UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission File Number 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)
(336) 626-8300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The registrant had 3,652,151 shares of $2.50 par value common stock outstanding
at November 13, 1998.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
September 30,
--------------------------------------------------
ASSETS 1998 1997
--------------------- -----------------------
<S> <C> <C>
Cash and due from banks $ 10,745,633 $ 12,331,035
Federal funds sold 4,100,000 --
Investment securities:
Available for sale, at estimated fair value
(amortized cost of $42,471,518,
$29,550,120 and $34,997,094) 42,838,675 29,643,623
Held to maturity (estimated fair value of
$52,721,823, $58,843,653 and $52,234,241) 51,331,897 58,516,379
Loans 226,293,855 211,501,710
Less: Allowance for loan losses (2,507,249) (2,188,476)
------------- -------------
Net loans 223,786,606 209,313,234
------------- -------------
Premises and equipment 6,393,907 6,143,442
Other assets 5,194,817 4,753,644
------------- -------------
TOTAL ASSETS $ 344,391,535 $ 320,701,357
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 36,904,478 $ 35,912,097
Interest-bearing deposits:
NOW, savings and money market deposits 93,730,310 87,057,063
Time deposits of $100,000 or more 58,839,857 51,996,700
Other time deposits 105,570,867 103,116,662
------------- -------------
Total deposits 295,045,512 278,082,522
Retail repurchase agreements 10,964,301 7,296,864
Federal funds purchased -- 875,000
Other liabilities 3,841,444 3,181,976
------------- -------------
TOTAL LIABILITIES 309,851,257 289,436,362
------------- -------------
Shareholders' equity:
Preferred stock - $10.00 par value;
authorized 200,000 shares, none issued -- --
Common stock - $2.50 par value;
authorized 10,000,000 shares, issued
shares - 3,652,151, 1,816,853 and 1,819,825 9,130,378 4,542,133
Surplus 25,758 456,816
Retained earnings 25,156,255 26,204,334
Accumulated other comprehensive income:
Net unrealized securities gains (losses) 227,887 61,712
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 34,540,278 31,264,995
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 344,391,535 $ 320,701,357
============= =============
<CAPTION>
December 31,
ASSETS 1997
--------------------------
<S> <C>
Cash and due from banks $ 12,914,021
Federal funds sold --
Investment securities:
Available for sale, at estimated fair value
(amortized cost of $42,471,518,
$29,550,120 and $34,997,094) 35,125,191
Held to maturity (estimated fair value of
$52,721,823, $58,843,653 and $52,234,241) 51,755,433
Loans 217,450,749
Less: Allowance for loan losses (2,293,495)
-------------
Net loans 215,157,254
-------------
Premises and equipment 6,129,335
Other assets 4,574,070
-------------
TOTAL ASSETS $ 325,655,304
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 38,310,654
Interest-bearing deposits:
NOW, savings and money market deposits 88,779,811
Time deposits of $100,000 or more 52,915,324
Other time deposits 100,541,785
-------------
Total deposits 280,547,574
Retail repurchase agreements 7,436,625
Federal funds purchased 2,400,000
Other liabilities 3,369,747
-------------
TOTAL LIABILITIES 293,753,946
-------------
Shareholders' equity:
Preferred stock - $10.00 par value;
authorized 200,000 shares, none issued --
Common stock - $2.50 par value;
authorized 10,000,000 shares, issued
shares - 3,652,151, 1,816,853 and 1,819,825 4,549,563
Surplus 527,627
Retained earnings 26,739,624
Accumulated other comprehensive income:
Net unrealized securities gains (losses) 84,544
-------------
TOTAL SHAREHOLDERS' EQUITY 31,901,358
-------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 325,655,304
=============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 15,308,904 $ 13,853,084
Interest and dividends on investment securities:
Taxable income 3,526,062 3,527,849
Non-taxable income 740,268 680,301
Federal funds sold 162,063 90,609
---------------- -----------------
Total interest income 19,737,297 18,151,843
---------------- -----------------
INTEREST EXPENSE:
Deposits 8,331,823 7,613,564
Retail repurchase agreements 323,661 192,209
Federal funds purchased 8,820 22,749
---------------- -----------------
Total interest expense 8,664,304 7,828,522
---------------- -----------------
NET INTEREST INCOME 11,072,993 10,323,321
Provision for loan losses 330,000 470,000
---------------- -----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,742,993 9,853,321
---------------- -----------------
OTHER OPERATING INCOME:
Service charges on deposit accounts 1,275,529 1,114,437
Annuity and brokerage commissions 169,132 236,788
Cardholder and merchant services income 260,569 254,203
Other service charges, commissions and fees 290,110 301,917
Other income 371,015 203,718
---------------- -----------------
Total other operating income 2,366,355 2,111,063
---------------- -----------------
OTHER OPERATING EXPENSE:
Personnel expense 4,169,019 3,908,156
Net occupancy expense 395,081 432,153
Furniture and equipment expense 639,007 589,197
Data processing services 954,082 823,771
Other expense 1,980,818 1,629,266
---------------- -----------------
Total other operating expense 8,138,007 7,382,543
---------------- -----------------
INCOME BEFORE INCOME TAXES 4,971,341 4,581,841
Income taxes 1,522,491 1,399,525
---------------- -----------------
NET INCOME $ 3,448,850 $ 3,182,316
=============== ================
Net income per common share:
Basic $ .95 $ .88
Diluted .91 .86
=============== ================
Weighted average number of shares outstanding:
Basic 3,648,990 3,622,900
Diluted 3,793,360 3,689,838
=============== ================
Cash dividends declared per common share $ .30 $ .27
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30,
-------------------------------------------------------
1998 1997
----------------------- --------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $5,107,776 $4,855,622
Interest and dividends on investment securities:
Taxable income 1,201,540 1,151,891
Non-taxable income 252,381 227,386
Federal funds sold 54,359 26,814
---------- ----------
Total interest income 6,616,056 6,261,713
---------- ----------
INTEREST EXPENSE:
Deposits 2,807,904 2,599,476
Retail repurchase agreements 115,463 79,287
Federal funds purchased 1,875 13,934
---------- ----------
Total interest expense 2,925,242 2,692,697
