UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission File Number 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)
Registrant's telephone number, including area code: (336) 626-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities pursuant to 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-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. |_|
As of March 19, 1998, 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 $88,635,993.
The registrant had 3,650,686 shares of $2.50 par value common stock outstanding
at March 19, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1997 are incorporated by reference into Part II.
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 12, 1998 are incorporated by reference into Part
III.
<PAGE>
PART I
Item 1. 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 Investor Services", a service provided by Liberty Securities.
On June 3, 1997, the Corporation entered into a definitive agreement to
acquire Home Savings Bank of Siler City, Inc., SSB ("Home Savings") of Siler
City, North Carolina. Under terms of the agreement, Home Savings shareholders
were to receive $15.50 per share, either in FNB Corp. common stock or in cash or
a combination thereof, subject to the limitation that FNB Corp. common stock
issued in the merger would be not more than 60% and not less than 50% of the
total consideration. On January 28, 1998, as permitted by the agreement, the
Board of Directors of Home Savings exercised its right to terminate the proposed
combination due to the increase in the market value of FNB Corp. common stock
above a specified level.
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 incurred certain costs in connection with the proposed
acquisitions. Those costs, which had been initially deferred, are included in
merger expenses in the consolidated statements of income and amounted to
$305,000 and $186,350 for the years ended December 31, 1997 and 1995,
respectively.
1
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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 $2,579,799, $2,257,204 and $1,524,718 at December 31, 1997, 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. Subsequent to the 1994 data processing
changes and without resuming any of the outsourced operations, the Bank has
significantly increased its investment in computer equipment 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 and one-half of 1997 capital expenditures, which totaled
$1,019,109 and $477,852, respectively, 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, 1997, 1996
and 1995 amounted to $9,674,229, $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. The funds
previously invested in this loan program are being redeployed, as loan payments
occur, to other loan programs or to the investment securities portfolio.
Year 2000 Issue
The Corporation is aware of the issue associated with the programming code
in existing computer systems as the year 2000 approaches. The "year 2000"
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year
2
<PAGE>
value to 00. The issue is whether computer systems and other equipment
incorporating computer components will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Corporation relies on vendors for all computer programming and
equipment. An internal assessment of the year 2000 situation was completed in
January 1997. The assessment included computer software, computer hardware and
other equipment incorporating computer components that are date sensitive. The
Corporation has monitored the status of its vendors and continues to evaluate
vendors for adherence to their year 2000 plans. To date, confirmations have been
received from the Corporation's primary processing vendors that plans have been
implemented to address the processing of transactions in the year 2000.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test systems for year 2000 compliance. The
vendors anticipate that all reprogramming efforts will be completed by December
31, 1998, allowing adequate time for testing. Management estimates the cost of
year 2000 compliance will be approximately $200,000, which primarily includes
capital expenditures relating to computer equipment expected to be replaced in
1998 and 1999. In 1997, the cost related to year 2000 compliance was immaterial.
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.
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.
3
<PAGE>
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.
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, 1997, the Parent Company had three officers, all of whom
were also officers of the Bank. On that same date, the Bank had 127 full-time
employees and 19 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.
4
<PAGE>
Item 2. Properties
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 January 31, 2002. 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.
5
<PAGE>
PART II
Item 5. Market for the Registrant's 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 11 - Quarterly Financial Data" of the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 1997 Annual Report to Shareholders, is
incorporated herein by reference.
Item 6. Selected Financial Data
The section entitled "Five Year Financial History" in the 1997 Annual
Report to Shareholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1997 Annual Report to Shareholders
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information with respect to market risk, appearing under the heading
"Market Risk" of the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1997 Annual Report to
Shareholders, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
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 1997 Annual Report to Shareholders.
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income, years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity, years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
6
<PAGE>
Information with respect to quarterly financial data, appearing under the
heading "Table 11 - Quarterly Financial Data" of the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1997 Annual Report to Shareholders, is incorporated herein by
reference,
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
7
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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 12, 1998, 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 12, 1998, is
incorporated herein by reference. Information with respect to delinquent filers
pursuant to Item 405 of Regulation S-K, 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 12, 1998, is incorporated
herein by reference.
Item 11. 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 12, 1998, is
incorporated herein by reference.
Item 12. 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 12, 1998, is incorporated herein by reference.
Item 13. 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 12, 1998, is incorporated herein by reference.
8
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The financial statements listed in Item 8 of Part II of this
report are filed as part of this report.
(2) The financial statement schedules normally required on Form 10-K
are omitted since they are not applicable.
(3) Exhibits to this report are listed in the index to exhibits on
pages 12 and 13 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.
9
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FNB Corp.
(Registrant)
Date: March 27, 1998 By: /s/ Michael C. Miller
-------------------------------------
Michael C. Miller
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 27, 1998.
Signature Title
- --------- -----
/s/ Michael C. Miller President, Chief Executive
- ------------------------------- Officer and Director
Michael C. Miller
/s/ Jerry A. Little Treasurer and Secretary
- ------------------------------- (Principal Financial and
Jerry A. Little 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.
10
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Signature Title
- --------- -----
/s/ Richard K. Pugh Director
- -------------------------------
Richard K. Pugh
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
11
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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, as amended effective May 13,
1997, incorporated herein by reference to Exhibit 10.30 to the
Registrant's Form 10-Q Quarterly Report for the quarter ended
June 30, 1997.
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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 Employment Agreement dated as of December 27, 1995
between First National Bank and Trust Company and Michael C.
Miller, incorporated herein by reference to Exhibit 10.50 to the
Registrant's Form 10-KSB Annual Report for the fiscal year ended
December 31, 1995.
13 Portions of the Registrant's 1997 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.
13
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- --------------------------------------------------------------------------------
Five Year Financial History
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income ............................................... $ 24,507 $ 22,248 $ 20,606 $ 17,688 $ 17,507
Interest expense .............................................. 10,576 9,612 9,002 6,979 6,945
-------- -------- -------- -------- --------
Net interest income ........................................... 13,931 12,636 11,604 10,709 10,562
Provision for loan losses ..................................... 600 490 515 220 370
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ........... 13,331 12,146 11,089 10,489 10,192
Losses on sales of securities ................................. - - (415) - -
Other operating income ........................................ 2,875 2,444 2,241 2,075 1,810
Merger expenses ............................................... 305 - 186 - -
Restructuring charges ......................................... - - 460 - -
Other operating expense ....................................... 9,983 9,077 8,468 8,578 8,306
-------- -------- -------- -------- --------
Income before income taxes .................................... 5,918 5,513 3,801 3,986 3,696
Income taxes .................................................. 1,818 1,676 1,101 1,159 1,006
-------- -------- -------- -------- --------
Net income .................................................... $ 4,100 $ 3,837 $ 2,700 $ 2,827 $ 2,690
======== ======== ======== ======== ========
Per Share Data (1)
Net income:
Basic ........................................................ $ 1.13 $ 1.06 .75 $ .79 $ .75
Diluted ...................................................... 1.11 1.05 .75 .79 .75
Cash dividends declared ....................................... .38 .33 .26 .23 .23
Book value .................................................... 8.76 7.96 7.23 6.49 6.17
Balance Sheet Information
Total assets .................................................. $325,655 $307,134 $283,678 $261,616 $249,698
Investment securities ......................................... 86,881 90,316 84,536 76,983 78,488
Loans ......................................................... 217,451 195,273 179,923 168,328 157,302
Deposits ...................................................... 280,548 271,380 250,144 229,925 224,260
Shareholders' equity .......................................... 31,901 28,767 25,995 23,379 22,223
Ratios (Averages)
Return on assets .............................................. 1.30% 1.32% 1.00% 1.11% 1.09%
Return on shareholders' equity ................................ 13.45 13.97 10.93 12.33 12.62
Shareholders' equity to assets ................................ 9.68 9.41 9.17 8.98 8.65
Dividend payout ratio ......................................... 33.21 31.02 34.62 29.71 30.34
Loans to deposits ............................................. 74.72 72.87 73.10 70.67 66.76
Net yield on earning assets, taxable equivalent basis ......... 4.99 4.90 4.84 4.73 4.86
</TABLE>
(1) All per share data has been retroactively adjusted to reflect the
two-for-one common stock split declared on February 19, 1998 and payable
in the form of a 100% stock dividend to shareholders on March 18, 1998 and
the three-for-two common stock split effected in the form of a 50% stock
dividend paid in the second quarter of 1995.
9
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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.
Overview The Corporation earned $4,099,769 in 1997, a 6.8%
increase in net income from 1996. Basic earnings per
share, adjusted for the two-for-one common stock split
declared in February 1998, increased from $1.06 in 1996 to
$1.13 in 1997 and diluted earnings per share increased
from $1.05 to $1.11. The 1997 results were impacted by
merger expenses as discussed below. Total assets were
$325,655,304 at December 31, 1997, up 6.0% from year-end
1996. Loans amounted to $217,450,749 at December 31, 1997,
up 11.4% from the prior year. Total deposits grew 3.4% to
$280,547,574 in 1997.
On June 3, 1997, the Corporation entered into a
definitive agreement to acquire Home Savings Bank of
Siler City, Inc., SSB ("Home Savings") of Siler City,
North Carolina. Under terms of the agreement, Home
Savings shareholders were to receive $15.50 per share,
either in FNB Corp. common stock or in cash or a
combination thereof, subject to the limitation that FNB
Corp. common stock issued in the merger would be not more
than 60% and not less than 50% of the total
consideration. On January 28, 1998, as permitted by the
agreement, the Board of Directors of Home Savings
exercised its right to terminate the proposed combination
due to the increase in the market value of FNB Corp.
common stock above a specified level.
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 incurred certain costs in connection with
the proposed acquisitions. Those costs, which had been
initially deferred, are included in merger expenses in
the consolidated statements of income and amounted to
$305,000 and $186,350 for the years ended December 31,
1997 and 1995, respectively.
Earnings Review The Corporation's net income increased $262,465 in 1997,
up 6.8% over 1996. Earnings were positively impacted in
1997 by increases of $1,294,910 or 10.2% in net interest
income and $431,514 in total other operating income. These
gains were significantly offset, however, by merger
expenses of $305,000 as discussed in the "Overview", by an
increase of $906,625 in total other operating expense
exclusive of the merger expenses and by a $110,000
increase in the provision for loan losses.
In 1996, earnings increased $1,136,847 or 42.1% from
1995. Earnings were positively impacted in 1996 by an
increase of $1,032,830 or 8.9% in net interest income.
