank, at December 31, 1996, had entered
into an interest rate floor agreement with a correspondent
bank to protect certain variable-rate loans from the
downward effects of their repricing in the event of a
decreasing rate environment. The notional amount of the
agreement is $10,000,000. The agreement requires the
correspondent bank to pay to the Bank the difference
between the floor rate of interest of 7.50% and the prime
rate of interest in the event that the prime rate is less.
Any payments received under the agreement, net of premium
amortization, will be treated as an adjustment of interest
income on loans.
11
<PAGE>
Table 3 presents information about the periods in which
the interest-sensitive assets and liabilities at December
31, 1996 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. As a simplifying assumption concerning
repricing behavior, 50% of the NOW, savings and money
market deposits are assumed to reprice immediately and 50%
are assumed to reprice beyond one year.
TABLE 3
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996
Rate Maturity In Days Beyond
1-90 91-180 181-365 One Year Total
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans.......................................................... $ 86,677 $ 8,851 $ 11,762 $87,983 $195,273
Investment securities.......................................... 2,594 948 2,628 84,146 90,316
Federal funds sold............................................. -- -- -- -- --
Total earning assets......................................... 89,271 9,799 14,390 172,129 285,589
INTEREST-BEARING LIABILITIES
NOW accounts................................................... 18,069 -- -- 18,070 36,139
Savings deposits............................................... 14,567 -- -- 14,567 29,134
Money market accounts.......................................... 8,652 -- -- 8,652 17,304
Time deposits of $100,000 or more.............................. 31,584 7,050 8,723 1,588 48,945
Other time deposits............................................ 25,782 21,594 40,807 12,870 101,053
Retail repurchase agreements................................... 3,725 -- -- -- 3,725
Federal funds purchased........................................ 575 -- -- -- 575
Total interest-bearing liabilities........................... 102,954 28,644 49,530 55,747 236,875
INTEREST SENSITIVITY GAP......................................... $(13,683) $(18,845) $ (35,140) $116,382 $ 48,714
Cumulative gap................................................... $(13,683) $(32,528) $ (67,668) $48,714 $ 48,714
Ratio of interest-sensitive assets to interest-sensitive
liabilities.................................................... 87% 34% 29% 309 % 121%
</TABLE>
Under guidelines established by the Board of Governors of
the Federal Reserve System, capital
CAPITAL ADEQUACY
adequacy is currently measured for regulatory purposes by
certain risk-based capital ratios, supplemented by a
leverage capital ratio. The risk-based capital ratios are
determined by expressing allowable capital amounts,
defined in terms of Tier I and Tier II, as a percentage of
risk-weighted 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 I capital consists primarily of common shareholders'
equity and qualifying perpetual preferred stock, net of
goodwill and other disallowed intangible assets. Tier II
capital, which is limited to the total of Tier I capital,
includes allowable amounts of subordinated debt, mandatory
convertible securities, preferred stock and the allowance
for loan losses. Under current requirements, the minimum
total capital ratio, consisting of both Tier I and Tier II
capital, is 8.00% and the minimum Tier I ratio is 4.00%.
At December 31, 1996, FNB Corp. and the Bank had total
capital ratios of 14.79% and 14.46%, respectively, and
Tier I capital ratios of 13.84% and 13.50%.
The leverage capital ratio, which serves as a minimum
capital standard, considers Tier I capital only and is
expressed as a percentage of average total assets for the
most recent quarter, after
12
<PAGE>
reduction of those assets for goodwill and other
disallowed intangible assets at the measurement date. As
currently required, the minimum leverage capital ratio is
4.00%. At December 31, 1996, FNB Corp. and the Bank had
leverage capital ratios of 9.41% and 9.18%, respectively.
The Bank is also required to comply with prompt corrective
action provisions established by the Federal Deposit
Insurance Corporation Improvement Act. To be categorized
as well-capitalized, the Bank must have a minimum ratio
for total capital of 10.00%, for Tier I capital of 6.00%
and for leverage capital of 5.00%. As noted above, the
Bank met all of those ratio requirements at December 31,
1996 and, accordingly, is well-capitalized under the
regulatory framework for prompt corrective action.
Asset and deposit growth was comparable in 1996 to 1995.
Total assets increased $23,456,000 or
BALANCE SHEET REVIEW
8.3% in 1996 compared to $22,062,000 or 8.4% in 1995.
Deposits grew $21,236,000 or 8.5% and $20,219,000 or 8.8%,
respectively, in the same periods. The average asset
growth rates were 8.4% in 1996 and 5.5% in 1995. The
corresponding average deposit growth rates were 7.7% and
4.5%.
Investments are carried on the consolidated balance sheet
at estimated fair value for available-
INVESTMENT SECURITIES
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. As discussed in Note 1 to Consolidated
Financial Statements and permitted on a one-time basis by
the Financial Accounting Standards Board in an
implementation guide to Statement of Financial Accounting
Standards 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.
13
<PAGE>
TABLE 4
INVESTMENT SECURITIES PORTFOLIO ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1996
Estimated Taxable 1995 1994
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....................................... $ 2,577 $ 2,589 6.74% $ 5,038 $ 7,256
Five to ten years....................................... 2,108 2,114 6.43 4,526 509
Total................................................. 4,685 4,703 6.59 9,564 7,765
U.S. Government agencies and corporations:
Within one year......................................... 500 500 6.57 2,060 --
One to five years....................................... 9,959 9,939 7.03 6,129 --
Five to ten years....................................... 8,825 8,844 7.50 452 --
Total................................................. 19,284 19,283 7.24 8,641 --
Mortgage-backed securities................................ 4,760 4,787 6.67 10,020 12,108
Total debt securities..................................... 28,729 28,773 7.04 28,225 19,873
Equity securities......................................... 147 156 150 4,696
Total available-for-sale securities................... $28,876 $28,929 $28,375 $24,569
HELD TO MATURITY
U.S. Treasury:
Within one year......................................... $ -- $ -- -- $ -- $ 4,954
One to five years....................................... -- -- -- -- 2,748
Total................................................. -- -- -- -- 7,702
U.S. Government agencies and corporations:
Within one year......................................... 1,348 1,356 6.92 2,854 3,151
One to five years....................................... 24,480 24,380 6.70 23,800 26,294
Five to ten years....................................... 18,108 17,873 7.27 17,022 4,916
Over ten years.......................................... -- -- -- 300 --
Total................................................. 43,936 43,609 6.95 43,976 34,361
State, county and municipal:
Within one year......................................... 325 327 11.67 1,203 2,081
One to five years....................................... 3,104 3,196 9.19 2,590 3,017
Five to ten years....................................... 5,930 6,038 7.80 4,959 4,909
Over ten years.......................................... 8,092 8,105 7.96 3,433 344
Total................................................. 17,451 17,666 8.20 12,185 10,351
Total held-to-maturity securities..................... $61,387 $61,275 $56,161 $52,414
</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.