---------- ----------
NET INTEREST INCOME 3,690,814 3,569,016
Provision for loan losses 60,000 230,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,630,814 3,339,016
---------- ----------
OTHER OPERATING INCOME:
Service charges on deposit accounts 427,926 386,713
Annuity and brokerage commissions 61,922 72,563
Cardholder and merchant services income 93,581 72,590
Other service charges, commissions and fees 88,966 91,814
Other income 141,489 113,977
---------- ----------
Total other operating income 813,884 737,657
---------- ----------
OTHER OPERATING EXPENSE:
Personnel expense 1,422,676 1,342,972
Net occupancy expense 138,013 142,398
Furniture and equipment expense 212,550 202,700
Data processing services 311,228 273,604
Other expense 650,423 535,473
---------- ----------
Total other operating expense 2,734,890 2,497,147
---------- ----------
INCOME BEFORE INCOME TAXES 1,709,808 1,579,526
Income taxes 523,561 489,881
---------- ----------
NET INCOME $1,186,247 $1,089,645
========== ==========
Net income per common share:
Basic $ .32 $ .30
Diluted .31 .29
========== ==========
Weighted average number of shares outstanding:
Basic 3,651,545 3,628,392
Diluted 3,789,343 3,695,452
========== ==========
Cash dividends declared per common share $ .10 $ .09
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and September 30, 1997
Common Stock
-----------------------------------------------
Shares Amount Surplus
----------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1996 1,806,994 $4,517,485 $ 213,510
Net income -- -- --
Cash dividends declared
Common stock issued through:
Dividend reinvestment plan 7,859 19,648 213,061
Stock option plan 2,000 5,000 30,245
Change in unrealized securities gains (losses),
net of applicable income taxes -- -- --
---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 1,816,853 $4,542,133 $ 456,816
========== ========== ==========
BALANCE, DECEMBER 31,1997 1,819,825 $4,549,563 $ 527,627
Net income -- -- --
Cash dividends declared
Two-for-one stock split effected in the form
of a 100% stock dividend 1,825,343 4,563,358 (626,535)
Common stock issued through:
Dividend reinvestment plan 1,015 2,537 23,224
Stock option plan 5,968 14,920 101,442
Change in unrealized securities gains (losses),
net of applicable income taxes -- -- --
---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1998 3,652,151 $9,130,378 $ 25,758
========== ========== ==========
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income
---------------------------- -----------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31,1996 $ 24,001,259 $ 34,988
Net income 3,182,316 --
Cash dividends declared (979,241)
Common stock issued through:
Dividend reinvestment plan -- --
Stock option plan -- --
Change in unrealized securities gains (losses),
net of applicable income taxes -- 26,724
------------ ------------
BALANCE, SEPTEMBER 30, 1997 $ 26,204,334 $ 61,712
============ ============
BALANCE, DECEMBER 31,1997 $ 26,739,624 $ 84,544
Net income 3,448,850 --
Cash dividends declared (1,095,397)
Two-for-one stock split effected in the form
of a 100% stock dividend (3,936,822)
Common stock issued through:
Dividend reinvestment plan -- --
Stock option plan -- --
Change in unrealized securities gains (losses),
net of applicable income taxes -- 143,343
------------ ------------
BALANCE, SEPTEMBER 30, 1998 $ 25,156,255 $ 227,887
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-------------------------------------------------------
1998 1997
----------------------- --------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,448,850 $ 3,182,316
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of premises and equipment 608,649 555,821
Provision for loan losses 330,000 470,000
Deferred income taxes (benefit) (5,893) (103,809)
Deferred loan fees and costs, net 125,444 323,933
Premium amortization and discount accretion
of investment securities, net (40,015) (21,664)
Amortization of intangibles 18,247 24,251
Net increase in loans held for sale (654,175) (476,250)
Increase in other assets (770,553) (530,812)
Increase in other liabilities 585,915 545,989
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,646,469 3,969,775
------------ ------------
INVESTING ACTIVITES:
Available-for-sale securities:
Proceeds from maturities and calls 26,205,108 16,296,849
Purchases (33,652,437) (16,960,157)
Held-to-maturity securities:
Proceeds from maturities and calls 25,192,250 4,267,140
Purchases (24,775,402) (1,385,186)
Net increase in loans (8,387,538) (16,335,014)
Proceeds from sales of premises and equipment 1,265 1,181
Purchases of premises and equipment (971,756) (408,792)
Other, net 18,260 22,419
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (16,370,250) (14,501,560)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 14,497,938 6,702,457
Increase in retail repurchase agreements 3,527,676 3,571,935
Increase (decrease) in federal funds purchased (2,400,000) 300,000
Common stock issued 142,124 267,954
Cash dividends paid (1,112,345) (1,031,676)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,655,393 9,810,670
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,931,612 (721,115)
Cash and cash equivalents at beginning of period 12,914,021 13,052,150
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,845,633 $ 12,331,035
============ ============
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 8,430,216 $ 7,726,419
Income taxes 1,577,211 1,333,031
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FNB Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FNB Corp. is a one-bank holding company whose wholly-owned subsidiary
is the First National Bank and Trust Company (the "Bank"). The Bank is
an independent community bank that offers full banking and trust
services to consumer and business customers primarily in the region of
North Carolina that includes Randolph, Montgomery and Chatham counties.
The accompanying consolidated financial statements, prepared without
audit, include the accounts of FNB Corp. and the Bank (collectively the
"Corporation"). All significant intercompany balances and transactions
have been eliminated.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Certain items for 1997 have been reclassified to conform with the 1998
presentation. The reclassifications have no effect on the financial
position or results of operations as previously reported.