The comparison to 1995 results was affected by the fact
that there were certain nonrecurring charges 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 merger expenses of
$186,350 as discussed in the "Overview" and by a $295,000
increase in the provision for loan losses.
Return on average assets, affected by merger expenses in
1997, declined slightly from 1.32% in 1996 to 1.30% in
1997. Return on average assets increased in 1996 from
10
<PAGE>
- --------------------------------------------------------------------------------
1.00% in 1995, reflecting the effect in 1995 of the
negative factors noted above. Similarly, return on
average shareholders' equity declined to 13.45% in 1997
after increasing to 13.97% in 1996 from 10.93% in 1995.
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 $13,931,222 in 1997 compared to
$12,636,312 in 1996. The increase of $1,294,910 or 10.2%
resulted from an improvement in the net yield on earning
assets, or net interest margin, from 4.90% in 1996 to
4.99% in 1997 coupled with an 8.1% increase in the level
of average earning assets. In 1996, there was a
$1,032,830 or 8.9% increase in net interest income
reflecting both an improvement in the net interest margin
from 4.84% in 1995 and an 8.3% increase in average
earning assets. Following a period of generally lower
interest rates prior to 1994, 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. These interest
rate increases, which have continued through the first
quarter of 1997, although 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 1997 and 1996
were $1,358,000 and $1,183,000, 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.
11
<PAGE>
- --------------------------------------------------------------------------------
Table 1
Average Balances and Net Interest Income Analysis
(Taxable Equivalent Basis, Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (1) (2) ................................ $205,127 $18,813 9.17% $186,937 $16,777 8.96%
Investment securities (1):
Taxable income .............................. 70,817 4,975 7.03 71,297 4,985 6.99
Non-taxable income .......................... 17,741 1,435 8.09 14,282 1,205 8.44
Federal funds sold ........................... 2,813 155 5.51 1,688 89 5.27
-------- ------- ---- -------- ------- ----
Total earning assets ....................... 296,498 25,378 8.56 274,204 23,056 8.40
-------- ------- ---- -------- ------- ----
Cash and due from banks ...................... 9,985 9,423
Other assets, net ............................ 8,267 8,161
-------- --------
TOTAL ASSETS ............................... $314,750 $291,788
======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts ................................ $ 38,017 677 1.78 $ 35,021 666 1.90
Savings deposits ............................ 29,199 678 2.32 30,147 756 2.50
Money market accounts ....................... 19,459 707 3.63 16,067 444 2.76
Certificates and other time
deposits ................................... 150,566 8,206 5.45 138,993 7,525 5.40
Retail repurchase agreements ................. 6,229 281 4.51 4,118 178 4.32
Federal funds purchased ...................... 473 27 5.71 764 43 5.63
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities ......... 243,943 10,576 4.34 225,110 9,612 4.26
-------- ------- ---- -------- ------- ----
Noninterest-bearing demand
deposits .................................... 37,289 36,296
Other liabilities ............................ 3,038 2,921
Shareholders' equity ......................... 30,480 27,461
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ...................... $314,750 $291,788
======== ========
NET INTEREST INCOME AND
SPREAD ...................................... $14,802 4.22% $13,444 4.14%
======= ==== ======= ====
NET YIELD ON EARNING ASSETS .................. 4.99% 4.90%
==== ====
<CAPTION>
1995
---------------------------------
Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
----------- ---------- ----------
<S> <C> <C> <C>
EARNING ASSETS
Loans (1) (2) ................................ $174,139 $15,698 9.01%
Investment securities (1):
Taxable income .............................. 65,397 4,418 6.76
Non-taxable income .......................... 10,610 970 9.14
Federal funds sold ........................... 3,042 177 5.82
-------- ------- ----
Total earning assets ....................... 253,188 21,263 8.40
-------- ------- ----
Cash and due from banks ...................... 9,226
Other assets, net ............................ 6,884
--------
TOTAL ASSETS ............................... $269,298
========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts ................................ $ 32,442 695 2.14
Savings deposits ............................ 29,945 845 2.82
Money market accounts ....................... 16,659 508 3.05
Certificates and other time
deposits ................................... 122,743 6,773 5.52
Retail repurchase agreements ................. 3,358 167 4.97
Federal funds purchased ...................... 239 14 5.77
-------- ------- ----
Total interest-bearing liabilities ......... 205,386 9,002 4.38
-------- ------- ----
Noninterest-bearing demand
deposits .................................... 36,444
Other liabilities ............................ 2,765
Shareholders' equity ......................... 24,703
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ...................... $269,298
========
NET INTEREST INCOME AND
SPREAD ...................................... $12,261 4.02%
======= ====
NET YIELD ON EARNING ASSETS .................. 4.84%
====
</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, the prime rate
was reduced to 8.25% and then increased again to the
8.50% level in 1997. The average prime rate for 1995,
1996 and 1997 amounted to 8.82%, 8.28% and 8.44%,
respectively. In 1997, the net interest spread increased
by 8 basis points from 4.14% in 1996 to 4.22% in 1997,
reflecting an increase in the average total yield on
earning assets that was only partially offset by an
increase in the average rate paid on interest-bearing
liabilities, or cost of funds. The yield on earning
assets increased by 16 basis points from 8.40% in 1996 to
8.56% in 1997, while the cost of funds increased by 8
basis points in moving from 4.26% to
12
<PAGE>
- --------------------------------------------------------------------------------
4.34%. In 1996, the 12 basis points increase in net
interest spread resulted from a decrease in the cost of
funds.
The 1997 and 1996 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>
1997 Versus 1996 1996 Versus 1995
-------------------------------- ----------------------------------
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) ...................................... $1,640 $ 396 $2,036 $1,165 $ (86) $1,079
Investment securities (2):
Taxable income ............................... (37) 27 (10) 412 155 567
Non-taxable income ........................... 282 (52) 230 314 (79) 235
Federal funds sold ............................. 62 4 66 (72) (16) (88)
------ ----- ------ ------ ------ ------
Total interest income ....................... 1,947 375 2,322 1,819 (26) 1,793
------ ----- ------ ------ ------ ------
Interest Expense
Interest-bearing deposits:
NOW accounts ................................. 55 (44) 11 53 (82) (29)
Savings deposits ............................. (24) (54) (78) 6 (95) (89)
Money market accounts ........................ 107 156 263 (17) (47) (64)
Certificates and other time deposits ......... 613 68 681 899 (147) 752
Retail repurchase agreements ................... 95 8 103 35 (24) 11
Federal funds purchased ........................ (17) 1 (16) 30 (1) 29
------ ----- ------ ------ -------- ------
Total interest expense ...................... 829 135 964 1,006 (396) 610
------ ----- ------ ------ ------- ------
Net Interest Income ............................. $1,118 $ 240 $1,358 $ 813 $ 370 $1,183
====== ===== ====== ====== ======= ======
</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 1997, earnings
were negatively impacted by an increase in the provision
of $110,000, while in 1996 there was a positive impact
from a $25,000 provision decrease.
Other Operating Income
Total other operating income, or noninterest income,
increased $431,514 or 17.7% in 1997 and $617,351 or 33.8%
in 1996, reflecting in part the general increase in the
volume of business. The comparison to 1995 results was
affected by the recognition of losses on sales of
investment securities in the 1995 first quarter of
$414,596 (see
13
<PAGE>
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"Business Development Matters"). The 1997 and 1996 gains
in annuity and brokerage commissions reflected
significant increases in the volume of brokerage
services. The level of other service charges, commissions
and fees was higher in both 1997 and 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. Other income was higher in 1997 due
largely to increases in gains on loan sales and in fees
for trust services.
The increase in service charges on deposit accounts in
1997 was primarily due to the selected increases in
service charges that became effective in the 1997 second
quarter and to the income generated by a new NOW account
version that provides a package of products and services
for a stated monthly fee. The 1996 increase in service
charges on deposit accounts resulted primarily from the
implementation of daily charges on overdraft balances in
the second quarter of 1995.
Other Operating Expense
Total other operating expense, or noninterest expense,
was $1,211,625 or 13.3% higher in 1997 due in part to
merger expenses of $305,000 (see "Overview"). The
remaining net increase of $906,625 was due largely to
costs associated with changes in operations, increased
personnel expense and the continuing effects of
inflation. Personnel expense was impacted by increased
staffing requirements, normal salary adjustments and
higher costs of fringe benefits. Net occupancy expense
was affected by increased maintenance charges. The
expanded use of personal computer networks has
contributed to higher levels of equipment costs and data
processing services.
In 1996, noninterest expense decreased $36,552 or 0.4%
due primarily to the effect on 1995 results of
restructuring charges of $460,457 (see "Business
Development Matters") and merger expenses of 186,350 (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.
Depreciation expense was particularly impacted in 1996 by
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 a minimum annual charge of $2,000 for
the majority of financial institutions with BIF-insured
deposits only. 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.
14
<PAGE>
- --------------------------------------------------------------------------------
The Deposit Insurance Funds Act of 1996 (DIFA) was
enacted on September 30, 1996 and has three main
components. The first component included a one-time
assessment on SAIF deposits to capitalize the SAIF fund
to the mandated 1.25 percent ratio. The second component
is a requirement that the repayment that of the Financing
Corporation (FICO) bonds be shared by both banks and
thrifts. The third component 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. Effective January 1, 1997, FDIC insurance premiums
are being assessed for FICO bond purposes at an
approximate rate of $.065 per $100 for SAIF deposits and
at a rate equal to one-fifth of that 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. FDIC insurance expense in 1997
amounted to $40,764.
Income Taxes
The effective income tax rate of 30.7% in 1997 did not
significantly change from the 30.4% rate in 1996. 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.
Liquidity Liquidity refers to the continuing ability of the Bank to
meet deposit withdrawals, fund loan and capital
expenditure commitments, maintain reserve requirements,
pay operating expenses and provide funds to the Parent
Company for payment of dividends, debt service and other
operational requirements. Liquidity is immediately
available from five major sources: (a) cash on hand and on
deposit at other banks, (b) the outstanding balance of
federal funds sold, (c) lines for the purchase of federal
funds from other banks, (d) the $37,000,000 line of credit
established at the Federal Home Loan Bank and (e) the
available-for-sale securities portfolio. 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.