14
<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 the growth in total assets exceeded
that for loans, the level of investment securities was
increased $5,780,00 or 6.8% in 1996 and $7,553,000 or 9.8%
in 1995. Investable funds not otherwise utilized are
temporarily invested on an overnight basis as federal
funds sold, the level of which is affected by such
considerations as near-term loan demand and liquidity
needs. Based on funds requirements, the Bank was a net
purchaser of funds at December 31, 1996.
The Corporation's primary source of revenue and largest
component of earning assets is the
LOANS
loan portfolio. Loans experienced growth of $15,350,000 or
8.5% in 1996 and $11,595,000 or 6.9% in 1995. Average
loans increased $12,798,000 or 7.3% and $13,018,000 or
8.1%, respectively. The ratio of average loans to average
deposits decreased slightly from 73.1% in 1995 to 72.9% in
1996. The ratio of loans to deposits at December 31, 1996
was 72.0%.
Table 5 sets forth the major categories of loans for each
of the last five years. The maturity distribution and
interest sensitivity of selected loan categories at
December 31, 1996 are presented in Table 6.
TABLE 5
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and agricultural............. $ 62,678 32.1 $ 47,317 26.3 41,777 24.8 40,858 26.0 34,630
Real estate -- construction............. 4,348 2.2 759 .4 1,331 .8 2,163 1.4 1,313
Real estate -- mortgage:
1-4 family residential................ 68,887 35.3 57,664 32.0 50,575 30.0 42,302 26.9 37,833
Commercial and other.................. 24,257 12.4 27,803 15.5 28,594 17.0 27,480 17.4 23,436
Consumer................................ 35,103 18.0 46,380 25.8 46,051 27.4 44,499 28.3 49,820
Total loans........................... $195,273 100.0 $179,923 100.0 $168,328 100.0 $157,302 100.0 $147,032
<CAPTION>
%
<S> <C>
Commercial and agricultural............. 23.5
Real estate -- construction............. .9
Real estate -- mortgage:
1-4 family residential................ 25.7
Commercial and other.................. 16.0
Consumer................................ 33.9
Total loans........................... 100.0
</TABLE>
TABLE 6
SELECTED LOAN MATURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996
One Year One to Over
or Less Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial and agricultural............................................... $22,563 $ 36,436 $ 3,679 $62,678
Real estate -- construction............................................... 1,606 2,298 444 4,348
Total selected loans.................................................... $24,169 $ 38,734 $ 4,123 $67,026
Sensitivity to rate changes:
Fixed interest rates.................................................... $ 4,742 $ 7,019 $ 4,123 $15,884
Variable interest rates................................................. 19,427 31,715 -- 51,142
Total................................................................... $24,169 $ 38,734 $ 4,123 $67,026
</TABLE>
15
<PAGE>
Loan growth and the composition of the loan portfolio are
being affected by management's
decision in March 1996 to discontinue the purchase of
retail installment loan contracts from automobile and
equipment dealers (see "Business Development Matters").
The outstanding balance of these loan contracts, which are
primarily included in consumer loans, experienced a net
1996 decrease of $13,169,776. Consequently, total consumer
loans declined significantly during that period. Other
consumer loan elements, including credit cards and home
equity lines of credit, have continued to grow. Changes in
the credit card operation are discussed in "Business
Development Matters". The commercial loan portfolio and
the residential construction and mortgage loan portfolio
each experienced strong gains during 1996.
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. As part of the loan
review function, a third party assessment group is
employed to review the underwriting documentation and risk
grading analysis. 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.
16
<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>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of year.............................................. $1,903 $1,720 $1,745 $1,766 $1,484
Charge-offs:
Commercial and agricultural............................................. 24 84 16 57 159
Real estate -- construction............................................. -- -- -- -- --
Real estate -- mortgage................................................. 12 -- 1 24 34
Consumer................................................................ 532 393 419 486 228
Total charge-offs..................................................... 568 477 436 567 421
Recoveries:
Commercial and agricultural............................................. 12 8 6 8 24
Real estate -- construction............................................. -- -- -- -- --
Real estate -- mortgage................................................. 3 3 5 7 1
Consumer................................................................ 146 134 180 161 103
Total recoveries...................................................... 161 145 191 176 128
Net loan charge-offs...................................................... 407 332 245 391 293
Provision for loan losses................................................. 490 515 220 370 575
Balance at end of year.................................................... $1,986 $1,903 $1,720 $1,745 $1,766
NONPERFORMING ASSETS, AT END OF YEAR
Nonaccrual loans.......................................................... $ 65 $ 26 $ -- $ -- $ 68
Accruing loans past due 90 days or more................................... 231 317 118 136 388
Total nonperforming loans............................................. 296 343 118 136 456
Foreclosed assets......................................................... 38 64 78 134 159
Other real estate owned................................................... -- -- -- -- 52
Total nonperforming assets............................................ $ 334 $ 407 $ 196 $ 270 $ 667
RATIOS
Net loan charge-offs to average loans..................................... .22% .19% .15% .26% .21%
Net loan charge-offs to allowance for loan losses......................... 20.49 17.45 14.25 22.43 16.59
Allowance for loan losses to year-end loans............................... 1.02 1.06 1.02 1.11 1.20
Total nonperforming loans to year-end loans............................... .15 .19 .07 .09 .31
</TABLE>
TABLE 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial and agricultural................................................. $ 650 $ 572 $ 490 $ 451 $ 418
Real estate -- construction................................................. 10 9 14 25 23
Real estate -- mortgage..................................................... 439 384 346 281 261
Consumer.................................................................... 727 695 651 569 343
Unallocated................................................................. 160 243 219 419 721
Total allowance for loan losses........................................... $1,986 $1,903 $1,720 $1,745 $1,766
</TABLE>
17
<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. A promotion that
offered premium-rate certificates of deposit, based on
selected maturities, has resulted in a significant portion
of the $17,173,000 increase in time deposits during 1996.