Share and per share information in the consolidated financial
statements and related notes thereto have been restated, where
appropriate, to reflect the two-for-one common stock split declared on
February 19, 1998 and paid to shareholders in the form of a 100% stock
dividend on March 18, 1998.
2. For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
3. In December 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.
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
6
<PAGE>
periods presented. A reconciliation of the denominators of the basic
and diluted EPS computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Basic EPS denominator - Weighted
average number of common
shares outstanding 3,651,545 3,628,392 3,648,990 3,622,900
Dilutive share effect arising from
assumed exercise of stock options 137,798 67,060 144,370 66,938
--------- --------- --------- ---------
Diluted EPS denominator 3,789,343 3,695,452 3,793,360 3,689,838
========= ========= ========= =========
</TABLE>
4. On January 1, 1998, The Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and surplus in the equity section of a statement of
financial position. In accordance with the provisions of SFAS No. 130,
comparative financial statements presented for earlier periods have
been reclassified to reflect the provisions of the statement.
Comprehensive income is the change in equity of an enterprise during
the period from transactions and other events and circumstances from
nonowner sources and, accordingly, includes both net income and amounts
referred to as other comprehensive income. The Corporation's other
comprehensive income for the three and nine months ended September 30,
1998 and 1997 consisted of unrealized gains and losses on certain
investments in debt and equity securities. Comprehensive income for the
three months ended September 30, 1998 and 1997 amounted to $1,391,972
and $1,164,350, respectively, and for the nine months then ended
amounted to $3,592,193 and $3,209,040.
5. Loans as presented are reduced by net unearned income of $387,842,
$237,964 and $269,599 at September 30, 1998, September 30, 1997 and
December 31, 1997, respectively.
6. Significant components of other expense were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- ---------
Advertising and marketing $69,778 $30,576 $280,237 $ 80,445
Stationery, printing and supplies $77,503 $78,809 $262,053 $241,954
7
<PAGE>
7. 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.
The Corporation incurred certain costs in connection with the proposed
acquisition. Those costs, which had been initially deferred, amounted
to $305,000 and were charged to expense in the fourth quarter of 1997.
A portion of these costs, amounting to $38,660, was recovered in the
second quarter of 1998 and credited to other income.
8. In the opinion of management, the financial information furnished in
this report includes all adjustments (consisting of normal recurring
accruals) necessary to a fair statement of the results for the periods
presented.
8
<PAGE>
ITEM 2. 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 financial information appearing elsewhere in this report.
OVERVIEW
The Corporation earned $3,448,850 in the first nine months of 1998, an
8.4% increase over the same period in 1997. Basic earnings per share, adjusted
for the two-for-one common stock split in March 1998, increased from $.88 to
$.95 in comparing these nine-month periods and diluted earnings per share
increased from $.86 to $.91. For the 1998 third quarter, earnings amounted to
$1,186,247, which represents an 8.9% increase from the 1997 third quarter and a
gain in basic earnings per share from $.30 to $.32 and in diluted earnings per
share from $.29 to $.31. Total assets were $344,391,535 at September 30, 1998,
up 7.4% from September 30, 1997 and 5.8% from December 31, 1997. Loans amounted
to $226,293,855 at September 30, 1998, increasing 7.0% from September 30, 1997
and 4.1% from December 31, 1997. Total deposits grew 6.1% from September 30,
1997 and 5.2% from December 31, 1997 to $295,045,512 at September 30, 1998.
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.
The Corporation incurred certain costs in connection with the proposed
acquisition. Those costs, which had been initially deferred, amounted to
$305,000 and were charged to expense in the fourth quarter of 1997. A portion of
these costs, amounting to $38,660, was recovered in the second quarter of 1998
and credited to other income.
EARNINGS REVIEW
The Corporation's net income increased $266,534 or 8.4% in the first
nine months of 1998 compared to the same period of 1997 and increased $96,602 or
8.9% in comparing third quarter periods. Earnings were positively impacted in
the first nine months and third quarter of 1998 by increases in net interest
income of $749,672 or 7.3% and $121,798 or 3.4%, respectively, by increases of
$255,292 and $76,227 in total other operating income and by reductions of
$140,000 and $170,000 in the provision for loan losses. As discussed in the
"Overview", other operating income benefited in the second quarter of 1998 from
a $38,660 recovery of merger expenses. These gains were significantly offset,
however, by increases in total other operating expense of $755,464 in the first
nine months of 1998 and $237,743 in the 1998 third quarter.
9
<PAGE>
On an annualized basis, return on average assets was unchanged at 1.36%
in comparing the first nine months of 1997 to the first nine months of 1998.
Return on average shareholders' equity decreased from 14.10% to 13.81% in
comparing the same periods. In comparing third quarter periods, return on
average assets improved from 1.38% to 1.39% and return on average shareholders'
equity decreased from 14.09% to 13.91%.
NET INTEREST INCOME
Net interest income is the difference between interest income,
principally from loans and investments, and interest expense, principally on
customer deposits. Changes in net interest income result from changes in
interest rates and in the volume, or average dollar level, and mix of earning
assets and interest-bearing liabilities.
Net interest income was $11,072,993 in the first nine months of 1998
compared to $10,323,321 in the same period of 1997. This increase of $749,672 or
7.3% resulted primarily from an 8.8% increase in the level of average earning
assets, the effect of which was partially offset by a decline in the net yield
on earning assets, or net interest margin, from 4.99% in the first nine months
of 1997 to 4.91% in the same period of 1998. In comparing third quarter periods,
net interest income increased $121,798 or 3.4% reflecting an 8.2% increase in
average earning assets and a decline in the net interest margin from 5.06% to
4.85%. On a taxable equivalent basis, the increases in net interest income in
the first nine months and third quarter of 1998 were $780,000 and $145,000,
respectively, reflecting changes in the relative mix of taxable and non-taxable
earning assets.