Consistent with its approach to liquidity, the Bank as a
matter of policy does not solicit or accept brokered
deposits for funding asset growth. Instead, loans and
other assets are based on a core of local deposits and
the Bank's capital position. To date, the steady increase
in deposits, retail repurchase agreements and capital has
been adequate to fund loan demand in the Bank's market
area, while maintaining the desired level of immediate
liquidity and a substantial investment securities
portfolio available for both immediate and secondary
liquidity purposes.
Asset/Liability One of the primary objectives of asset/liability
Management and management is to maximize net inter est margin while
Interest Rate minimizing the earnings risk associated with changes in
Sensitivity interest Management and Interest rates. One method used to
manage interest rate sensitivity is to measure, over
variRate Sensitivity ous 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
15
<PAGE>
- --------------------------------------------------------------------------------
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 15 to Consolidated Financial
Statements, the Bank, at December 31, 1997, had entered
into two interest rate floor agreements 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
each agreement is $10,000,000. The agreements require the
correspondent bank to pay to the Bank the difference
between the floor rate of interest of 7.50% in one
agreement and 8.00% in the other agreement as compared to
the prime rate of interest in the event that the prime
rate is less. Any payments received under the agreements,
net of premium amortization, will be treated as an
adjustment of interest income on loans.
Table 3 presents information about the periods in which
the interest-sensitive assets and liabilities at December
31, 1997 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, 1997
--------------------------------------------------------------------
Rate Maturity In Days
----------------------------------------
Beyond
1-90 91-180 181-365 One Year Total
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Earning Assets
Loans ................................................. $ 91,233 $ 7,712 $ 14,629 $ 103,877 $ 217,451
Investment securities ................................. 1,981 3,834 5,202 75,864 86,881
--------- --------- --------- --------- ---------
Total earning assets ................................ 93,214 11,546 19,831 179,741 304,332
--------- --------- --------- --------- ---------
Interest-Bearing Liabilities
NOW accounts .......................................... 19,303 - - 19,304 38,607
Savings deposits ...................................... 13,852 - - 13,852 27,704
Money market accounts ................................. 11,234 - - 11,235 22,469
Time deposits of $100,000 or more...................... 25,456 8,942 9,455 9,062 52,915
Other time deposits ................................... 26,426 19,256 14,927 39,933 100,542
Retail repurchase agreements .......................... 7,437 - - - 7,437
Federal funds purchased ............................... 2,400 - - - 2,400
--------- --------- --------- --------- ---------
Total interest-bearing liabilities .................. 106,108 28,198 24,382 93,386 252,074
--------- --------- --------- --------- ---------
Interest Sensitivity Gap ............................... $ (12,894) $ (16,652) $ (4,551) $ 86,355 $ 52,258
========= ========= ========= ========= =========
Cumulative gap ......................................... $ (12,894) $ (29,546) $ (34,097) $ 52,258 $ 52,258
Ratio of interest-sensitive assets to interest-sensitive
liabilities ........................................... 88% 41% 81% 192% 121%
</TABLE>
16
<PAGE>
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Market Risk Market risk reflects the risk of economic loss resulting
from adverse changes in mar ket price and interest rates.
This risk of loss can be reflected in diminished current
market values and/or reduced potential net interest income
in future periods.
The Bank's market risk arises primarily from interest
rate risk inherent in its lending and deposit-taking
activities. The structure of the Bank's loan and deposit
portfolios is such that a significant decline in interest
rates may adversely impact net market values and net
interest income. The Bank does not maintain a trading
account nor is the Bank subject to currency exchange risk
or commodity price risk. Interest rate risk is monitored
as part of the Bank's asset/liability management
function, which is discussed in "Asset/Liability
Management and Interest Rate Sensitivity" above.
Table 4 presents information about the contractual
maturities, average interest rates and estimated fair
values of financial instruments considered market risk
sensitive at December 31, 1997.
Table 4
Market Risk Analysis of Financial Instruments
(Dollars in thousands)
<TABLE>
<CAPTION>
Contractual Maturities at December 31, 1997
--------------------------------------------------------------------------
Beyond
Five
1998 1999 2000 2001 2002 Years Total
---------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Assets
Debt securities (2) .................. $ 11,018 $ 5,030 $ 6,308 $10,065 $11,414 $ 41,839 $ 85,674
Loans (3):
Fixed rate .......................... 28,582 14,101 10,357 8,298 11,679 32,981 105,998
Variable rate ....................... 39,500 13,100 8,535 7,121 9,447 33,750 111,453
-------- ------- ------- ------- ------- -------- --------
Total ............................. $ 79,100 $32,231 $25,200 $25,484 $32,540 $108,570 $303,125
======== ======= ======= ======= ======= ======== ========
Financial Liabilities
Now accounts ......................... $ 38,607 $ - $ - $ - $ - $ - $ 38,607
Savings deposits ..................... 27,704 - - - - - 27,704
Money market accounts ................ 22,469 - - - - - 22,469
Time deposits:
Fixed rate .......................... 94,856 29,670 11,376 428 323 - 136,653
Variable rate ....................... 7,035 8,750 972 47 - - 16,804
Retail repurchase agreements ......... 7,437 - - - - - 7,437
Federal funds purchased .............. 2,400 - - - - - 2,400
-------- ------- ------- ------- ------- -------- --------
Total ............................. $200,508 $38,420 $12,348 $ 475 $ 323 $ - $252,074
======== ======= ======= ======= ======= ======== ========
<CAPTION>
Average Estimated
Interest Fair
Rate (1) Value
---------- ----------
<S> <C> <C>
Financial Assets
Debt securities (2) .................. 7.18% $ 86,265
Loans (3):
Fixed rate .......................... 9.19 106,478
Variable rate ....................... 8.92 112,934
--------
Total ............................. 8.52 $305,677
========
Financial Liabilities
Now accounts ......................... 1.72 $ 38,607
Savings deposits ..................... 2.25 27,704
Money market accounts ................ 3.81 22,469
Time deposits:
Fixed rate .......................... 5.46 137,548
Variable rate ....................... 5.38 16,849
Retail repurchase agreements ......... 4.51 7,437
Federal funds purchased .............. 6.59 2,400
--------
Total ............................. 4.36 $253,014
========
</TABLE>
(1) The average interest rate related to debt securities is 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.
(2) Debt securities are reported on the basis of amortized cost.
(3) Nonaccrual loans are included in the balance of loans. The allowance for
loan losses is excluded.
Capital Adequacy Under guidelines established by the Board of Governors of
the Federal Reserve System, capital 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
17
<PAGE>
- --------------------------------------------------------------------------------
requirements, the minimum total capital ratio, consisting
of both Tier I and Tier II capital, is 8.00% and the
minimum Tier I capital ratio is 4.00%. At December 31,
1997, FNB Corp. and the Bank had total capital ratios of
15.75% and 15.39%, respectively, and Tier I capital
ratios of 14.69% and 14.33%.
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 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, 1997,
FNB Corp. and the Bank had leverage capital ratios of
9.83% and 9.58%, 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, 1997 and, accordingly, is
well-capitalized under the regulatory framework for
prompt corrective action.
Balance Sheet Review Asset and deposit growth in 1997 was below that in 1996.
Total assets increased $18,521,000 or 6.0% in 1997
compared to $23,456,000 or 8.3% in 1996. Deposits grew
$9,168,000 or 3.4% and $21,236,000 or 8.5%, respectively,
in the same periods. A portion of the asset growth in 1997
was funded by retail repurchase agreements which increased
$3,712,000 during that period. The average asset growth
rates were 7.9% in 1997 and 8.4% in 1996. The
corresponding average deposit growth rates were 7.0% and
7.7%.
Investment Investments are carried on the consolidated balance sheet
Securities at estimated fair value for available-for-sale securities
and at amortized cost for held-to-maturity securities.
Table 5 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.
18
<PAGE>
- --------------------------------------------------------------------------------
Table 5
Investment Securities Portfolio Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1997 1996 1995
---------------------------------------- ---------- ---------
Estimated Taxable
Amortized Fair Equivalent Carrying Carrying
Cost Value Yield (1) Value Value
----------- ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Available for Sale
U.S. Treasury:
Within one year .............................. $ 1,349 $ 1,345 5.91% $ 2,589 $ 5,038
One to five years ............................ 1,255 1,280 7.14 2,114 4,526
------- ------- ------- -------
Total ....................................... 2,604 2,625 6.50 4,703 9,564
------- ------- ------- -------
U.S. Government agencies and corporations:
Within one year .............................. 1,750 1,750 6.18 500 2,060
One to five years ............................ 8,333 8,354 7.01 9,939 6,129
Five to ten years ............................ 18,810 18,880 7.39 8,844 452
------- ------- ------- -------
Total ....................................... 28,893 28,984 7.21 19,283 8,641
------- ------- ------- -------
Mortgage-backed securities ..................... 2,422 2,422 6.94 4,787 10,020
------- ------- ------- -------
Total debt securities .......................... 33,919 34,031 7.14 28,773 28,225
Equity securities .............................. 1,078 1,095 156 150
------- ------- ------- -------
Total available-for-sale securities ......... $34,997 $35,126 $28,929 $28,375
======= ======= ======= =======
Held to Maturity
U.S. Government agencies and corporations:
Within one year .............................. $ 5,383 $ 5,371 5.83 $ 1,348 $ 2,854
One to five years ............................ 18,597 18,574 6.79 24,480 23,800
Five to ten years ............................ 8,824 8,816 7.24 18,108 17,022
Over ten years ............................... - - - - 300
------- ------- ------- -------
Total ....................................... 32,804 32,761 6.75 43,936 43,976
------- ------- ------- -------
State, county and municipal:
Within one year .............................. 753 755 8.44 325 1,203
One to five years ............................ 3,992 4,091 8.53 3,104 2,590
Five to ten years ............................ 6,456 6,617 7.56 5,930 4,959
Over ten years ............................... 7,750 8,010 8.12 8,092 3,433
------- ------- ------- -------
Total ....................................... 18,951 19,473 8.02 17,451 12,185
------- ------- ------- -------
Total held-to-maturity securities ........... $51,755 $52,234 7.21 $61,387 $56,161
======= ======= ======= =======
</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.
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 loans exceeded that for total assets
in 1997, there was a reduction in the level of investment
securities of $3,435,000 or 3.8%. In 1996, when the growth
in total assets exceeded that for loans, the level of
investment securities was increased $5,780,000 or 6.8%.
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, 1997.