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
$3,725,000 at December 31, 1996 and $4,642,000 at December
31, 1995. Further, the level of time deposits obtained
from governmental units fluctuates, amounting to
$21,602,000, $17,820,000 and $4,898,000 at December 31,
1996, 1995 and 1994, respectively.
Table 9 shows the year-end and average deposit balances
for the years 1996, 1995 and 1994 and the changes in 1996
and 1995.
TABLE 9
ANAYLSIS OF DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
Change from Change from
Prior Year Prior Year 1994
Balance Amount % Balance Amount % Balance
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR-END BALANCES
Interest-bearing deposits:
NOW accounts...................................... $ 36,139 $3,732 11.5 $ 32,407 $ 505 1.6 $ 31,902
Savings deposits.................................. 29,134 (958 ) (3.2) 30,092 (828 ) (2.7) 30,920
Money market accounts............................. 17,304 1,075 6.6 16,229 (3,350 ) (17.1) 19,579
Total........................................... 82,577 3,849 4.9 78,728 (3,673 ) (4.5) 82,401
Certificates and other time deposits.............. 149,998 17,173 12.9 132,825 22,583 20.5 110,242
Total interest-bearing deposits................. 232,575 21,022 9.9 211,553 18,910 9.8 192,643
Noninterest-bearing demand deposits................. 38,805 214 .6 38,591 1,309 3.5 37,282
Total deposits.................................. $271,380 $21,236 8.5 $250,144 $20,219 8.8 $229,925
AVERAGE BALANCES
Interest-bearing deposits:
NOW accounts...................................... $ 35,021 $2,579 7.9 $ 32,442 $ (79 ) (.2) $ 32,521
Savings deposits.................................. 30,147 202 .7 29,945 (1,875 ) (5.9) 31,820
Money market accounts............................. 16,067 (592 ) (3.6) 16,659 (4,602 ) (21.6) 21,261
Total........................................... 81,235 2,189 2.8 79,046 (6,556 ) (7.7) 85,602
Certificates and other time deposits.............. 138,993 16,250 13.2 122,743 15,984 15.0 106,759
Total interest-bearing deposits................. 220,228 18,439 9.1 201,789 9,428 4.9 192,361
Noninterest-bearing demand deposits................. 36,296 (148 ) (.4) 36,444 830 2.3 35,614
Total deposits.................................. $256,524 $18,291 7.7 $238,233 $10,258 4.5 $227,975
</TABLE>
18
<PAGE>
As discussed in the "Overview" and in Note 16 to
Consolidated Financial Statements, the
BUSINESS DEVELOPMENT Corporation had entered into definitive agreements to
MATTERS acquire two mutual savings banks. In 1995, the
agreements expired without the acquisitions having
been completed due to changes in federal and state
regulatory policies which strictly limited the
circumstances under which such transactions would be
permitted.
During 1994, a new credit card operation was established
in which the Bank carries its own credit card receivables
as opposed to the former fee-based arrangement under which
accounts were generated for and owned by a correspondent
bank. As part of the new credit card strategy, extensive
marketing efforts were undertaken in 1995, primarily to
Bank customers. Credit card receivables amounted to
$2,257,204 and $1,524,718 at December 31, 1996 and 1995,
respectively. Additionally, the merchant aspect of credit
card operations has been shifted to an in-house basis from
the prior correspondent arrangement.
In a significant 1994 development, the Bank elected to
outsource all of its data processing, item capture and
statement rendering operations. The conversion to a
service bureau arrangement was completed in the 1994
fourth quarter. The major items of data processing
equipment that were no longer needed by the Bank were
acquired by the new processor. While the Bank does not
currently plan to resume any major data processing
operations, the level of computer equipment was
significantly increased in 1995 through expanded use of
personal computer networks. The new networks allow for a
more direct input of basic loan and deposit account
information to the data files maintained by the service
bureau. Capital expenditures in 1995, which totaled
$1,302,230, related primarily to the increase in computer
equipment. Since most of this equipment was not placed
into service until late in 1995, the full effect on annual
depreciation expense was not recognized until 1996.
Approximately one-third of 1996 capital expenditures,
which totaled $1,019,109, also related to personal
computer networks.
In 1995, as discussed in Note 15 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 were either realigned or eliminated. Total
restructuring charges, all of which were incurred and paid
in 1995, 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, 1996 and 1995 amounted to $20,355,367 and
$33,525,143, respectively. 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.
In March 1995, the Financial Accounting Standards Board
(the "FASB") issued Statement of
ACCOUNTING
PRONOUNCEMENT Financial Accounting Standards (SFAS) No. 121, "Accounting
MATTERS for Impairment of Long-Lived 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
19
<PAGE>
is effective for fiscal years beginning after December 15,
1995. The Corporation adopted the provisions of SFAS No.
121 in 1996 without any effect 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. The Corporation adopted
the provisions of SFAS No. 122 without any 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.
The Corporation adopted the provisions of SFAS No. 123 in
1996, resulting in the disclosures presented in Note 12 to
the consolidated financial statements.
In June 1996, the FASB issued SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125 provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of
liabilities using a financial-components approach that
focuses on control of the asset or liability. It requires
that an entity recognize only assets it controls and
liabilities it has incurred and should derecognize assets
only when control has been surrendered and derecognize
liabilities only when they have been extinguished. SFAS
No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied
prospectively. The Corporation adopted the provisions of
SFAS No. 125 on January 1, 1997 without any 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.