Table 1 on page 18 and Table 2 on page 19 set forth for the periods
indicated information with respect to the Corporation's average balances of
assets and liabilities, as well as the total dollar amounts of interest income
(taxable equivalent basis) from earning assets and interest expense on
interest-bearing liabilities, resultant rates earned or paid, net interest
income, net interest spread and net yield on earning assets. Net interest spread
refers to the difference between the average yield on earning assets and the
average rate paid on interest-bearing liabilities. Net yield on earning assets,
or net interest margin, refers to net interest income divided by average earning
assets and is influenced by the level and relative mix of earning assets and
interest-bearing liabilities. Changes in net interest income on a taxable
equivalent basis, as measured by volume and rate variances, are also analyzed in
Tables 1 and 2. Volume refers to the average dollar level of earning assets and
interest-bearing liabilities.
Changes in the net interest margin and net interest spread tend to
correlate with movements in the prime rate of interest. There are variations,
however, in the degree and timing of rate changes, compared to prime, for the
different types of earning assets and interest-bearing liabilities.
The prime rate of interest has been relatively stable in recent years,
averaging 8.28% in 1996 and 8.44% in 1997. For the first nine months of 1998,
the average prime rate was 8.50% compared to 8.42% in the same period of 1997.
This general stability has tended to apply to the interest rates both earned and
paid by the Bank. In comparing nine-month periods, the net interest spread
declined by 6 basis points from 4.22% in 1997 to 4.16% in 1998, reflecting the
effect of a decrease in the average total yield on earning assets coupled with
an increase in the average rate paid on interest-bearing liabilities, or cost of
funds. The yield on earning assets decreased by 2 basis points from 8.55% in
1997 to 8.53% in 1998, while the cost of funds increased by 4 basis points from
4.33% to 4.37%. In comparing third quarter periods, the net interest spread
declined by 19 basis points from 4.29% to 4.10%, as the yield on earning assets
decreased by 19 basis points while the cost of funds was unchanged.
10
<PAGE>
PROVISION FOR LOAN LOSSES
This provision is the charge against earnings to provide an allowance
or reserve for possible future losses on loans. The amount of each period's
charge is affected by several considerations including management's evaluation
of various risk factors in determining the adequacy of the allowance (see "Asset
Quality"), actual loan loss experience and loan portfolio growth. Earnings were
positively impacted in the first nine months and third quarter of 1998 compared
to the same periods in 1997 by decreases in the provision of $140,000 and
$170,000, respectively, due primarily to a lower rate of loan growth in 1998 and
a reduction in net loan charge-offs.
OTHER OPERATING INCOME
Total other operating income, or noninterest income, for the first nine
months and third quarter of 1998 increased $255,292 or 12.1% and $76,227 or
10.3%, respectively, compared to the same periods in 1997, reflecting in part
the general increase in the volume of business. The increase in service charges
on deposit accounts was primarily due to the selected increases in service
charge rates that became effective in the 1997 second quarter and to the higher
level of income being generated by a NOW account version that provides a package
of products and services for a stated monthly fee as a result of increases in
the number of such NOW accounts and in the stated monthly fee, the new fee
having become effective in the 1997 fourth quarter. The decline in annuity and
brokerage commissions related to a general decrease in both sales of annuity
products and the volume of brokerage services. Other income was higher due
mainly to an increase in the gains on loan sales, increased trust revenues and
the $38,660 recovery in the 1998 second quarter of a portion of the merger
expenses initially recorded in the 1997 fourth quarter (see "Overview").
OTHER OPERATING EXPENSE
Total other operating expense, or noninterest expense, was $755,464 or
10.2% higher in the first nine months of 1998 compared to the same period in
1997 and for the third quarter was $237,743 or 9.5% higher, due largely to
increased personnel expense, new advertising and marketing programs and the
continuing effects of inflation. Personnel expense was impacted by increased
staffing requirements and normal salary adjustments. Advertising and marketing
expense, included in other expense, increased $199,792 in the first nine months
of 1998 and $39,202 in the third quarter due primarily to new programs
undertaken in 1998 that include an advertising campaign based on customer
testimonials and a major marketing plan centered around the "YES YOU CAN, YES WE
CAN(R)" program.
INCOME TAXES
The effective income tax rate of 30.6% in the first nine months of 1998
did not significantly change from the 30.5% rate in the same period of 1997.
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
11
<PAGE>
$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 six 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 MANAGEMENT AND INTEREST RATE SENSITIVITY
One of the primary objectives of asset/liability management is to
maximize net interest margin while minimizing the earnings risk associated with
changes in interest rates. One method used to manage interest rate sensitivity
is to measure, over various time periods, the interest rate sensitivity
positions, or gaps; however, this method addresses only the magnitude of timing
differences and does not address earnings or market value. Therefore, management
uses an earnings simulation model to prepare, on a regular basis, earnings
projections based on a range of interest rate scenarios in order to more
accurately measure interest rate risk.
The Bank's balance sheet is generally liability-sensitive, meaning that
in a given period there will be more liabilities than assets subject to
immediate repricing as market rates change. When immediately rate sensitive
interest-bearing liabilities exceed rate sensitive assets, the earnings position
could improve in a declining rate environment and could deteriorate in a rising
rate environment, depending on the correlation of rate changes in these two
categories. Included in interest-bearing liabilities subject to rate changes
within 30 days 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, the Bank, at September
30, 1998, 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
total 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.
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-adjusted assets, which are computed by measuring the relative credit risk
of both the asset categories on the balance sheet and various off-balance
12
<PAGE>
sheet exposures. Tier I capital consists primarily of common shareholders'
equity and qualifying perpetual preferred stock, net of goodwill and other
disallowed intangible assets. Tier II capital, which is limited to the total of
Tier I capital, includes allowable amounts of subordinated debt, mandatory
convertible securities, preferred stock and the allowance for loan losses. Under
current requirements, the minimum total capital ratio, consisting of both Tier I
and Tier II capital, is 8.00% and the minimum Tier I capital ratio is 4.00%. At
September 30, 1998, FNB Corp. and the Bank had total capital ratios of 16.03%
and 15.64%, respectively, and Tier I capital ratios of 14.94% and 14.55%.