19
<PAGE>
- --------------------------------------------------------------------------------
Loans The Corporation's primary source of revenue and largest
component of earning assets is the loan portfolio. Loans
experienced growth of $22,178,000 or 11.4% in 1997 and
$15,350,000 or 8.5% in 1996. Average loans increased
$18,190,000 or 9.7% and $12,798,000 or 7.3%, respectively.
The ratio of average loans to average deposits increased
from 72.9% in 1996 to 74.7% in 1997. The ratio of loans to
deposits at December 31, 1997 was 77.5%.
Table 6 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, 1997 are presented in Table 7.
Table 6
Loan Portfolio Composition
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
-----------------------------------------
1997 1996
-------------------- --------------------
Amount % Amount %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial and agricultural ..... $ 84,221 38.7 $ 62,678 32.1
Real estate - construction ...... 4,989 2.3 4,348 2.2
Real estate - mortgage:
1-4 family residential ......... 81,182 37.3 68,887 35.3
Commercial and other ........... 20,556 9.5 24,257 12.4
Consumer ........................ 26,503 12.2 35,103 18.0
-------- ----- -------- -----
Total loans ................... $217,451 100.0 $195,273 100.0
======== ===== ======== =====
<CAPTION>
December 31
--------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
Amount % Amount % Amount %
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural ..... $ 47,317 26.3 $ 41,777 24.8 $ 40,858 26.0
Real estate - construction ...... 759 .4 1,331 .8 2,163 1.4
Real estate - mortgage:
1-4 family residential ......... 57,664 32.0 50,575 30.0 42,302 26.9
Commercial and other ........... 27,803 15.5 28,594 17.0 27,480 17.4
Consumer ........................ 46,380 25.8 46,051 27.4 44,499 28.3
-------- ----- -------- ----- -------- -----
Total loans ................... $179,923 100.0 $168,328 100.0 $157,302 100.0
======== ===== ======== ===== ======== =====
</TABLE>
Table 7
Selected Loan Maturities
(In thousands)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
One Year One to Over
or Less Five Years Five Years Total
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Commercial and agricultural ......... $34,201 $31,775 $18,245 $84,221
Real estate - construction .......... 1,783 3,164 42 4,989
------- ------- ------- -------
Total selected loans ............. $35,984 $34,939 $18,287 $89,210
======= ======= ======= =======
Sensitivity to rate changes:
Fixed interest rates ............... $ 6,758 $17,548 $ 9,294 $33,600
Variable interest rates ............ 29,226 17,391 8,993 55,610
------- ------- ------- -------
Total ............................ $35,984 $34,939 $18,287 $89,210
======= ======= ======= =======
</TABLE>
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 net decreases in 1997 and 1996
of $10,681,138 and $13,169,776, respectively.
Consequently, total consumer loans declined significantly
during those periods. 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 1997.
20
<PAGE>
- --------------------------------------------------------------------------------
Asset Quality Management considers the Bank's asset quality to be of
primary importance. A formal loan review function,
independent of loan origination, is used to identify and
monitor problem loans. 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 in the
determination of the allowance for loan losses.
21
<PAGE>
- --------------------------------------------------------------------------------
Table 8 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 9.
Table 8
Allowance For Loan Losses And Nonperforming Assets
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses
Balance at beginning of year .............................. $ 1,986 $ 1,903 $ 1,720 $ 1,745 $ 1,766
Charge-offs:
Commercial and agricultural ............................. 66 24 84 16 57
Real estate - construction .............................. - - - - -
Real estate - mortgage .................................. 2 12 - 1 24
Consumer ................................................ 389 532 393 419 486
------- ------- ------- ------- -------
Total charge-offs ...................................... 457 568 477 436 567
------- ------- ------- ------- -------
Recoveries:
Commercial and agricultural ............................. 14 12 8 6 8
Real estate - construction .............................. - - - - -
Real estate - mortgage .................................. 11 3 3 5 7
Consumer ................................................ 140 146 134 180 161
------- ------- ------- ------- -------
Total recoveries ....................................... 165 161 145 191 176
------- ------- ------- ------- -------
Net loan charge-offs ...................................... 292 407 332 245 391
Provision for loan losses ................................. 600 490 515 220 370
------- ------- ------- ------- -------
Balance at end of year .................................... $ 2,294 $ 1,986 $ 1,903 $ 1,720 $ 1,745
======= ======= ======= ======= =======
Nonperforming Assets, at end of year
Nonaccrual loans .......................................... $ 51 $ 65 $ 26 $ - $ -
Accruing loans past due 90 days or more ................... 167 231 317 118 136
------- ------- ------- ------- -------
Total nonperforming loans .............................. 218 296 343 118 136
Foreclosed assets ......................................... 23 38 64 78 134
Other real estate owned ................................... 27 - - - -
------- ------- ------- ------- -------
Total nonperforming assets ............................. $ 268 $ 334 $ 407 $ 196 $ 270
======= ======= ======= ======= =======
Ratios
Net loan charge-offs to average loans ..................... .14% .22% .19% .15% .26%
Net loan charge-offs to allowance for loan losses ......... 12.74 20.49 17.45 14.25 22.43
Allowance for loan losses to year-end loans ............... 1.05 1.02 1.06 1.02 1.11
Total nonperforming loans to year-end loans ............... .10 .15 .19 .07 .09
</TABLE>
Table 9
Allocation of Allowance For Loan Losses
(In thousands)
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural .............. $ 719 $ 650 $ 572 $ 490 $ 451
Real estate - construction ............... 12 10 9 14 25
Real estate - mortgage ................... 493 439 384 346 281
Consumer ................................. 830 727 695 651 569
Unallocated .............................. 240 160 243 219 419
------ ------ ------ ------ ------
Total allowance for loan losses ......... $2,294 $1,986 $1,903 $1,720 $1,745
======= ====== ====== ====== ======
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
Deposits The level and mix of deposits is affected by various
factors, including general economic conditions, the
particular circumstances of local markets and the specific
deposit strategies employed. In general, broad interest
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. The 1997
growth in money market accounts of $5,165,000 was due to
a new high-yield product introduced in the 1996 fourth
quarter. A promotion that offered premium-rate
certificates of deposit, based on selected maturities,
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. The balance of
retail repurchase agreements, a program that has tended
to transfer funds away from deposits, was $7,436,625 at
December 31, 1997 and $3,724,929 at December 31, 1996.
Further, the level of time deposits obtained from
governmental units fluctuates, amounting to $24,431,000,
$21,602,000 and $17,820,000 at December 31, 1997, 1996
and 1995, respectively.
Table 10 shows the year-end and average deposit balances
for the years 1997, 1996 and 1995 and the changes in 1997
and 1996.
Table 10
Analysis of Deposits
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- --------------------------------- ----------
Change from Change from
Prior Year Prior Year
-------------------- ---------------------
Balance Amount % Balance Amount % Balance
----------- ----------- -------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Year-End Balances
Interest-bearing deposits:
NOW accounts ................................. $ 38,607 $ 2,468 6.8 $ 36,139 $ 3,732 11.5 $ 32,407
Savings deposits ............................. 27,704 (1,430) (4.9) 29,134 (958) (3.2) 30,092
Money market accounts ........................ 22,469 5,165 29.8 17,304 1,075 6.6 16,229
-------- -------- -------- ------- --------
Total ...................................... 88,780 6,203 7.5 82,577 3,849 4.9 78,728
Certificates and other time deposits ......... 153,457 3,459 2.3 149,998 17,173 12.9 132,825
-------- -------- -------- ------- --------
Total interest-bearing deposits ............ 242,237 9,662 4.2 232,575 21,022 9.9 211,553
Noninterest-bearing demand deposits ........... 38,311 (494) (1.3) 38,805 214 .6 38,591
-------- -------- -------- ------- --------
Total deposits ............................. $280,548 $ 9,168 3.4 $271,380 $21,236 8.5 $250,144
======== ======== ======== ======= ========
Average Balances
Interest-bearing deposits:
NOW accounts ................................. $ 38,017 $ 2,996 8.6 $ 35,021 $ 2,579 7.9 $ 32,442
Savings deposits ............................. 29,199 (948) (3.1) 30,147 202 .7 29,945
Money market accounts ........................ 19,459 3,392 21.1 16,067 (592) (3.6) 16,659
-------- -------- -------- ------- --------
Total ...................................... 86,675 5,440 6.7 81,235 2,189 2.8 79,046
Certificates and other time deposits ......... 150,566 11,573 8.3 138,993 16,250 13.2 122,743
-------- -------- -------- ------- --------
Total interest-bearing deposits ............ 237,241 17,013 7.7 220,228 18,439 9.1 201,789
Noninterest-bearing demand deposits ........... 37,289 993 2.7 36,296 (148) ( .4) 36,444
-------- -------- -------- ------- --------
Total deposits ............................. $274,530 $ 18,006 7.0 $256,524 $18,291 7.7 $238,233
======== ======== ======== ======= ========
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
Table 11
Quarterly Financial Data
(In thousands except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Interest income ............................................. $ 5,893 $ 5,997 $ 6,262 $ 6,355
Interest expense ............................................ 2,559 2,577 2,693 2,747
-------- -------- -------- --------
Net interest income ......................................... 3,334 3,420 3,569 3,608
Provision for loan losses ................................... 125 115 230 130
-------- -------- -------- --------
Net interest income after provision for loan losses ......... 3,209 3,305 3,339 3,478
Other operating income ...................................... 664 709 738 764
Merger expenses ............................................. - - - 305
Other operating expense ..................................... 2,400 2,485 2,497 2,601
-------- -------- -------- --------
Income before income taxes .................................. 1,473 1,529 1,580 1,336
Income taxes ................................................ 440 469 491 418
-------- -------- -------- --------
Net income .................................................. $ 1,033 $ 1,060 $ 1,089 $ 918
======== ======== ======== ========
Per share data (2): .........................................
Net income: ...............................................
Basic .................................................... $ .29 $ .29 $ .30 $ .25
Diluted .................................................. .28 .29 .29 .25
Cash dividends declared ................................... .09 .09 .09 .11
Common stock price (1): ...................................
High ..................................................... 16.00 16.50 16.00 20.25
Low ...................................................... 13.50 14.25 14.38 16.00
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 (2): .........................................
Net income: ...............................................
Basic .................................................... $ .26 $ .26 $ .26 $ .28
Diluted .................................................. .26 .26 .26 .27
Cash dividends declared ................................... .08 .08 .08 .11
Common stock price (1): ...................................