20
<PAGE>
TABLE 10
QUARTERLY FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
1996
Interest income.................................................................... $5,436 $5,443 $5,538 $5,831
Interest expense................................................................... 2,380 2,346 2,357 2,529
Net interest income................................................................ 3,056 3,097 3,181 3,302
Provision for loan losses.......................................................... 100 95 110 185
Net interest income after provision for loan losses................................ 2,956 3,002 3,071 3,117
Other operating income............................................................. 586 589 592 677
Other operating expense............................................................ 2,186 2,222 2,305 2,364
Income before income taxes......................................................... 1,356 1,369 1,358 1,430
Income taxes....................................................................... 411 417 419 429
Net income......................................................................... $ 945 $ 952 $ 939 $1,001
Per share data:
Net income....................................................................... $ .53 $ .53 $ .52 $ .56
Cash dividends declared.......................................................... .15 .15 .15 .21
Common stock price (1):
High........................................................................... 26.50 26.50 26.00 30.00
Low............................................................................ 22.50 22.63 23.50 25.50
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 (2):
Net income....................................................................... $ .07 $ .44 $ .49 $ .49
Cash dividends declared.......................................................... .12 .12 .13 .15
Common stock price (1):
High........................................................................... 16.67 18.00 21.00 24.00
Low............................................................................ 15.33 15.33 16.50 18.50
</TABLE>
(1) FNB Corp. common stock is traded on the NASDAQ National Market System under
the symbol FNBN.
(2) All per share data in 1995 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.
21
<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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
March 7, 1997
22
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
ASSETS 1996 1995
Cash and due from banks............................................................. $ 13,052,150 $ 8,764,539
Federal funds sold.................................................................. -- 2,600,000
Investment securities:
Available for sale, at estimated fair value (amortized cost of $28,875,531 in 1996
and $28,183,155 in 1995)........................................................ 28,928,543 28,375,645
Held to maturity (estimated fair value of $61,274,858 in 1996 and $57,008,236 in
1995)........................................................................... 61,387,196 56,160,814
Loans............................................................................... 195,272,683 179,922,737
Less: Allowance for loan losses................................................... (1,985,581) (1,902,640)
Net loans....................................................................... 193,287,102 178,020,097
Premises and equipment.............................................................. 6,290,471 6,029,541
Other assets........................................................................ 4,189,015 3,727,476
TOTAL ASSETS.................................................................... $307,134,477 $283,678,112
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits............................................... $ 38,805,364 $ 38,590,985
Interest-bearing deposits:
NOW, savings and money market deposits.......................................... 82,576,792 78,728,366
Time deposits of $100,000 or more............................................... 48,944,981 36,427,161
Other time deposits............................................................. 101,052,928 96,397,964
Total deposits................................................................ 271,380,065 250,144,476
Retail repurchase agreements........................................................ 3,724,929 4,641,527
Federal funds purchased............................................................. 575,000 --
Other liabilities................................................................... 2,687,241 2,897,038
Total Liabilities............................................................. 278,367,235 257,683,041
Shareholders' Equity:
Preferred stock, $10.00 par value; authorized 200,000 shares, none issued......... -- --
Common stock, $2.50 par value; authorized 5,000,000 shares, issued 1,806,994
shares in 1996 and 1,797,995 shares in 1995..................................... 4,517,485 4,494,988
Surplus........................................................................... 213,510 18,705
Retained earnings................................................................. 24,001,259 21,354,335
Net unrealized securities gains................................................... 34,988 127,043
Total Shareholders' Equity.................................................... 28,767,242 25,995,071
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $307,134,477 $283,678,112
Commitments (Note 13)
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1996 1995 1994
INTEREST INCOME
Interest and fees on loans............................................. $16,727,702 $15,638,486 $13,228,841
Interest and dividends on investment securities:
Taxable income....................................................... 4,661,250 4,170,724 3,722,957
Non-taxable income................................................... 770,119 619,480 645,224
Federal funds sold..................................................... 88,799 177,071 91,034
Total interest income.............................................. 22,247,870 20,605,761 17,688,056
INTEREST EXPENSE
Deposits............................................................... 9,390,717 8,821,404 6,880,389
Retail repurchase agreements........................................... 178,113 167,076 84,094
Federal funds purchased................................................ 42,728 13,799 14,251
Total interest expense............................................. 9,611,558 9,002,279 6,978,734
NET INTEREST INCOME...................................................... 12,636,312 11,603,482 10,709,322
Provision for loan losses.............................................. 490,000 515,000 220,000
Net Interest Income After Provision for Loan Losses...................... 12,146,312 11,088,482 10,489,322
OTHER OPERATING INCOME
Service charges on deposit accounts.................................... 1,415,038 1,356,083 1,218,066
Annuity and brokerage commissions...................................... 217,766 182,091 318,309
Credit card income..................................................... 315,641 263,678 100,816
Other service charges, commissions and fees............................ 314,097 284,994 270,280
Losses on sales of investment securities............................... -- (414,596) --
Other income........................................................... 180,975 153,916 167,407
Total other operating income....................................... 2,443,517 1,826,166 2,074,878
OTHER OPERATING EXPENSE
Personnel expense...................................................... 4,733,429 4,479,773 4,902,442
Net occupancy expense.................................................. 485,357 461,992 447,645
Furniture and equipment expense........................................ 661,504 452,094 503,296
Data processing services............................................... 1,006,405 881,757 297,670
Restructuring charges.................................................. -- 460,457 --