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 September 30, 1998,
FNB Corp. and the Bank had leverage capital ratios of 10.04% and 9.78%,
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 September 30, 1998 and, accordingly, is well-capitalized under the regulatory
framework for prompt corrective action.
BALANCE SHEET REVIEW
Total assets at September 30, 1998 were higher than at September 30,
1997 and December 31, 1997 by $23,691,000 or 7.4% and $18,737,000 or 5.8%,
respectively; deposits were ahead by $16,963,000 or 6.1% and $14,498,000 or
5.2%. A portion of the asset growth was funded by retail repurchase agreements,
which had increased at September 30, 1998 by $3,667,000 or 50.3% from September
30, 1997 and by $3,527,000 or 47.4% from December 31, 1997. Average assets
increased $26,841,000 or 8.6% in the first nine months of 1998 compared to the
same period in 1997, while average deposits increased $19,613,000 or 7.2% and
average retail repurchase agreements increased $3,777,000 or 65.8%, the third
quarter increases being $25,352,000 or 8.0%, $19,212,000 or 7.0% and $3,261,000
or 47.2%, respectively.
INVESTMENT SECURITIES
Additions to the investment securities portfolio depend to a large
extent on the availability of investable funds that are not otherwise needed to
satisfy loan demand. During the twelve-month period ended September 30, 1998,
when the growth in total assets exceeded that for loans, the level of investment
securities was increased $6,011,000 or 6.8%, with a larger net increase of
$7,290,000 or 8.4% occurring in the first nine months of 1998. 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.
LOANS
The Corporation's primary source of revenue and largest component of
earning assets is the loan portfolio. Loans increased $14,792,000 or 7.0% during
the twelve-month period ended September 30, 1998. The net loan increase during
the first nine months of 1998 was $8,843,000 or 4.1%. Average loans were
$21,947,000 or 10.8% higher in the first nine months of 1998 than in the same
period of 1997. The ratio of
13
<PAGE>
average loans to average deposits, in comparing nine-month periods, increased
from 74.3% in 1997 to 76.8% in 1998. The ratio of loans to deposits at September
30, 1998 was 76.7%.
Loan growth and the composition of the loan portfolio are being
affected by management's decision in March 1996 to discontinue the purchase of
retail installment loan contracts from automobile and equipment dealers (see
"Business Development Matters"). The outstanding balance of these loan
contracts, which are primarily included in consumer loans, experienced a net
decrease of $6,754,883 during the twelve-month period ended September 30, 1998.
Consequently, total consumer loans declined significantly during that period.
The commercial and agricultural loan portfolio has experienced strong gains
during both the twelve-month period ended September 30,1998 and the first nine
months of 1998. The 1-4 family residential mortgage loan portfolio has also
gained significantly during these periods.
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.
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. Time deposits increased $9,297,000 during the
twelve-month period ended September 30, 1998 and $10,954,000 during the first
nine months of 1998. Similarly, money market accounts, during the same periods,
grew $6,141,000 and $3,654,000, respectively, due to a new high-yield product
first introduced in the 1996 fourth quarter. Further, the level of time deposits
obtained from governmental units fluctuates, amounting to $23,863,000,
$23,169,000 and $24,431,000 at September 30, 1998, September 30, 1997 and
December 31, 1997, respectively.
14
<PAGE>
BUSINESS DEVELOPMENT MATTERS
As discussed in the "Overview" and in Note 7 to Consolidated Financial
Statements, the Corporation in 1997 entered into a definitive agreement to
acquire Home Savings 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.
Management decided in March 1996 that the Bank would discontinue the
purchase of retail installment loan contracts from automobile and equipment
dealers, due largely to the declining yields being experienced in this loan
program. Contracts of this nature included in loans amounted to $4,885,604,
$11,640,487 and $9,674,229 at September 30, 1998, September 30, 1997 and
December 31, 1997, 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.
As of September 30, 1998, the Bank had filed for regulatory approval of
a new branch office to be established in Trinity, North Carolina. Assuming that
approval is granted, construction and occupancy of the Trinity branch is
expected to occur in 1999, resulting in a total capital outlay of approximately
$950,000.
The Bank's data processing, item capture and statement rendering
operations are currently outsourced under a service bureau arrangement. The Bank
is planning to shift these operations to an in-house basis. The target date for
conversion is April 1999. The total outlay for hardware and software
expenditures is expected to amount to approximately $1,600,000.
YEAR 2000 ISSUE
The Corporation recognizes and is addressing the potentially serious
implications of the "Year 2000 Issue", which is a general term used to describe
various problems that may result from the improper processing of dates and
date-sensitive calculations by many existing computer programs when the Year
2000 is reached. This issue is ultimately caused by the fact that many of the
world's existing computer programs use only two digits to identify the year in
the date field of a program. These programs were designed and developed without
considering the upcoming change in the century and could experience serious
malfunctions when the last two digits of the year change to "00" as a result of
identifying the "00" year as the year 1900 rather than the year 2000. This
identification error could result in a disruption of normal business operations,
including, among other things, the miscalculation of interest accruals and the
inability to process customer transactions. In addition, non-banking systems,
such as security alarms, elevators and telephones, are subject to malfunction
due to their dependence upon computers for proper operation.
The Corporation first began to assess its Year 2000 readiness in August
1996, completing that assessment in January 1997. The Corporation then developed
a Year 2000 Plan that follows guidelines outlined by the Federal Financial
Institutions Council. The Year 2000 Project Team, which is responsible for
execution of the Plan, includes members of senior management and departmental
management from all areas of the organization. Additionally, an outside
consulting firm has been engaged to assist with the Year 2000 project.