High ..................................................... 13.25 13.25 13.00 15.00
Low ...................................................... 11.25 11.31 11.75 12.75
</TABLE>
(1) FNB Corp. common stock is traded on the NASDAQ National Market System under
the symbol FNBN.
(2) All per share data has been retroactively adjusted to reflect the
two-for-one common stock split declared on February 19, 1998 and payable
in the form of a 100% stock dividend to shareholders on March 18, 1998.
24
<PAGE>
- --------------------------------------------------------------------------------
Business As discussed in the "Overview" and in Note 18 to
Development Consolidated Financial Statements, the Corporation in 1997
Matters entered into a definitive agreement to acquire Home
Savings Matters Bank of Siler City, Inc., SSB ("Home
Savings") of Siler City, North Carolina. On January 28,
1998, as permitted by the agreement, the Board of
Directors of Home Savings exercised its right to terminate
the proposed combination due to the increase in the market
value of FNB Corp. common stock above a specified level.
As similarly discussed, the Corporation in 1993 entered
into definitive agreements to acquire two mutual savings
banks. In 1995, those 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 $2,579,799, $2,257,204 and
$1,524,718 at December 31, 1997, 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. Subsequent to the 1994
data processing changes and without resuming any of the
outsourced operations, the Bank has significantly
increased its investment in computer equipment 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
and one-half of 1997 capital expenditures, which totaled
$1,019,109 and $477,852, respectively, also related to
personal computer networks.
In 1995, as discussed in Note 17 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, 1997, 1996 and 1995 amounted to
25
<PAGE>
- --------------------------------------------------------------------------------
$9,674,229, $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. The funds
previously invested in this loan program are being
redeployed, as loan payments occur, to other loan
programs or to the investment securities portfolio.
Year 2000 Issue The Corporation is aware of the issue associated with the
programming code in existing computer systems as the year
2000 approaches. The "year 2000" problem is pervasive and
complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems and
other equipment incorporating computer components will
properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data
or cause a system to fail.
The Corporation relies on vendors for all computer
programming and equipment. An internal assessment of the
year 2000 situation was completed in January 1997. The
assessment included computer software, computer hardware
and other equipment incorporating computer components
that are date sensitive. The Corporation has monitored
the status of its vendors and continues to evaluate
vendors for adherence to their year 2000 plans. To date,
confirmations have been received from the Corporation's
primary processing vendors that plans have been
implemented to address the processing of transactions in
the year 2000.
The Corporation is utilizing both internal and external
resources to identify, correct or reprogram, and test
systems for year 2000 compliance. The vendors anticipate
that all reprogramming efforts will be completed by
December 31, 1998, allowing adequate time for testing.
Management estimates the cost of year 2000 compliance
will be approximately $200,000, which primarily includes
capital expenditures relating to computer equipment
expected to be replaced in 1998 and 1999. In 1997, the
cost related to year 2000 compliance was immaterial.
Accounting In June 1996, the Financial Accounting Standards Board
Pronouncement (the "FASB") issued Statement of Financial Accounting
Matters Standards (SFAS) No. 125, "Accounting for Transfers
Pronouncement Matters 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 in 1997 without any effect on the
consolidated financial statements.
In February 1997, The FASB issued SFAS No. 129,
"Disclosures of Information About Capital Structure".
SFAS No. 129 continues the existing requirements to
disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands
the number of companies subject to portions of its
requirements. Specifically, SFAS No. 129 requires all
entities to provide the capital structure disclosures
previously required by APB Opinion No. 15. Companies that
were exempt from the provisions of APB Opinion No. 15
will now need to make those disclosures. SFAS No. 129
will have no impact on the Corporation's consolidated
financial statements.
In July 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its
components in a full set of general purpose financial
statements. The objective of SFAS No. 130 is to report a
measure of all changes in equity of an enterprise that
26
<PAGE>
- --------------------------------------------------------------------------------
result from transactions and other economic events during
the period other than transactions with owners (therein
defined as "comprehensive income"). Comprehensive income
is the total of net income and all other nonshareholder
changes in equity. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997, with earlier
application permitted. If comparative financial
statements are provided for earlier periods, those
financial statements shall be reclassified to reflect
application of the provisions of SFAS No. 130. Adoption
of SFAS No. 130 will not change total shareholders'
equity as previously reported.
In July 1997, the FASB issued SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information".
SFAS No. 131 requires disclosures for each segment that
are similar to those required under current standards
with the addition of quarterly disclosure requirements
and a finer partitioning of geographic disclosures. It
requires limited segment data on a quarterly basis. It
also requires geographic data by country, as opposed to
broader geographic regions as permitted under current
standards. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997, with earlier
application permitted. As the Corporation has only one
operating segment, adoption of SFAS No. 131 is not
expected to have a significant impact on the consolidated
financial statements.
In February 1998, the FASB issued SFAS No. 132,
"Employers Disclosures about Pensions and Other
Postretirement Benefits". SFAS No. 132 standardizes the
disclosure requirements of pensions and other
postretirement benefits. It does not change any
measurement or recognition provisions, and thus will not
materially impact the Corporation. SFAS No. 132 is
effective for fiscal years beginning after December 15,
1997.
Effects of Inflation The operations of the Bank and therefore of the
Corporation are subject to the effects of 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.
27
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
March 13, 1998
28
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................... $ 12,914,021 $ 13,052,150
Investment securities:
Available for sale, at estimated fair value (amortized cost of $34,997,094 in 1997
and $28,875,531 in 1996) ....................................................... 35,125,191 28,928,543
Held to maturity (estimated fair value of $52,234,241 in 1997 and $61,274,858
in 1996) ....................................................................... 51,755,433 61,387,196
Loans ............................................................................. 217,450,749 195,272,683
Less: Allowance for loan losses .................................................. (2,293,495) (1,985,581)
------------ ------------
Net loans ...................................................................... 215,157,254 193,287,102
------------ ------------
Premises and equipment, net ....................................................... 6,129,335 6,290,471
Other assets ...................................................................... 4,574,070 4,189,015
------------ ------------
Total Assets .................................................................. $325,655,304 $307,134,477
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits .............................................. $ 38,310,654 $ 38,805,364
Interest-bearing deposits:
NOW, savings and money market deposits ......................................... 88,779,811 82,576,792
Time deposits of $100,000 or more .............................................. 52,915,324 48,944,981
Other time deposits ............................................................ 100,541,785 101,052,928
------------ ------------
Total deposits ................................................................ 280,547,574 271,380,065
Retail repurchase agreements ...................................................... 7,436,625 3,724,929
Federal funds purchased ........................................................... 2,400,000 575,000
Other liabilities ................................................................. 3,369,747 2,687,241
------------ ------------
Total Liabilities ............................................................. 293,753,946 278,367,235
------------ ------------
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 1,819,825
shares in 1997 and 1,806,994 shares in 1996 .................................... 4,549,563 4,517,485
Surplus .......................................................................... 527,627 213,510
Retained earnings ................................................................ 26,739,624 24,001,259
Net unrealized securities gains .................................................. 84,544 34,988
------------ ------------
Total Shareholders' Equity .................................................... 31,901,358 28,767,242
------------ ------------
Total Liabilities And Shareholders' Equity .................................... $325,655,304 $307,134,477
============ ============
Commitments (Note 15)
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans ................................. $ 18,787,063 $ 16,727,702 $15,638,486
Interest and dividends on investment securities:
Taxable income ............................................ 4,645,185 4,661,250 4,170,724
Non-taxable income ........................................ 919,543 770,119 619,480
Federal funds sold ......................................... 154,917 88,799 177,071
------------ ------------ -----------
Total interest income ................................... 24,506,708 22,247,870 20,605,761
------------ ------------ -----------
Interest Expense
Deposits ................................................... 10,268,235 9,390,717 8,821,404
Retail repurchase agreements ............................... 280,322 178,113 167,076
Federal funds purchased .................................... 26,929 42,728 13,799
------------ ------------ -----------
Total interest expense .................................. 10,575,486 9,611,558 9,002,279
------------ ------------ -----------
Net Interest Income ......................................... 13,931,222 12,636,312 11,603,482
Provision for loan losses .................................. 600,000 490,000 515,000
------------ ------------ -----------
Net Interest Income After Provision for Loan Losses ......... 13,331,222 12,146,312 11,088,482
------------ ------------ -----------
Other Operating Income
Service charges on deposit accounts ........................ 1,532,549 1,415,038 1,356,083
Annuity and brokerage commissions .......................... 313,440 217,766 182,091
Cardholder and merchant services income .................... 332,979 315,641 263,678
Other service charges, commissions and fees ................ 389,167 314,097 284,994
Losses on sales of investment securities ................... - - (414,596)
Other income ............................................... 306,896 180,975 153,916
------------ ------------ -----------
Total other operating income ............................ 2,875,031 2,443,517 1,826,166
------------ ------------ -----------
Other Operating Expense
Personnel expense .......................................... 5,318,017 4,733,429 4,479,773
Net occupancy expense ...................................... 562,339 485,357 461,992
Furniture and equipment expense ............................ 776,853 661,504 452,094
Data processing services ................................... 1,135,733 1,006,405 881,757
Merger expenses ............................................ 305,000 - 186,350
Restructuring charges ...................................... - - 460,457
Other expense .............................................. 2,190,757 2,190,379 2,191,203
------------ ------------ -----------
Total other operating expense ........................... 10,288,699 9,077,074 9,113,626
------------ ------------ -----------
Income Before Income Taxes .................................. 5,917,554 5,512,755 3,801,022
Income taxes ................................................ 1,817,785 1,675,451 1,100,565
------------ ------------ -----------
Net Income .................................................. $ 4,099,769 $ 3,837,304 $ 2,700,457
============ ============ ===========
Net income per common share:
Basic ...................................................... $ 1.13 $ 1.06 $ .75
Diluted .................................................... $ 1.11 $ 1.05 $ .75
Weighted average number of shares outstanding:
Basic ...................................................... 3,626,132 3,603,866 3,597,434
Diluted .................................................... 3,696,384 3,641,660 3,606,110