Other expense.......................................................... 2,190,379 2,377,553 2,426,895
Total other operating expense...................................... 9,077,074 9,113,626 8,577,948
Income Before Income Taxes............................................... 5,512,755 3,801,022 3,986,252
Income taxes............................................................. 1,675,451 1,100,565 1,159,386
NET INCOME............................................................... $ 3,837,304 $ 2,700,457 $ 2,826,866
Net income per share..................................................... $ 2.13 $ 1.50 $ 1.57
Weighted average number of shares outstanding............................ 1,801,933 1,798,717 1,800,000
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK RETAINED SECURITIES
SHARES AMOUNT SURPLUS EARNINGS GAINS (LOSSES)
<S> <C> <C> <C> <C> <C>
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
Net income, 1996................................. -- -- -- 3,837,304 --
Cash dividends declared, $.66 per share.......... -- -- -- (1,190,380) --
Common stock issued through:
Dividend reinvestment plan..................... 6,574 16,435 150,356 -- --
Stock option plan.............................. 2,425 6,062 44,449 -- --
Change in net unrealized gains (losses) on
available-for-sale securities.................. -- -- -- -- (92,055)
BALANCE, DECEMBER 31, 1996....................... 1,806,994 $4,517,485 $213,510 $24,001,259 $ 34,988
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1996 1995 1994
OPERATING ACTIVITIES
Net income........................................................... $ 3,837,304 $ 2,700,457 $ 2,826,866
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment............ 634,116 397,979 408,730
Provision for loan losses.......................................... 490,000 515,000 220,000
Deferred income taxes (benefit).................................... (65,999) 36,206 295,558
Deferred loan fees and costs, net.................................. 395,050 (130,477) (504,202)
Premium amortization and discount accretion of investment
securities, net.................................................. 39,357 157,127 417,395
Losses on sales of investment securities........................... -- 414,596 --
Amortization of intangibles........................................ 43,876 59,115 78,107
Net decrease (increase) in loans held for sale..................... 405,503 (405,503) 1,089,594
Increase in other assets........................................... (439,441) (557,531) (273,155)
Increase (decrease) in other liabilities........................... (160,153) 732,884 320,447
Net Cash Provided By Operating Activities........................ 5,179,613 3,919,853 4,879,340
INVESTING ACTIVITIES
Available-for-sale securities:
Proceeds from sales................................................ -- 5,896,328 --
Proceeds from maturities........................................... 20,000,719 2,659,634 6,690,357
Purchases.......................................................... (20,765,272) (249,405) (3,400,725)
Held-to-maturity securities:
Proceeds from maturities........................................... 15,368,717 21,184,527 18,249,914
Purchases.......................................................... (20,558,380) (36,279,578) (21,708,597)
Net increase in loans................................................ (16,531,348) (11,376,742) (11,743,814)
Proceeds from sales of premises and equipment........................ 15,485 2,718 183,292
Purchases of premises and equipment.................................. (1,019,109) (1,302,230) (239,939)
Other, net........................................................... (33,497) (26,031) (213,423)
Net Cash Used In Investing Activities............................ (23,522,685) (19,490,779) (12,182,935)
FINANCING ACTIVITIES
Net increase in deposits............................................. 21,235,589 20,219,164 5,665,256
Increase (decrease) in retail repurchase agreements.................. (916,598) 1,115,301 3,526,226
Increase (decrease) in federal funds purchased....................... 575,000 (3,050,000) 1,250,000
Common stock issued.................................................. 217,302 21,773 --
Common stock repurchased............................................. -- (52,800) --
Cash dividends and fractional shares paid............................ (1,080,610) (666,086) (840,000)
Net Cash Provided By Financing Activities........................ 20,030,683 17,587,352 9,601,482
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 1,687,611 2,016,426 2,297,887
Cash and cash equivalents at beginning of year......................... 11,364,539 9,348,113 7,050,226
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 13,052,150 $ 11,364,539 $ 9,348,113
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................... $ 9,746,990 $ 8,233,042 $ 6,911,446
Income taxes....................................................... 1,911,293 1,075,350 749,993
Noncash investing and financing activity -- Transfer of investment
securities to available-for-sale category............................ -- 11,353,710 --
</TABLE>
See notes to consolidated financial statements.
26
<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 periods. 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
Under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" , investment
securities 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.
The Corporation intends to hold its securities classified as
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 Financial Accounting Standards Board (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.
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". Commencing in 1995 under the
provisions of SFAS No. 114, the 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.
27
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $99,703 and $143,579 at December 31, 1996 and 1995, 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.
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.
RESTATEMENTS
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.
28
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996
U.S. Treasury....................................... $ 4,685,376 $ 33,154 $ 15,432 $ 4,703,098
U.S. Government agencies and corporations........... 19,283,516 63,259 63,882 19,282,893
Mortgage-backed securities.......................... 4,759,750 43,187 15,799 4,787,138
Equity securities................................... 146,889 8,525 -- 155,414
Total............................................. $28,875,531 $148,125 $ 95,113 $28,928,543
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
HELD TO MATURITY
DECEMBER 31, 1996
U.S. Government agencies and corporations........... $43,935,800 $114,573 $ 441,497 $43,608,876
State, county and municipal......................... 17,451,396 301,006 86,420 17,665,982
Total............................................. $61,387,196 $415,579 $ 527,917 $61,274,858
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
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because issuers 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............................ $ 3,077,658 $ 3,089,571 $ 1,673,383 $ 1,682,583
Due after one year through five years.............. 12,066,711 12,052,628 27,583,959 27,575,662
Due after five years through ten years............. 8,824,523 8,843,792 24,037,534 23,911,622
Due after ten years................................ -- -- 8,092,320 8,104,991
Total........................................ 23,968,892 23,985,991 61,387,196 61,274,858
Mortgage-backed securities......................... 4,759,750 4,787,138 -- --
Equity securities.................................. 146,889 155,414 -- --
Total investment securities.................. $28,875,531 $28,928,543 $61,387,196 $61,274,858
</TABLE>
Debt securities with an estimated fair value of $50,856,716 were pledged to
secure public funds and trust funds on deposit and retail repurchase
agreements at December 31, 1996.
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 1996 and
1994.