15
<PAGE>
In the implementation of the Year 2000 Plan, a thorough inventory was
first performed to determine all hardware, software and facilities that might be
impacted by the Year 2000 Issue. Since all software is purchased and no separate
in-house programming is performed, the Corporation is dependent upon its
third-party vendors for modifications of its existing systems to correct any
defects related to the Year 2000 Issue. Accordingly, written documentation has
been solicited from all of the software and hardware vendors, as well as the
providers of facilities using embedded chip technology, with respect to their
Year 2000 compliance status. The validation phase of the Corporation's project
includes the receipt and analysis of vendor-performed testing, as well as the
testing of all hardware, software and facilities in the Corporate environment.
Internal testing of mission critical systems is scheduled to be completed by
December 31, 1998, with the testing of other applications to be completed by
June 30, 1999.
The Corporation currently uses a service bureau for core processing and
related items processing. All testing of this mission critical system for Year
2000 compliance is to be completed by December 31, 1998. In August 1998,
however, the Corporation contracted with third-party vendors for the hardware
and software necessary to shift this entire operation to an in-house basis. The
target date for this conversion is April 1999. Initial internal testing on a
trial basis of these replacement systems for Year 2000 compliance is to be
completed by December 31, 1998. Final testing in the normal operating
environment is to be completed by June 30, 1999.
The Corporation is informing its customers about the Year 2000 Issue in
general and the efforts it is undertaking to ensure that banking services
continue in the Year 2000 and beyond. Additionally, the Corporation is
contacting its significant commercial customers to determine such customers'
plans with respect to the Year 2000 Issue and the Corporation's vulnerability to
the failure of any such customer to remediate its own problems that may result
from the Year 2000 Issue. As most commercial customers depend on computer
systems that must be Year 2000 compliant, a disruption in their businesses could
result in potentially significant financial difficulties that could affect their
creditworthiness. The Corporation is also initiating contact with key vendors to
determine their plans with respect to the Year 2000 Issue. There can be no
guarantee that customers and vendors will convert their systems on a timely
basis or in a manner that is compatible with the Corporation's systems.
Significant business interruptions or failures by significant commercial
vendors, trading partners or governmental agencies resulting from the effects of
the Year 2000 Issue could have a material adverse effect on the Corporation.
The Corporation's projected cost of year 2000 compliance is estimated
to be approximately $200,000, the majority of such estimated cost relating to
computer equipment that may need be replaced in 1998 and 1999. Actual
expenditures related to the Year 2000 project, which have all been charged to
expense, amount to $10,771 for the nine months ended September 30, 1998 and
$12,175 on a cumulative project basis. Funding of year 2000 project costs will
come from normal operating cash flows; however, the expenses associated with the
Year 2000 Issue will directly reduce otherwise reported net income for the
Corporation.
Management believes that the potential effects on the Corporation's
internal operations of the Year 2000 Issue can be mitigated on a timely basis.
However, if required modifications or conversions are not made or are not
completed on a timely basis, the Year 2000 Issue could disrupt normal business
operations and have a material adverse impact on the Corporation.
Contingency plans are being developed to mitigate the potential effects
of a disruption in normal business operations. Contingency planning includes
developing alternative solutions should a vendor not become compliant, as well
as plans for the resumption of business if, despite the Corporation's best
efforts,
16
<PAGE>
there is a disruption in business operations. In the event of what could be
described as a "worst case" scenario, the contingency plans will allow for
limited transactions, including the ability to make certain deposit withdrawals,
until the Year 2000 problems are fixed.
The costs of the Year 2000 project and the schedule for achieving Year
2000 compliance are based on management's best estimates, which were derived
using numerous assumptions of future events such as the availability of certain
resources (including appropriately trained personnel and other internal and
external resources), third-party vendor plans and other factors. However, there
can be no guarantee that these estimates will be achieved at the cost disclosed
or within the timeframes indicated, and actual results could differ materially
from these plans. Factors that might affect the timely and efficient completion
of the Corporation's Year 2000 project include, but are not limited to, vendors'
abilities to adequately correct or convert software and the effect on the
Corporation's ability to test its systems, the availability and cost of
personnel trained in the Year 2000 areas, the ability to identify and correct
all relevant computer programs, the readiness of key utilities, vendors and
customers, and similar uncertainties.