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Common Stock Unrealized
-------------------------- Retained Securities
Shares Amount Surplus Earnings Gains (Losses)
------------ ------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
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
Net income, 1997 ...................................... - - - 4,099,769 -
Cash dividends declared, $.75 per share ............... - - - (1,361,404) -
Common stock issued through:
Dividend reinvestment plan ........................... 8,106 20,265 220,718 - -
Stock option plan .................................... 4,725 11,813 93,399 - -
Change in net unrealized gains (losses) on
available-for-sale securities ........................ - - - - 49,556
--------- ---------- ---------- ------------ ----------
Balance, December 31, 1997 ............................ 1,819,825 $4,549,563 $ 527,627 $ 26,739,624 $ 84,544
========= ========== ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Operating Activities
Net income ....................................................... $ 4,099,769 $ 3,837,304 $ 2,700,457
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment ......... 734,022 634,116 397,979
Provision for loan losses ....................................... 600,000 490,000 515,000
Deferred income taxes (benefit) ................................. (251,925) (65,999) 36,206
Deferred loan fees and costs, net ............................... 367,368 395,050 (130,477)
Premium amortization and discount accretion of investment
securities, net ................................................ (24,970) 39,357 157,127
Losses on sales of investment securities ........................ - - 414,596
Amortization of intangibles ..................................... 32,336 43,876 59,115
Net decrease (increase) in loans held for sale .................. (559,350) 405,503 (405,503)
Increase in other assets ........................................ (203,805) (439,441) (557,531)
Increase (decrease) in other liabilities ........................ 581,277 (160,153) 732,884
------------- ------------- -------------
Net Cash Provided by Operating Activities ...................... 5,374,722 5,179,613 3,919,853
------------- ------------- -------------
Investing Activities
Available-for-sale securities:
Proceeds from sales ............................................. - - 5,896,328
Proceeds from maturities and calls .............................. 20,536,260 20,000,719 2,659,634
Purchases ....................................................... (26,645,098) (20,765,272) (249,405)
Held-to-maturity securities:
Proceeds from maturities and calls .............................. 11,717,140 15,368,717 21,184,527
Purchases ....................................................... (2,072,378) (20,558,380) (36,279,578)
Net increase in loans ............................................ (22,291,097) (16,531,348) (11,376,742)
Proceeds from sales of premises and equipment .................... 4,862 15,485 2,718
Purchases of premises and equipment .............................. (477,852) (1,019,109) (1,302,230)
Other, net ....................................................... 23,622 (33,497) (26,031)
------------- ------------- -------------
Net Cash Used in Investing Activities .......................... (19,204,541) (23,522,685) (19,490,779)
------------- ------------- -------------
Financing Activities
Net increase in deposits ......................................... 9,167,509 21,235,589 20,219,164
Increase (decrease) in retail repurchase agreements .............. 3,711,696 (916,598) 1,115,301
Increase (decrease) in federal funds purchased ................... 1,825,000 575,000 (3,050,000)
Common stock issued .............................................. 346,195 217,302 21,773
Common stock repurchased ......................................... - - (52,800)
Cash dividends and fractional shares paid ........................ (1,358,710) (1,080,610) (666,086)
------------- ------------- -------------
Net Cash Provided by Financing Activities ...................... 13,691,690 20,030,683 17,587,352
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents ............... (138,129) 1,687,611 2,016,426
Cash and cash equivalents at beginning of year ..................... 13,052,150 11,364,539 9,348,113
------------- ------------- -------------
Cash and Cash Equivalents At End Of Year ........................... $ 12,914,021 $ 13,052,150 $ 11,364,539
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ........................................................ $ 10,230,874 $ 9,746,990 $ 8,233,042
Income taxes .................................................... 1,895,676 1,911,293 1,075,350
Noncash investing and financing activity - Transfer of investment
securities to available-for-sale category ....................... - - 11,353,710
</TABLE>
See accompanying notes to consolidated financial statements.
32
<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.
Certain items for 1995 and 1996 have been reclassified to conform with the
1997 presentation. The reclassifications have no effect on the financial
position or results of operations as previously reported.
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:
o Held-to-maturity securities - Debt securities that the Corporation has the
positive intent and ability to hold to maturity are reported at amortized
cost.
o Trading securities - Debt and equity securities bought and held
principally for the purpose of being sold in the near future are reported
at fair value, with unrealized gains and losses included in earnings.
o Available-for-sale securities - Debt and equity securities not classified
as either held-to-maturity securities or trading securities are 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
33
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
loans. The Corporation previously measured loan impairment in a method
generally comparable to the methods prescribed in SFAS No. 114. Accordingly,
no additional provisions for loan losses were required as a result of the
adoption of SFAS No. 114.
Unearned income on certain installment loans is recognized as income over
the life of the loans by the sum-of-the-months'-digits method which is not
materially different from the interest method. Interest on all other loans
is calculated by using the constant yield method based on the daily
outstanding balance. The recognition of interest revenue, including interest
income on impaired loans, is discontinued when, in management's opinion, the
collection of all or a portion of interest becomes doubtful.
Loan fees and the incremental direct costs associated with making loans are
deferred and subsequently recognized over the life of the loan as an
adjustment of interest income. Residential mortgage loans held for sale are
valued at the lower of cost or market as determined by outstanding
commitments from investors or current investor yield requirements,
calculated on the aggregate loan basis.
Allowance for Loan Losses
The allowance for loan losses represents an amount considered adequate to
absorb loan losses inherent in the portfolio. Management's evaluation of the
adequacy of the allowance is based on a review of individual loans,
historical loan loss experience, the value and adequacy of collateral, and
economic conditions in the Bank's market area. Losses are charged and
recoveries are credited to the allowance for loan losses. This evaluation is
inherently subjective as it requires material estimates, including the
amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize changes to the
allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets as follows: buildings and improvements,
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 $67,367 and $99,703 at December 31, 1997 and 1996,
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.
Earnings Per Share
In 1997, the Corporation adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share", which establishes
standards for computing and presenting earnings per share (EPS) data. SFAS
No. 128 simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings Per Share", and makes them comparable to
international EPS standards. Under SFAS No.128, basic EPS replaces the
former presentation of primary EPS. Also, a dual presentation of basic and
diluted EPS is required on the face of the income statement for all entities
with complex capital structures, and a reconciliation must be provided of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. In accordance with SFAS No.
128, all prior period EPS data has been restated.
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.
34
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Medical and life insurance benefits are provided by the Corporation on a
postretirement basis under defined benefit plans covering substantially all
full-time employees. Postretirement benefit costs, which are actuarially
determined using the attribution method and recorded on an unfunded basis,
are charged to current operations and credited to a liability account on the
consolidated balance sheet.
Stock Options
Effective January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which requires either (i) the fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of income as of the date of grant of awards related
to such plans or (ii) the impact of such fair value on net income and
earnings per share be disclosed in a footnote to financial statements for
awards granted after December 15, 1994., if the accounting for such awards
continues to be in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees". The Corporation has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Derivative Financial Instruments
The Corporation may use off-balance sheet derivative contracts for interest
rate risk management purposes. The existing contracts are accounted for on
the accrual basis and the net interest differential, including premiums
paid, if any, is recognized as an adjustment to interest income or expense
of the related asset or liability. The Corporation does not utilize
derivative financial instruments for trading purposes.
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 and the two-for-one common
stock split declared on February 19, 1998 and payable in the form of a 100%
stock dividend to shareholders on March 18, 1998.
- --------------------------------------------------------------------------------
35
<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, 1997
U.S. Treasury ..................................... $ 2,603,382 $ 25,969 $ 4,497 $ 2,624,854
U.S. Government agencies and corporations ......... 28,893,256 120,150 29,465 28,983,941
Mortgage-backed securities ........................ 2,422,481 6,428 6,788 2,422,121
Equity securities ................................. 1,077,975 16,300 - 1,094,275
----------- -------- -------- -----------
Total ........................................... $34,997,094 $168,847 $ 40,750 $35,125,191
=========== ======== ======== ===========
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
=========== ======== ======== ===========
Held To Maturity
December 31, 1997
U.S. Government agencies and corporations ......... $32,804,633 $ 67,265 $110,484 $32,761,414
State, county and municipal ....................... 18,950,800 550,826 28,799 19,472,827
----------- -------- -------- -----------
Total ........................................... $51,755,433 $618,091 $139,283 $52,234,241
=========== ======== ======== ===========
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
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1997, 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 ........................ $ 3,098,752 $ 3,095,124 $ 6,135,736 $ 6,126,062
Due after one year through five years .......... 9,587,851 9,634,235 22,589,667 22,665,912
Due after five years through ten years ......... 18,810,035 18,879,436 15,280,238 15,432,584
Due after ten years ............................ - - 7,749,792 8,009,683
----------- ----------- ----------- -----------
Total ...................................... 31,496,638 31,608,795 51,755,433 52,234,241
Mortgage-backed securities ..................... 2,422,481 2,422,121 - -
Equity securities .............................. 1,077,975 1,094,275 - -
----------- ----------- ----------- -----------
Total investment securities ................ $34,997,094 $35,125,191 $51,755,433 $52,234,241
=========== =========== =========== ===========
</TABLE>
Debt securities with an estimated fair value of $50,171,509 were pledged to
secure public funds and trust funds on deposit and retail repurchase
agreements at December 31, 1997.
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 1997 and
1996.
- --------------------------------------------------------------------------------
36
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Commercial and agricultural ......... $ 84,220,526 $ 62,677,847
Real estate - construction .......... 4,988,792 4,347,673
Real estate - mortgage:
1-4 family residential ............. 81,182,189 68,886,704
Commercial and other ............... 20,556,246 24,256,938
Consumer ............................ 26,502,996 35,103,521
------------ ------------
Total loans ....................... $217,450,749 $195,272,683
============ ============
</TABLE>
Loans as presented are reduced by net unearned income of $269,599 at
December 31,1997 and are increased by net deferred expense of $37,998 at
December 31, 1996. Nonaccrual loans amounted to $51,087 at December 31, 1997
and $65,230 at December 31, 1996. Lost and recorded 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, 1997 or 1996.