29
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1996 1995
Commercial and agricultural................................................... $ 62,677,847 $ 47,317,352
Real estate -- construction................................................... 4,347,673 759,263
Real estate -- mortgage:
1-4 family residential...................................................... 68,886,704 57,663,783
Commercial and other........................................................ 24,256,938 27,802,936
Consumer...................................................................... 35,103,521 46,379,403
Total loans............................................................... $195,272,683 $179,922,737
</TABLE>
Loans as presented are increased by net deferred expense of $37,998 and
$133,400 at December 31, 1996 and 1995, respectively. Residential mortgage
loans held for sale at December 31, 1995 amounted to $405,503, with no such
loans being held for sale at December 31, 1996. Nonaccrual loans amounted to
$65,230 at December 31, 1996 and $25,576 at December 31, 1995. 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, 1996 or 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, 1996 and 1995 are $20,355,367 and $33,525,143,
respectively, of retail installment loan contracts purchased primarily from
automobile dealers. In March 1996, the Bank discontinued the purchase of
retail installment loan contracts from automobile and equipment dealers.
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 1996 with respect to related party loans is as
follows:
<TABLE>
<S> <C>
Balance, December 31, 1995.................................................. $ 8,596,170
New loans during 1996....................................................... 10,244,476
Repayments during 1996...................................................... (8,637,755)
Balance, December 31, 1996.................................................. $ 10,202,891
</TABLE>
30
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1996 1995 1994
Balance at beginning of year.......................................... $1,902,640 $1,719,717 $1,744,820
Provision for losses charged to operations............................ 490,000 515,000 220,000
Loans charged off..................................................... (568,499) (476,977) (436,157)
Recoveries on loans previously charged off............................ 161,440 144,900 191,054
Balance at end of year................................................ $1,985,581 $1,902,640 $1,719,717
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1996 1995
Land.............................................................................. $ 1,003,619 $1,003,619
Buildings and improvements........................................................ 4,275,866 4,045,155
Furniture and equipment........................................................... 4,953,489 4,572,809
Leasehold improvements............................................................ 394,390 394,390
Total....................................................................... 10,627,364 10,015,973
Less accumulated depreciation and amortization.................................... 4,336,893 3,986,432
Premises and equipment, net....................................................... $ 6,290,471 $6,029,541
</TABLE>
6. INCOME TAXES
Income taxes as reported in the consolidated income statement included the
following expense (benefit) components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal............................................................. $1,674,945 $1,045,564 $ 818,773
State............................................................... 66,505 18,795 45,055
Total............................................................. 1,741,450 1,064,359 863,828
Deferred -- Federal................................................... (65,999) 36,206 295,558
Total income taxes................................................ $1,675,451 $1,100,565 $1,159,386
</TABLE>
A reconciliation of income tax expense computed at the statutory Federal
income tax rate to actual income tax expense is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Amount of tax computed using Federal statutory tax rate of 34%........ $1,874,337 $1,292,348 $1,355,326
Increases (decreases) resulting from:
Effect of tax-exempt loan and investment securities income.......... (251,508) (213,390) (233,114)
Other............................................................... 52,622 21,607 37,174
Total........................................................... $1,675,451 $1,100,565 $1,159,386
</TABLE>
31
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The sources of deferred tax assets and liabilities and the tax effect of each
are as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1996 1995
Deferred tax assets:
Allowance for loan losses......................................................... $501,571 $ 473,370
Accrued expenses, not currently deductible........................................ 324,210 326,010
Other............................................................................. 76,663 73,001
Total........................................................................... 902,444 872,381
Deferred tax liabilities:
Depreciable basis of premises and equipment....................................... 309,869 236,963
Taxable basis of investment securities............................................ 53,499 47,066
Prepaid pension cost.............................................................. 224,827 250,717
Net deferred loan fees and costs.................................................. 219,625 309,318
Other............................................................................. 27,472 74,587
Total........................................................................... 835,292 918,651
Net deferred tax assets (liabilities)............................................... $ 67,152 $ (46,270)
</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.
Information concerning the funded status of the plan is as follows:
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1996 1995
Actuarial present value of benefit obligation:
Vested benefit obligation...................................................... $ 4,368,884 $ 4,059,993
Non-vested benefit obligation.................................................. 48,293 40,180
Total accumulated benefit obligation......................................... $ 4,417,177 $ 4,100,173
Projected benefit obligation for service rendered................................ $(5,325,298) $(4,706,895)
Plan assets at fair value, primarily marketable securities....................... 4,828,175 4,428,752
Projected benefit obligation in excess of plan assets............................ (497,123) (278,143)
Unrecognized net transition liability............................................ 107,369 128,844
Unrecognized prior service cost.................................................. 995,011 720,672
Unrecognized net loss............................................................ 56,000 166,029
Prepaid pension cost included on the consolidated balance sheet.............. $ 661,257 $ 737,402
</TABLE>
32
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost -- benefits earned during the period........................ $ 108,379 $ 71,275 $ 82,674
Interest cost on projected benefit obligation............................ 327,835 311,432 280,736
Actual return on plan assets............................................. (517,299) (458,088) 101,768
Net amortization and deferral............................................ 266,453 290,002 (279,824)
Net periodic pension cost............................................ $ 185,368 $ 214,621 $ 185,354
</TABLE>
The rates used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rate........................................................................... 7.0% 7.0% 8.0%
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>
1996 1995
Accumulated postretirement benefit obligation:
Retirees........................................................................... $(322,587) $(330,919)
Fully eligible active participants................................................. (26,174) (25,500)
Other active plan participants..................................................... (201,338) (173,295)
Total accumulated postretirement benefit obligation.............................. (550,099) (529,714)
Unrecognized net transition liability................................................ 323,502 343,720
Unrecognized prior service cost...................................................... 87,906 97,673
Unrecognized net gain................................................................ (13,926) (18,285)
Accrued postretirement benefit cost included on the consolidated balance sheet... $(152,617) $(106,606)
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost -- benefits earned during the period............................. $17,049 $12,523 $ 6,880
Interest cost on accumulated postretirement benefit obligation................ 35,931 35,998 34,468
Net amortization and deferral................................................. 29,985 28,239 20,218
Net periodic postretirement benefit cost.................................. $82,965 $76,760 $61,566
</TABLE>
For measurement purposes, the annual rate of increase assumed in 1996 for the
cost of medical benefits was 14%, decreasing gradually to 6% in 2004 and
assumed to remain at that level thereafter. In 1995, the annual rate of
increase assumed for the cost of medical benefits was 15%, 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 December 31, 1996 or the aggregate of
the service and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1996. The discount rate used in
determining the accumulated postretirement benefit obligation was 7.0% in
1996, 7.0% in 1995 and 8.0% in 1994.