17
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Taxable Equivalent Basis, Dollars in Thousands)
1998
-----------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 224,234 $ 15,327 9.13 %
Investment securities (2):
Taxable income 71,860 3,780 7.01
Non-taxable income 19,637 1,152 7.82
Federal funds sold 3,889 162 5.57
---------------- ---------------- -----------
Total earning assets 319,620 20,421 8.53
---------------- ---------------- -----------
Cash and due from banks 10,630
Other assets, net 8,331
----------------
TOTAL ASSETS $ 338,581
================
INTEREST-BEARING LIABILITIES Interest-bearing deposits:
NOW accounts $ 41,048 505 1.64
Savings deposits 27,725 472 2.28
Money market accounts 24,668 721 3.91
Certificates and other time deposits 161,631 6,634 5.49
Retail repurchase agreements 9,517 323 4.55
Federal funds purchased 202 9 5.84
---------------- ---------------- -----------
Total interest-bearing liabilities 264,791 8,664 4.37
---------------- ---------------- -----------
Noninterest-bearing demand deposits 36,968
Other liabilities 3,512
Shareholders' equity 33,310
----------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 338,581
================
NET INTEREST INCOME AND SPREAD $ 11,757 4.16 %
================ ===========
NET YIELD ON EARNING ASSETS 4.91 %
===========
<CAPTION>
1997
---------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 202,287 $ 13,876 9.17 %
Investment securities (2):
Taxable income 71,710 3,778 7.03
Non-taxable income 17,429 1,061 8.12
Federal funds sold 2,225 91 5.44
---------------- ----------------- ---------------
Total earning assets 293,651 18,806 8.55
---------------- ----------------- ---------------
Cash and due from banks 9,812
Other assets, net 8,277
----------------
TOTAL ASSETS $ 311,740
================
INTEREST-BEARING LIABILITIES Interest-bearing deposits:
NOW accounts $ 37,640 503 1.79
Savings deposits 29,497 516 2.34
Money market accounts 18,792 502 3.57
Certificates and other time deposits 149,580 6,093 5.45
Retail repurchase agreements 5,740 192 4.45
Federal funds purchased 535 23 5.69
---------------- ----------------- ---------------
Total interest-bearing liabilities 241,784 7,829 4.33
---------------- ----------------- ---------------
Noninterest-bearing demand deposits 36,918
Other liabilities 2,952
Shareholders' equity 30,086
----------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 311,740
================
NET INTEREST INCOME AND SPREAD $ 10,977 4.22 %
================= ===============
NET YIELD ON EARNING ASSETS 4.99 %
===============
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 1998 Versus 1997
----------------------------------------------------------
Interest Variance
due to (1)
-------------------------------------- Net
Volume Rate Change
----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 1,512 $ (61) $ 1,451
Investment securities (2):
Taxable income 10 (8) 2
Non-taxable income 131 (40) 91
Federal funds sold 68 3 71
----------------- ----------------- ----------------
Total earning assets 1,721 (106) 1,615
----------------- ----------------- ----------------
Cash and due from banks
Other assets, net
TOTAL ASSETS
INTEREST-BEARING LIABILITIES Interest-bearing deposits:
NOW accounts 45 (43) 2
Savings deposits (31) (13) (44)
Money market accounts 168 51 219
Certificates and other time deposits 496 45 541
Retail repurchase agreements 127 4 131
Federal funds purchased (15) 1 (14)
----------------- ----------------- ----------------
Total interest-bearing liabilities 790 45 835
----------------- ----------------- ----------------
Noninterest-bearing demand deposits
Other liabilities
Shareholders' equity
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
NET INTEREST INCOME AND SPREAD $ 931 $ (151) $ 780
================= ================= ================
NET YIELD ON EARNING ASSETS
</TABLE>
(1) The mix variance, not separately stated, has been proportionally
allocated to the volume and rate variances based on their absolute
dollar amount.
(2) Interest income and yields related to certain investment securities and
loans exempt from both federal and state income tax or from state income
tax alone are stated on a fully taxable equivalent basis, assuming a 34%
federal tax rate and applicable state tax rate, reduced by the
nondeductible portion of interest expense.
(3) Nonaccrual loans are included in the average loan balance. Loan fees and
the incremental direct costs associated with making loans are deferred
and subsequently recognized over the life of the loan as an adjustment
of interest income.
18
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Taxable Equivalent Basis, Dollars in Thousands)
1998
------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 224,134 $ 5,114 9.07 %
Investment securities (2):
Taxable income 74,626 1,290 6.92
Non-taxable income 20,096 393 7.81
Federal funds sold 3,875 54 5.57
-------------- --------------- ------------
Total earning assets 322,731 6,851 8.45
-------------- --------------- ------------
Cash and due from banks 10,561
Other assets, net 8,449
--------------
TOTAL ASSETS $ 341,741
==============
INTEREST-BEARING LIABILITIES Interest-bearing deposits:
NOW accounts $ 41,005 157 1.51
Savings deposits 27,023 151 2.22
Money market accounts 25,959 257 3.94
Certificates and other time deposits 162,675 2,243 5.47
Retail repurchase agreements 10,168 115 4.51
Federal funds purchased 125 2 5.95
-------------- --------------- ------------
Total interest-bearing liabilities 266,955 2,925 4.35
-------------- --------------- ------------
Noninterest-bearing demand deposits 36,966
Other liabilities 3,703
Shareholders' equity 34,117
--------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 341,741
==============
NET INTEREST INCOME AND SPREAD $ 3,926 4.10 %
=============== ============
NET YIELD ON EARNING ASSETS 4.85 %
============
<CAPTION>
1997
-----------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 208,472 $ 4,859 9.26 %
Investment securities (2):
Taxable income 70,150 1,233 7.03
Non-taxable income 17,640 355 8.04
Federal funds sold 1,900 27 5.60
-------------- -------------- ------------
Total earning assets 298,162 6,474 8.64
-------------- -------------- ------------
Cash and due from banks 9,863
Other assets, net 8,364
--------------
TOTAL ASSETS $ 316,389
==============
INTEREST-BEARING LIABILITIES Interest-bearing deposits:
NOW accounts $ 38,283 173 1.79
Savings deposits 29,294 171 2.32
Money market accounts 19,628 187 3.79
Certificates and other time deposits 150,393 2,069 5.46
Retail repurchase agreements 6,907 79 4.55
Federal funds purchased 960 14 5.76
-------------- -------------- ------------
Total interest-bearing liabilities 245,465 2,693 4.35
-------------- -------------- ------------
Noninterest-bearing demand deposits 36,818
Other liabilities 3,162
Shareholders' equity 30,944
--------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 316,389
==============
NET INTEREST INCOME AND SPREAD $ 3,781 4.29 %
============== ============
NET YIELD ON EARNING ASSETS 5.06 %
============
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 1998 Versus 1997
---------------------------------------------------
Interest Variance
due to (1)
------------------------------- Net
Volume Rate Change
------------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 356 $ (101) $ 255
Investment securities (2):
Taxable income 77 (20) 57
Non-taxable income 48 (10) 38
Federal funds sold 27 - 27
------------ --------------- -----------------
Total earning assets 508 (131) 377
------------ --------------- -----------------
Cash and due from banks
Other assets, net
TOTAL ASSETS
INTEREST-BEARING LIABILITIES Interest-bearing deposits:
NOW accounts 11 (27) (16)
Savings deposits (13) (7) (20)
Money market accounts 63 7 70
Certificates and other time deposits 170 4 174
Retail repurchase agreements 37 (1) 36
Federal funds purchased (12) - (12)
------------ --------------- -----------------
Total interest-bearing liabilities 256 (24) 232
------------ --------------- -----------------
Noninterest-bearing demand deposits
Other liabilities
Shareholders' equity
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
NET INTEREST INCOME AND SPREAD $ 252 $ (107) $ 145
============ =============== =================
NET YIELD ON EARNING ASSETS
</TABLE>
(1) The mix variance, not separately stated, has been proportionally
allocated to the volume and rate variances based on their absolute
dollar amount.