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 consumer loans at December 31, 1997 and 1996 are $9,674,229 and
$20,355,367, 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 1997 with respect to related party loans is as
follows:
<TABLE>
<S> <C>
Balance, December 31, 1996 ......... $ 10,202,891
New loans during 1997 .............. 22,201,685
Repayments during 1997 ............. (22,367,245)
-------------
Balance, December 31, 1997 ......... $ 10,037,331
=============
</TABLE>
- --------------------------------------------------------------------------------
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year ....................... $1,985,581 $1,902,640 $1,719,717
Provision for losses charged to operations ......... 600,000 490,000 515,000
Loans charged off .................................. (456,976) (568,499) (476,977)
Recoveries on loans previously charged off ......... 164,890 161,440 144,900
---------- ---------- ----------
Balance at end of year ............................. $2,293,495 $1,985,581 $1,902,640
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Land ................................................... $ 1,003,619 $ 1,003,619
Buildings and improvements ............................. 4,314,513 4,275,866
Furniture and equipment ................................ 5,221,327 4,953,489
Leasehold improvements ................................. 409,780 394,390
----------- -----------
Total ............................................... 10,949,239 10,627,364
Less accumulated depreciation and amortization ......... 4,819,904 4,336,893
----------- -----------
Premises and equipment, net ............................ $ 6,129,335 $ 6,290,471
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
6. INCOME TAXES
Income taxes as reported in the consolidated income statement included the
following expense (benefit) components:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal ...................... $1,941,569 $1,674,945 $1,045,564
State ........................ 128,141 66,505 18,795
---------- ---------- ----------
Total ...................... 2,069,710 1,741,450 1,064,359
---------- ---------- ----------
Deferred - Federal ............ (251,925) (65,999) 36,206
---------- ---------- ----------
Total income taxes ......... $1,817,785 $1,675,451 $1,100,565
========== ========== ==========
</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>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Amount of tax computed using Federal statutory tax rate of 34% ......... $2,011,968 $1,874,337 $1,292,348
Increases (decreases) resulting from:
Effect of tax-exempt loan and investment securities income ............ (282,470) (251,508) (213,390)
Other ................................................................. 88,287 52,622 21,607
---------- ---------- ----------
Total ............................................................... $1,817,785 $1,675,451 $1,100,565
========== ========== ==========
</TABLE>
38
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The components of deferred tax assets and liabilities and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ........................... $ 606,261 $501,571
Accrued expenses, not currently deductible .......... 470,563 324,210
Other ............................................... 76,401 76,663
---------- --------
Total .............................................. 1,153,225 902,444
---------- --------
Deferred tax liabilities:
Depreciable basis of premises and equipment ......... 323,616 309,869
Taxable basis of investment securities .............. 67,665 53,499
Prepaid pension cost ................................ 266,568 224,827
Net deferred loan fees and costs .................... 139,001 219,625
Other ............................................... 62,827 27,472
---------- --------
Total .............................................. 859,677 835,292
---------- --------
Net deferred tax asset ............................... $ 293,548 $ 67,152
========== ========
</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. TIME DEPOSITS
The scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Years ending December 31
- ----------------------------------
<S> <C>
1998 ........................... $101,891,679
1999 ........................... 38,419,009
2000 ........................... 12,348,322
2001 ........................... 475,022
2002 ........................... 323,077
------------
Total time deposits ......... $153,457,109
============
</TABLE>
- --------------------------------------------------------------------------------
8. BORROWED FUNDS
Funds are borrowed on an overnight basis through retail repurchase
agreements with Bank customers and federal funds purchased from other
financial institutions. Retail repurchase agreement borrowings are
collateralized by securities of the U.S. Treasury and U.S. Government
agencies and corporations.
Information concerning retail repurchase agreements and federal funds
purchased is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
Retail Federal Retail Federal
Repurchase Funds Repurchase Funds
Agreements Purchased Agreements Purchased
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31 .................. $ 7,436,625 $ 2,400,000 $ 3,724,929 $ 575,000
Average balance during the year ......... 6,229,000 473,000 4,118,000 764,000
Maximum month-end balance ............... 7,675,607 2,400,000 4,848,611 4,200,000
Weighted average interest rate:
At December 31 ......................... 4.51% 6.59% 4.21% 7.33%
During the year ........................ 4.51 5.71 4.32 5.63
</TABLE>
39
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
At December 31, 1997, the Bank had an available line of credit of
$37,000,000 with the Federal Home Loan Bank (the "FHLB"). Any advances that
the Bank may obtain under the FHLB line would be secured by a blanket
collateral agreement on qualifying 1-4 family residential mortgage loans.
- --------------------------------------------------------------------------------
9. 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
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation ............................................. $ 4,658,760 $ 4,368,884
Non-vested benefit obligation ......................................... 49,043 48,293
------------ ------------
Total accumulated benefit obligation ................................. $ 4,707,803 $ 4,417,177
============ ============
Projected benefit obligation for service rendered ...................... $ (5,680,805) $ (5,325,298)
Plan assets at fair value, primarily marketable securities ............. 5,952,459 4,828,175
------------ ------------
Plan assets in excess of (under) projected benefit obligations ......... 271,654 (497,123)
Unrecognized net transition liability .................................. 85,894 107,369
Unrecognized prior service cost ........................................ 887,673 995,011
Unrecognized net loss (gain) ........................................... (461,197) 56,000
------------ ------------
Prepaid pension cost included on the consolidated balance sheet ...... $ 784,024 $ 661,257
============ ============
</TABLE>
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Service cost - benefits earned during the period ......... $ 150,589 $ 108,379 $ 71,275
Interest cost on projected benefit obligation ............ 363,237 327,835 311,432
Actual return on plan assets ............................. (1,050,212) (517,299) (458,088)
Net amortization and deferral ............................ 793,739 266,453 290,002
------------ ---------- ----------
Net periodic pension cost ............................. $ 257,353 $ 185,368 $ 214,621
============ =========== ==========
</TABLE>
The rates used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate ............................................ 7.0% 7.0% 7.0%
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.
40
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Information reconciling the plans, which are unfunded, with the amount
included on the consolidated balance sheet is as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ................................................................. $ (458,706) $ (322,587)
Fully eligible active participants ....................................... (30,845) (26,174)
Other active plan participants ........................................... (231,752) (201,338)
---------- ----------
Total accumulated postretirement benefit obligation .................... (721,303) (550,099)
Unrecognized net transition liability ..................................... 303,284 323,502
Unrecognized prior service cost ........................................... 78,139 87,906
Unrecognized net loss (gain) .............................................. 126,171 (13,926)
---------- ----------
Accrued postretirement benefit cost included on the consolidated balance
sheet ................................................................. $ (213,709) $ (152,617)
=========== ==========
</TABLE>
Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the period ....................... $18,654 $17,049 $12,523
Interest cost on accumulated postretirement benefit obligation ......... 46,412 35,931 35,998
Net amortization and deferral .......................................... 34,670 29,985 28,239
------- ------- -------
Net periodic postretirement benefit cost ............................ $99,736 $82,965 $76,760
======= ======== =========
</TABLE>
For measurement purposes, the annual rate of increase assumed in 1997 for
the cost of medical benefits was 13%, decreasing gradually to 6% in 2004 and
assumed to remain at that level thereafter. In 1996, the annual rate of
increase assumed for the cost of medical benefits was 14%, 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, 1997 or the aggregate of
the service and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1997. The discount rate used in
determining the accumulated postretirement benefit obligation was 7.0% in
1997, 1996 and 1995.
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 $85,184 in 1997, $78,247 in 1996 and
$77,835 in 1995.
- --------------------------------------------------------------------------------
10. LEASES
Future obligations for minimum rentals under noncancellable operating lease
commitments, primarily relating to premises, are as follows:
<TABLE>
<CAPTION>
Years ending December 31
- -------------------------------------------
<S> <C>
1998 .................................... $ 50,686
1999 .................................... 46,703
2000 .................................... 45,376
2001 .................................... 45,376
2002 .................................... 6,623
2003 and later years .................... 47,740
--------
Total minimum lease payments ......... $242,504
========
</TABLE>
Net rental expense for all operating leases amounted to $57,308 in 1997,
$57,891 in 1996 and $55,122 in 1995. One operating lease for real property
contains a purchase option considered to approximate fair market value.
- --------------------------------------------------------------------------------
41
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
11. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Significant components of other expense were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
FDIC insurance ............................ $ 40,764 $101,621 $281,894
Stationery, printing and supplies ......... 335,240 301,703 280,665
</TABLE>
- --------------------------------------------------------------------------------
12. 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, 1997 and
1996, and the related condensed statements of income and cash flows for each
of the years in the three-year period ended December 31, 1997 are as
follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Assets:
Cash ................................................. $ 706,162 $ 611,884
Investment in wholly-owned bank subsidiary ........... 31,155,338 28,129,278
Other assets ......................................... 422,021 405,549
----------- -----------
Total assets ....................................... $32,283,521 $29,146,711
=========== ===========
Liabilities and Shareholders' Equity:
Accrued liabilities .................................. $ 382,163 $ 379,469
Shareholders' equity ................................. 31,901,358 28,767,242
----------- -----------
Total liabilities and shareholders' equity ......... $32,283,521 $29,146,711
=========== ===========
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary ................................ $1,137,000 $1,383,000 $ 936,000
Other income (expense) ........................................ 755 3,899 (315)
---------- ---------- ----------
Total income ................................................ 1,137,755 1,386,899 935,685
---------- ---------- ----------
Operating expenses ............................................. 23,109 15,707 201,916
---------- ---------- ----------
Income before income tax benefit and equity in undistributed net
income of bank subsidiary ..................................... 1,114,646 1,371,192 733,769
Income tax benefit ............................................. 8,618 2,815 68,957
---------- ---------- ----------
Income before equity in undistributed net income
of bank subsidiary ............................................ 1,123,264 1,374,007 802,726
Equity in undistributed net income of bank subsidiary .......... 2,976,505 2,463,297 1,897,731
---------- ---------- ----------
Net income .................................................. $4,099,769 $3,837,304 $2,700,457
========== ========== ==========
</TABLE>
42
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income ...................................................... $ 4,099,769 $ 3,837,304 $ 2,700,457
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of bank subsidiary ......... (2,976,505) (2,463,297) (1,897,731)
Other, net .................................................... (8,204) (111,900) (82,601)
------------ ------------ ------------
Net cash provided by operating activities .................... 1,115,060 1,262,107 720,125
------------ ------------ ------------
Investing activities:
Increase in other assets ........................................ (8,267) (7,227) (4,444)
------------ ------------ ------------
Financing activities:
Common stock issued ............................................. 346,195 217,302 21,773
Common stock repurchased ........................................ - - (52,800)
Cash dividends and fractional shares paid ....................... (1,358,710) (1,080,610) (666,086)
------------ ------------ ------------
Net cash used in financing activities ........................ (1,012,515) (863,308) (697,113)
------------ ------------ ------------
Net increase in cash ............................................. 94,278 391,572 18,568
Cash at beginning of year ........................................ 611,884 220,312 201,744
------------ ------------ ------------
Cash at end of year .............................................. $ 706,162 $ 611,884 $ 220,312
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
13. CAPITAL ADEQUACY REQUIREMENTS
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
1998, the maximum amount of dividends the Bank can pay to FNB Corp., without
the approval of the Comptroller of the Currency, is $5,439,802 plus an
additional amount equal to the retained net income in 1998 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, 1997, the average daily reserve requirement
was $3,585,000.