33
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $78,247 in 1996, $77,835 in 1995 and $71,484 in
1994.
8. LEASES
Future obligations for minimum rentals under noncancellable operating lease
commitments, all relating to premises, are as follows:
<TABLE>
<CAPTION>
Years ending December 31
<S> <C>
1997.............................................................................................. $ 45,109
1998.............................................................................................. 45,109
1999.............................................................................................. 45,109
2000.............................................................................................. 15,100
2001.............................................................................................. 15,100
2002 and later years.............................................................................. 51,840
Total minimum lease payments.................................................................. $217,367
</TABLE>
Net rental expense for all operating leases amounted to $57,891 in 1996,
$55,122 in 1995 and $50,908 in 1994. 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>
1996 1995 1994
<S> <C> <C> <C>
FDIC insurance............................................................. $101,621 $281,894 $503,379
Stationery, printing and supplies.......................................... 301,703 280,665 304,997
</TABLE>
34
<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.
The Parent Company's condensed balance sheets as of December 31, 1996 and
1995, and the related condensed statements of income and cash flows for each
of the years in the three-year period ended December 31, 1996 are as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
1996 1995
Assets:
Cash........................................................................... $ 611,884 $ 220,312
Investment in wholly-owned bank subsidiary..................................... 28,129,278 25,758,036
Other assets................................................................... 405,549 286,422
Total assets................................................................. $29,146,711 $26,264,770
Liabilities and Shareholders' Equity:
Accrued liabilities............................................................ $ 379,469 $ 269,699
Shareholders' equity........................................................... 28,767,242 25,995,071
Total liabilities and shareholders' equity................................... $29,146,711 $26,264,770
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1996 1995 1994
Income:
Dividends from bank subsidiary...................................... $1,383,000 $ 936,000 $1,146,000
Other income (expense).............................................. 3,899 (315) 1,345
Total income...................................................... 1,386,899 935,685 1,147,345
Operating expenses.................................................... 15,707 201,916 21,017
Income before income tax benefit and equity in undistributed net
income of bank subsidiary........................................... 1,371,192 733,769 1,126,328
Income tax benefit.................................................... 2,815 68,957 6,738
Income before equity in undistributed net income of bank subsidiary... 1,374,007 802,726 1,133,066
Equity in undistributed net income of bank subsidiary................. 2,463,297 1,897,731 1,693,800
Net income........................................................ $3,837,304 $2,700,457 $2,826,866
</TABLE>
35
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1996 1995 1994
Operating activities:
Net income........................................................ $ 3,837,304 $2,700,457.. $ 2,826,866
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of bank subsidiary........... (2,463,297) (1,897,731) (1,693,800)
Other, net...................................................... (111,900) (82,601) (2,245)
Net cash provided by operating activities..................... 1,262,107 720,125 1,130,821
Investing activities:
Increase in other assets.......................................... (7,227) (4,444) (180,112)
Financing activities:
Common stock issued............................................... 217,302 21,773 --
Common stock repurchased.......................................... -- (52,800) --
Cash dividends and fractional shares paid......................... (1,080,610) (666,086) (840,000)
Net cash used in financing activities......................... (863,308) (697,113) (840,000)
Net increase in cash................................................ 391,572 18,568 110,709
Cash at beginning of year........................................... 220,312 201,744 91,035
Cash at end of year................................................. $ 611,884 $ 220,312 $ 201,744
</TABLE>
11. REGULATORY MATTERS
Certain regulatory requirements restrict the lending of funds by the Bank to
FNB Corp. and the amount of dividends which can be paid to FNB Corp. In 1997,
the maximum amount of dividends the Bank can pay to FNB Corp., without the
approval of the Comptroller of the Currency, is $4,361,057 plus an additional
amount equal to the retained net income in 1997 up to the date of any
dividend declaration.
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, 1996, the average daily reserve requirement
was $3,253,000.
FNB Corp. and the Bank are required to comply with capital adequacy standards
established by the Board of Governors of the Federal Reserve System. In
addition, the Bank is required to comply with prompt corrective action
provisions established by the Federal Deposit Insurance Corporation
Improvement Act. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, there are minimum ratios of capital
to risk-weighted assets. The capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly discretionary actions by
regulators that, if undertaken, could have a material effect on the
consolidated financial statements.
Regulatory capital amounts and ratios are set forth in the table below. The
risk-based capital ratios are determined by expressing allowable capital
amounts, defined in terms of Tier I and Tier II, as a percentage of
risk-weighted 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 I capital consists primarily of common
shareholders' equity and qualifying perpetual preferred stock, net of
goodwill and other disallowed intangible assets. Tier II capital, which is
limited to the total of Tier I capital, includes allowable amounts of
subordinated debt, mandatory convertible securities, preferred stock and the
allowance for loan losses. Total capital, for risk-based purposes, consists
of both Tier I and Tier II capital.
36
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank is well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, the Bank must meet
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below.
<TABLE>
<CAPTION>
Minimum Ratios
For To Be Well
Capital Capitalized Under
Capital Amount Ratio Adequacy Prompt Corrective
1996 1995 1996 1995 Purposes Action Provisions
<S> <C> <C> <C> <C> <C> <C>
(thousands)
AS OF DECEMBER 31
Total capital (to risk-weighted assets):
FNB Corp................................. $30,695 $27,740 14.79% 14.78% 8.00% N/A
Bank..................................... 29,980 27,390 14.46 14.61 8.00 10.00%
Tier I capital (to risk-weighted assets):
FNB Corp................................. 28,709 25,837 13.84 13.77 4.00 N/A
Bank..................................... 27,994 25,487 13.50 13.59 4.00 6.00%
Tier I capital (to average assets):
FNB Corp................................. 28,709 25,837 9.41 9.16 4.00 N/A
Bank..................................... 27,994 25,487 9.18 9.04 4.00 5.00%
</TABLE>
12. STOCK OPTIONS
The Corporation adopted a stock compensation plan in 1994 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. At December 31, 1996, there were
39,525 shares available under the plan for the granting of additional
options.