(2) Interest income and yields related to certain investment securities and
loans exempt from both federal and state income tax or from state income
tax alone are stated on a fully taxable equivalent basis, assuming a 34%
federal tax rate and applicable state tax rate, reduced by the
nondeductible portion of interest expense.
(3) Nonaccrual loans are included in the average loan balance. Loan fees and
the incremental direct costs associated with making loans are deferred
and subsequently recognized over the life of the loan as an adjustment
of interest income.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market 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 above in
Item 2 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the heading "Asset/Liability Management and Interest Rate
Sensitivity".
Management does not believe there has been any significant change in
the overall analysis of financial instruments considered market risk sensitive,
as measured by the factors of contractual maturities, average interest rates and
estimated fair values, since the analysis prepared and presented in conjunction
with the Form 10-K Annual Report for the fiscal year ended December 31, 1997.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibits to this report are listed in the index to exhibits on
pages 22 and 23 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FNB Corp.
(Registrant)
Date: November 13, 1998 By: /s/ Jerry A. Little
------------------------------
Jerry A. Little
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
21
<PAGE>
FNB CORP.
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3.10 Articles of Incorporation of the Registrant,
incorporated herein by reference to Exhibit
3.1 to the Registrant's Form S-14
Registration Statement (No. 2-96498) filed
June 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.
3.12 Articles of Amendment to Articles of
Incorporation of the Registrant, adopted May
12, 1998, incorporated herein by reference
to Exhibit 3.12 to the Registrant's Form
10-Q Quarterly Report for the quarter ended
June 30, 1998.
3.20 Amended and Restated Bylaws of the
Registrant, adopted May 21, 1998,
incorporated herein by reference to Exhibit
3.20 to the Registrant's Form 10-Q Quarterly
Report for the quarter ended June 30, 1998.
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.
22
<PAGE>
Exhibit No. Description of Exhibit
10.30 Copy of Stock Compensation Plan, as amended,
effective May 12, 1998, incorporated herein
by reference to Exhibit 10.30 the
Registrant's Form 10-Q Quarterly Report for
the quarter ended June 30, 1998.
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.
27.10 Financial Data Schedule for the nine months
ended September 30, 1998.
27.11 Restated Financial Data Schedule for the
nine months ended September 30, 1997.
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,745,633
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,838,675
<INVESTMENTS-CARRYING> 51,331,897
<INVESTMENTS-MARKET> 0
<LOANS> 226,293,855
<ALLOWANCE> 2,507,249
<TOTAL-ASSETS> 344,391,535
<DEPOSITS> 295,045,512
<SHORT-TERM> 10,964,301
<LIABILITIES-OTHER> 3,841,444
<LONG-TERM> 0
0
0
<COMMON> 9,130,378
<OTHER-SE> 25,409,900
<TOTAL-LIABILITIES-AND-EQUITY> 344,391,535
<INTEREST-LOAN> 15,308,904
<INTEREST-INVEST> 4,266,330
<INTEREST-OTHER> 162,063
<INTEREST-TOTAL> 19,737,297
<INTEREST-DEPOSIT> 8,331,823
<INTEREST-EXPENSE> 8,664,304
<INTEREST-INCOME-NET> 11,072,993
<LOAN-LOSSES> 330,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,138,007
<INCOME-PRETAX> 4,971,341
<INCOME-PRE-EXTRAORDINARY> 4,971,341
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,448,850
<EPS-PRIMARY> .95
<EPS-DILUTED> .91
<YIELD-ACTUAL> 4.62
<LOANS-NON> 606,000
<LOANS-PAST> 288,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,294,000
<CHARGE-OFFS> 255,000
<RECOVERIES> 138,000
<ALLOWANCE-CLOSE> 2,507,000
<ALLOWANCE-DOMESTIC> 2,228,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 279,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,331,035
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,643,623
<INVESTMENTS-CARRYING> 58,516,379
<INVESTMENTS-MARKET> 0
<LOANS> 211,501,710
<ALLOWANCE> 2,188,476
<TOTAL-ASSETS> 320,701,357
<DEPOSITS> 278,082,522
<SHORT-TERM> 8,171,864
<LIABILITIES-OTHER> 3,181,976
<LONG-TERM> 0
0
0
<COMMON> 4,542,133
<OTHER-SE> 26,722,862
<TOTAL-LIABILITIES-AND-EQUITY> 320,701,357
<INTEREST-LOAN> 13,853,084
<INTEREST-INVEST> 4,208,150
<INTEREST-OTHER> 90,609
<INTEREST-TOTAL> 18,151,843
<INTEREST-DEPOSIT> 7,613,564
<INTEREST-EXPENSE> 7,828,522
<INTEREST-INCOME-NET> 10,323,321
<LOAN-LOSSES> 470,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,382,543
<INCOME-PRETAX> 4,581,841
<INCOME-PRE-EXTRAORDINARY> 4,581,841
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,182,316
<EPS-PRIMARY> .88
<EPS-DILUTED> .86
<YIELD-ACTUAL> 4.69
<LOANS-NON> 47,000
<LOANS-PAST> 126,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,986,000
<CHARGE-OFFS> 386,000
<RECOVERIES> 119,000
<ALLOWANCE-CLOSE> 2,189,000
<ALLOWANCE-DOMESTIC> 2,029,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 160,000
</TABLE>