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.
43
<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. There are no events or conditions since the
notification that management believes have changed the Bank's category.
<TABLE>
<CAPTION>
Minimum Ratios
-------------------------------
To Be Well
For Capitalized
Capital Amount Ratio Capital Under Prompt
----------------------- ------------------------- Adequacy Corrective
1997 1996 1997 1996 Purposes Action Provisions
---------- ---------- ----------- ----------- ---------- ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31
Total capital
(to risk-weighted assets):
FNB Corp. ................ $34,095 $30,695 15.75% 14.79% 8.00% N/A
Bank ..................... 33,298 29,980 15.39 14.46 8.00 10.00%
Tier I capital
(to risk-weighted assets):
FNB Corp. ................ 31,801 28,709 14.69 13.84 4.00 N/A
Bank ..................... 31,004 27,994 14.33 13.50 4.00 6.00%
Tier I capital
(to average assets):
FNB Corp. ................ 31,801 28,709 9.83 9.41 4.00 N/A
Bank ..................... 31,004 27,994 9.58 9.18 4.00 5.00%
</TABLE>
- --------------------------------------------------------------------------------
14. SHAREHOLDERS' EQUITY
Earnings Per Share (EPS)
Basic net income per share, or basic EPS, is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if the
Corporation's dilutive stock options were exercised. The numerator of the
basic EPS computation is the same as the numerator of the diluted EPS
computation for all periods presented. A reconcilation of the denominators
of the basic and diluted EPS computations is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Basic EPS denominator - Weighted average number of common shares
outstanding ........................................................ 3,626,132 3,603,866 3,597,434
Dilutive share effect arising from assumed exercise of stock options 70,252 37,794 8,676
--------- --------- ---------
Diluted EPS denominator ............................................. 3,696,384 3,641,660 3,606,110
========= ========= =========
</TABLE>
Stock Options
All information presented below has been restated to reflect the 1998 and
1995 stock splits disclosed in Note 1.
The Corporation adopted a stock compensation plan in 1993 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 360,000 shares of common stock has been reserved for
issuance under the stock compensation plan. At December 31, 1997, there were
4,900 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
44
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
measure compensation costs related to stock option grants in 1995 and
subsequent years. The effect on pro forma net income for 1997, 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>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Net Income:
As reported ........... $ 4,099,769 $ 3,837,304 $2,700,457
Pro forma ............. 4,017,763 3,803,186 2,699,117
Net Income Per Share:
Basic:
As reported ......... 1.13 1.06 .75
Pro forma ........... 1.11 1.06 .75
Diluted:
As reported ......... 1.11 1.05 .75
Pro forma ........... 1.09 1.04 .75
</TABLE>
The weighted-average fair value per share of options granted in 1997, 1996
and 1995 amounted to $5.55, $4.44 and $3.61, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate ......... 5.86% 6.25% 5.38%
Dividend yield .................. 1.60 2.50 2.50
Volatility ...................... 26.00 30.00 30.00
Expected life ................... 6 years 6 years 6 years
</TABLE>
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
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 ........... 276,100 $ 11.21 194,750 $ 9.73 132,000 $ 8.13
Granted .................................... 93,000 17.47 95,500 14.00 80,000 12.00
Exercised .................................. (9,450) 9.41 (4,850) 8.78 - -
Forfeited .................................. (18,850) 12.00 (9,300) 10.01 (17,250) 8.13
------- ------- -------
Outstanding at end of year ................. 340,800 12.93 276,100 11.21 194,750 9.73
======= ======= =======
Options exercisable at end of year ......... 96,500 10.19 54,500 9.15 22,950 8.13
======= ======= =======
</TABLE>
At December 31, 1997, information concerning stock options outstanding and
exercisable is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Weighted
Average
Remaining
Exercise Contractual Options
Price Shares Life (Years) Exercisable
- ------------ ---------- -------------- ------------
<S> <C> <C> <C>
$ 8.13 94,200 6.96 53,700
12.00 68,400 7.96 26,400
14.00 85,200 8.96 16,400
16.00 2,000 9.75 -
17.50 91,000 9.96 -
------ ------
340,800 8.48 96,500
======= ======
</TABLE>
45
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. COMMITMENTS
In the normal course of business, various commitments are outstanding that
are not reflected in the consolidated financial statements. At December 31,
1997, a summary of significant commitments is as follows:
<TABLE>
<S> <C>
Commitments to extend credit ......... $54,394,000
Standby letters of credit ............ 561,000
</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 two interest rate floor agreements 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 each agreement is $10,000,000. The agreements require
the correspondent bank to pay to the Bank the difference between the floor
rate of interest of 7.50% in one agreement and 8.00% in the other agreement
as compared to the prime rate of interest in the event that the prime rate
is less. Any payments received under the agreements, 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 potential future payments to the Bank that are required
pursuant to the agreements. The Bank's exposure to market risk of loss is
limited to the amount of the unamortized premium. At December 31, 1997, the
unamortized premium related to the interest rate floor agreements amounted
to $55,625 and had an estimated fair value of $65,000.
- --------------------------------------------------------------------------------
16. 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.
Borrowed Funds. 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 15.
46
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents ............ $ 12,914 $ 12,914 $ 13,052 $ 13,052
Investment securities:
Available for sale ................. 35,126 35,126 28,929 28,929
Held to maturity ................... 51,755 52,234 61,387 61,275
Net loans ............................ 215,157 217,118 193,287 191,296
Financial Liabilities
Deposits ............................. 280,548 281,488 271,380 272,047
Retail repurchase agreements ......... 7,437 7,437 3,725 3,725
Federal funds purchased .............. 2,400 2,400 575 575
</TABLE>
The fair value estimates are made at a specific point in time based on
relevant market and other information about the financial instruments. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular financial instrument nor are potential taxes and other expenses
that would be considered in an actual sale considered. 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.
- --------------------------------------------------------------------------------
17. 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>
- --------------------------------------------------------------------------------
18. ACQUISITIONS
On June 3, 1997, the Corporation entered into a definitive agreement to
acquire Home Savings Bank of Siler City, Inc., SSB ("Home Savings") of Siler
City, North Carolina. Under terms of the agreement, Home Savings
shareholders were to receive $15.50 per share, either in FNB Corp. common
stock or in cash or a combination thereof, subject to the limitation that
FNB Corp. common stock issued in the merger would be not more than 60% and
not less than 50% of the total consideration. On January 28, 1998, as
permitted by the agreement, the Board of Directors of Home Savings exercised
its right to terminate the proposed combination due to the increase in the
market value of FNB Corp. common stock above a specified level.
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,
47
<PAGE>
FNB CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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. 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 initially deferred, are included
in merger expenses in the consolidated statements of income and amounted to
$305,000 and $186,350 for the years ended December 31, 1997 and 1995,
respectively.
48
<PAGE>
- --------------------------------------------------------------------------------
General Information
Corporate Headquarters Form 10-K
FNB Corp. Copies of the FNB Corp. Annual Report
101 Sunset Avenue to the Securities and Exchange
Post Office Box 1328 Commission on Form 10-K may be obtained
Asheboro, North Carolina 27204 by any shareholder upon written request
to Jerry A. Little, Treasurer.
Common Stock
Equal Opportunity Employer
FNB Corp. common stock is traded
on the NASDAQ National Market System FNB Corp. and First National Bank
under the symbol FNBN. At and Trust Company are equal
December 31, 1997, there were 1,078 opportunity employers. All matters
shareholders of record. regarding recruiting, hiring,
training, compensation, benefits,
promotions, transfers and all other
Market Makers personnel policies will continue to
be free from all discriminatory
Interstate/Johnson Lane Corporation practices.
J.C. Bradford & Co., Incorporated
Stock Transfer Agent and Registrar
Annual Meeting
First National Bank and Trust Company
The annual Meeting of Shareholders Post Office Box 1328
of FNB Corp. will be held at the AVS Asheboro, North Carolina 27204
Banquet Centre, 2045 North Attention: Mrs. Susan G. Brown,
Fayetteville Street, Asheboro, North Assistant Secretary
Carolina, on Tuesday, May 12, 1998 (336) 626-8300
at 1:00 p.m., preceded by a buffet
luncheon beginning at 12:15 p.m.
Independent Auditors
KPMG Peat Marwick LLP
Greensboro, North Carolina
52
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.
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 13, 1998, relating
to the consolidated balance sheets of FNB Corp. and subsidiary as of December
31, 1997 and 1996, 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, 1997, which report is incorporated by reference in the
December 31, 1997 annual report on Form 10-K of FNB Corp.
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRTY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,914,021
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,125,191
<INVESTMENTS-CARRYING> 51,755,433
<INVESTMENTS-MARKET> 0
<LOANS> 217,450,749
<ALLOWANCE> 2,293,495
<TOTAL-ASSETS> 325,655,304
<DEPOSITS> 280,547,574
<SHORT-TERM> 9,836,625
<LIABILITIES-OTHER> 3,369,747
<LONG-TERM> 0
0
0
<COMMON> 4,549,563
<OTHER-SE> 27,351,795
<TOTAL-LIABILITIES-AND-EQUITY> 325,655,304
<INTEREST-LOAN> 18,787,063
<INTEREST-INVEST> 5,564,728
<INTEREST-OTHER> 154,917
<INTEREST-TOTAL> 24,506,708
<INTEREST-DEPOSIT> 10,268,235
<INTEREST-EXPENSE> 10,575,486
<INTEREST-INCOME-NET> 13,931,222
<LOAN-LOSSES> 600,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,288,699
<INCOME-PRETAX> 5,917,554
<INCOME-PRE-EXTRAORDINARY> 5,917,554
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,099,769
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 4.70
<LOANS-NON> 51,000
<LOANS-PAST> 167,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,986,000
<CHARGE-OFFS> 457,000
<RECOVERIES> 165,000
<ALLOWANCE-CLOSE> 2,294,000
<ALLOWANCE-DOMESTIC> 2,054,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 240,000
</TABLE>