The Corporation applies APB Opinion No. 25 in accounting for the stock
compensation plan and, accordingly, no compensation cost has been recognized
for stock option grants in the consolidated financial statements. As required
by Statement of Financial Accounting Standards (SFAS) No. 123, disclosures
are presented below for the effect on net income and net income per share
that would result from the use of the fair value based method to measure
compensation costs related to stock option grants in 1995 and subsequent
years. The effect on pro forma net income for 1996 and 1995 for options
granted prior to 1995 has not been determined. Consequently, the effects of
applying SFAS No. 123 pro forma disclosures during the initial phase-in
period may not be representative of the effects on reported net income in
future years.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
NET INCOME
As reported....................................................................... $3,837,304 $2,700,457
Pro forma......................................................................... $3,803,186 $2,699,117
NET INCOME PER SHARE
As reported....................................................................... 2.13 1.50
Pro forma......................................................................... 2.11 1.50
</TABLE>
37
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average fair value per share of options granted in 1996 and 1995
amounted to $8.87 and $7.21, respectively. Fair values were estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Risk-free interest rate.................................................................. 6.25% 5.38%
Dividend yield........................................................................... 2.50 2.50
Volatility............................................................................... 30.00 30.00
Expected life............................................................................ 6 years 6 years
</TABLE>
A summary of stock option activity, adjusted to reflect the 1995 stock split
disclosed in Note 1, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............... 97,375 $19.45 66,000 $16.27 -- $ --
Granted........................................ 47,750 28.00 40,000 24.00 66,000 16.27
Exercised...................................... (2,425) 17.55 -- -- -- --
Forfeited...................................... (4,650) 20.01 (8,625) 16.27 -- --
Outstanding at end of year..................... 138,050 22.42 97,375 19.45 66,000 16.27
Options exercisable at end of year............. 27,250 18.30 11,475 16.27 -- --
</TABLE>
At December 31, 1996, stock options outstanding had exercise prices ranging
from $16.27 to $28.00 and a weighted-average remaining contractual life of
8.9 years.
13. COMMITMENTS
In the normal course of business, various commitments are outstanding that
are not reflected in the consolidated financial statements. At December 31,
1996, a summary of significant commitments is as follows:
<TABLE>
<S> <C>
Commitments to extend credit................................................. $45,576,000
Standby letters of credit.................................................... 8,438,000
</TABLE>
In management's opinion, these commitments will be funded from normal
operations with not more than the normal risk of loss.
The Bank has entered into an interest rate floor agreement with a
correspondent bank to protect certain variable-rate loans from the downward
effects of their repricing in the event of a decreasing rate environment. The
notional amount of the agreement is $10,000,000. The agreement requires the
correspondent bank to pay to the Bank the difference between the floor rate
of interest of 7.50% and the prime rate of interest in the event that the
prime rate is less. Any payments received under the agreement, net of premium
amortization, will be treated as an adjustment of interest income on loans.
The Bank's exposure to credit risk is limited to the ability of the
counterparty to make payments to the Bank that are required pursuant to the
agreement. The Bank's exposure to market risk of loss is limited to the
amount of the unamortized premium. At December 31, 1996, the unamortized
premium related to the interest rate floor agreement amounted to $42,000 and
had an estimated fair value of $15,000. The Bank received no payments under
the agreement in 1996.
38
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 13.
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
FINANCIAL ASSETS
Cash and cash equivalents.................................... $ 13,052 $ 13,052 $ 11,365 $ 11,365
Investment securities:
Available for sale......................................... 28,929 28,929 28,375 28,375
Held to maturity........................................... 61,387 61,275 56,161 57,008
Net loans.................................................... 193,287 191,296 178,020 179,173
FINANCIAL LIABILITIES
Deposits..................................................... 271,380 272,047 250,144 250,795
Retail repurchase agreements................................. 3,725 3,725 4,642 4,642
Federal funds purchased...................................... 575 575 -- --
</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.
39
<PAGE>
FNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 were either realigned or eliminated. 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>
16. 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.
40
<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, 1996, there were 1,062 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 13, 1997 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>
<PAGE>
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 March 7, 1997, relating
to the consolidated balance sheets of FNB Corp. and subsidiary as of December
31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996
annual report on Form 10-KSB of FNB Corp.
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
March 31, 1997
<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-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 13,052,150
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,928,543
<INVESTMENTS-CARRYING> 61,387,196
<INVESTMENTS-MARKET> 0
<LOANS> 195,272,683
<ALLOWANCE> 1,985,581
<TOTAL-ASSETS> 307,134,477
<DEPOSITS> 271,380,065
<SHORT-TERM> 4,299,929
<LIABILITIES-OTHER> 2,687,241
<LONG-TERM> 0
0
0
<COMMON> 4,517,485
<OTHER-SE> 24,249,757
<TOTAL-LIABILITIES-AND-EQUITY> 307,134,477
<INTEREST-LOAN> 16,727,702
<INTEREST-INVEST> 5,431,369
<INTEREST-OTHER> 88,799
<INTEREST-TOTAL> 22,247,870
<INTEREST-DEPOSIT> 9,390,717
<INTEREST-EXPENSE> 9,611,558
<INTEREST-INCOME-NET> 12,636,312
<LOAN-LOSSES> 490,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,077,074
<INCOME-PRETAX> 5,512,755
<INCOME-PRE-EXTRAORDINARY> 5,512,755
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,837,304
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 4.60
<LOANS-NON> 65,000
<LOANS-PAST> 231,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,903,000
<CHARGE-OFFS> 568,000
<RECOVERIES> 161,000
<ALLOWANCE-CLOSE> 1,986,000
<ALLOWANCE-DOMESTIC> 1,826,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 160,000
</TABLE>
