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 March 31, 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 3,651,136 shares of $2.50 par value common stock outstanding
at May 13, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FNB Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
------------------------------------ December 31,
ASSETS 1998 1997 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Cash and due from banks $ 12,001,249 $ 11,279,668 $ 12,914,021
Federal funds sold 7,700,000 2,750,000 -
Investment securities:
Available for sale, at estimated fair value
(amortized cost of $37,172,371,
$27,622,493 and $34,997,094) 37,276,116 27,622,493 35,125,191
Held to maturity (estimated fair value of
$49,423,473, $57,975,089 and $52,234,241) 48,805,769 58,641,746 51,755,433
Loans 226,807,950 201,186,836 217,450,749
Less: Allowance for loan losses (2,374,454) (2,043,565) (2,293,495)
-------------- ---------------- ----------------
Net loans 224,433,496 199,143,271 215,157,254
-------------- ---------------- ----------------
Premises and equipment 6,020,155 6,244,892 6,129,335
Other assets 4,746,187 4,457,073 4,574,070
-------------- ----------------- ---------------
TOTAL ASSETS $ 340,982,972 $ 310,139,143 $ 325,655,304
=============== ================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 36,535,779 $ 40,122,540 $ 38,310,654
Interest-bearing deposits:
NOW, savings and money market deposits 95,380,330 85,675,779 88,779,811
Time deposits of $100,000 or more 58,809,090 45,303,090 52,915,324
Other time deposits 104,239,227 101,875,481 100,541,785
-------------- ----------------- ---------------
Total deposits 294,964,426 272,976,890 280,547,574
Retail repurchase agreements 9,441,323 4,564,338 7,436,625
Federal funds purchased - - 2,400,000
Other liabilities 3,858,345 3,177,499 3,369,747
-------------- ----------------- ---------------
TOTAL LIABILITIES 308,264,094 280,718,727 293,753,946
-------------- ----------------- ---------------
Shareholders' equity:
Preferred stock - $10.00 par value;
authorized 200,000 shares, none issued - - -
Common stock - $2.50 par value;
authorized 5,000,000 shares, issued
shares - 3,650,686, 1,811,104 and 1,819,825 9,126,715 4,527,760 4,549,563
Surplus - 323,452 527,627
Retained earnings 23,523,690 24,708,010 26,739,624
Accumulated other comprehensive income:
Net unrealized securities gains (losses) 68,473 (138,806) 84,544
-------------- ----------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 32,718,878 29,420,416 31,901,358
-------------- ----------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 340,982,972 $ 310,139,143 $ 325,655,304
=============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,074,452 $ 4,428,072
Interest and dividends on investment securities:
Taxable income 1,110,091 1,208,455
Non-taxable income 237,288 227,991
Federal funds sold 61,078 28,151
----------------- -----------------
Total interest income 6,482,909 5,892,669
----------------- -----------------
INTEREST EXPENSE:
Deposits 2,711,950 2,509,933
Retail repurchase agreements 95,614 44,305
Federal funds purchased 1,265 4,608
----------------- -----------------
Total interest expense 2,808,829 2,558,846
----------------- -----------------
NET INTEREST INCOME 3,674,080 3,333,823
Provision for loan losses 160,000 125,000
----------------- -----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,514,080 3,208,823
----------------- -----------------
OTHER OPERATING INCOME:
Service charges on deposit accounts 405,690 345,909
Annuity and brokerage commissions 44,267 91,227
Cardholder and merchant services income 77,394 86,390
Other service charges, commissions and fees 105,717 102,448
Other income 82,704 37,915
----------------- -----------------
Total other operating income 715,772 663,889
----------------- -----------------
OTHER OPERATING EXPENSE:
Personnel expense 1,348,495 1,256,366
Net occupancy expense 129,455 148,468
Furniture and equipment expense 217,619 194,964
Data processing services 304,879 274,665
Other expense 662,776 525,243
----------------- -----------------
Total other operating expense 2,663,224 2,399,706
----------------- -----------------
INCOME BEFORE INCOME TAXES 1,556,628 1,473,006
Income taxes 480,671 440,256
----------------- -----------------
NET INCOME $ 1,085,957 $ 1,032,750
================= =================
Net income per common share:
Basic $ .30 $ .29
Diluted .29 .28
================= =================
Weighted average number of shares outstanding:
Basic 3,644,339 3,617,550
Diluted 3,791,946 3,681,366
================= =================
Cash dividends declared per common share $ .10 $ .09
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
FNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,085,957 $ 1,032,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of premises and equipment 202,883 185,274
Provision for loan losses 160,000 125,000
Deferred income taxes (benefit) 86,597 (22,856)
Deferred loan fees and costs, net 80,023 114,199
Premium amortization and discount accretion
of investment securities, net (32,689) (20,569)
Amortization of intangibles 6,085 8,081
Net increase in loans held for sale (3,570,269) -
Increase in other assets (324,646) (162,300)
Increase in other liabilities 603,787 543,598
----------------- -----------------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES (1,702,272) 1,803,177
----------------- -----------------
INVESTING ACTIVITES:
Available-for-sale securities:
Proceeds from maturities and calls 8,094,944 10,781,594
Purchases (10,232,868) (9,721,940)
Held-to-maturity securities:
Proceeds from maturities and calls 7,802,250 2,749,844
Purchases (4,854,984) -
Net increase in loans (5,929,529) (6,113,931)
Proceeds from sales of premises and equipment 440 130
Purchases of premises and equipment (192,238) (139,695)
Other, net 49,395 16,357
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (5,262,590) (2,427,641)
----------------- -----------------
FINANCING ACTIVITIES:
Net increase in deposits 14,416,852 1,596,825
Increase in retail repurchase agreements 2,004,698 839,409
Decrease in federal funds purchased (2,400,000) (575,000)
Common stock issued 112,703 120,217
Cash dividends paid (382,163) (379,469)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,752,090 1,601,982
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,787,228 977,518
Cash and cash equivalents at beginning of period 12,914,021 13,052,150
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,701,249 $ 14,029,668
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,593,968 $ 2,383,737
Income taxes 65,300 24,500
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FNB Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FNB Corp. is a one-bank holding company whose wholly-owned subsidiary
is the First National Bank and Trust Company (the "Bank"). The Bank is
an independent community bank that offers full banking and trust
services to consumer and business customers primarily in the region of
North Carolina that includes Randolph, Montgomery and Chatham counties.
The accompanying consolidated financial statements, prepared without
audit, include the accounts of FNB Corp. and the Bank (collectively the
"Corporation"). All significant intercompany balances and transactions
have been eliminated.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
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
4
<PAGE>
the basic EPS computation is the same as the numerator of the diluted
EPS computation for all periods presented. A reconciliation of the
denominators of the basic and diluted EPS computations is as follows:
Three Months Ended
March 31,
--------------------------
1998 1997
--------- ---------
Basic EPS denominator - Weighted average
number of common shares outstanding 3,644,339 3,617,550
Dilutive share effect arising from assumed
exercise of stock options 147,607 63,816
---------- ---------
Diluted EPS denominator 3,791,946 3,681,366
========= =========
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 a Corporation 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 months ended March 31, 1998 and 1997
consisted of unrealized gains and losses on certain investments in debt
and equity securities. Comprehensive income for the three months ended
March 31, 1998 and 1997 amounted to $1,069,886 and $858,956,
respectively.
5. Loans as presented are reduced by net unearned income of $346,323,
$55,814, and $269,599 at March 31, 1998, March 31, 1997 and December
31, 1997, respectively.
6. Significant components of other expense were as follows:
Three Months Ended
March 31,
-------------------------
1998 1997
-------- --------
Advertising and marketing $120,554 $ 21,863
Stationery, printing and supplies 89,062 92,586
5
<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.
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.
6
<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 $1,085,957 in the first quarter of 1998, a 5.2%
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 $.29 to $.30 in
comparing these first quarter periods and diluted earnings per share increased
from $.28 to $.29. Total assets were $340,982,972 at March 31, 1998, up 9.9%
from March 31, 1997 and 4.7% from December 31, 1997. Loans amounted to
$226,807,950 at March 31, 1998, increasing 12.7% from March 31, 1997 and 4.3%
from December 31, 1997. Total deposits grew 8.1% from March 31, 1997 and 5.1%
from December 31, 1997 to $294,964,426 at March 31, 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.
EARNINGS REVIEW
The Corporation's net income increased $53,207 or 5.2% in the first
quarter of 1998 compared to the same period of 1997. Earnings were positively
impacted in the first quarter of 1998 by an increase in net interest income of
$340,257 or 10.2% and by a $51,883 increase in total other operating income.
These gains were significantly offset, however, by a $263,518 increase in total
other operating expense and by a $35,000 increase in the provision for loan
losses.
On an annualized basis, return on average assets decreased from 1.34%
in the first quarter of 1997 to 1.31% in the first quarter of 1998. Return on
average shareholders' equity decreased from 14.09% to 13.33% in comparing the
same periods.
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.
7
<PAGE>
Net interest income was $3,674,080 in the first quarter of 1998
compared to $3,333,823 in the same period of 1997. This increase of $340,257 or
10.2% resulted primarily from a 7.3% increase in the level of average earning
assets coupled with an improvement in the net yield on earning assets, or net
interest margin, from 4.92% in the first quarter of 1997 to 5.01% in the same
period of 1998. On a taxable equivalent basis, the increase in net interest
income in the first quarter of 1998 was $328,000, reflecting changes in the
relative mix of taxable and non-taxable earning assets.
Table 1 on page 14 sets forth for the periods indicated information
with respect to the Corporation's average balances of assets and liabilities, as
well as the total dollar amounts of interest income (taxable equivalent basis)
from earning assets and interest expense on interest-bearing liabilities,
resultant rates earned or paid, net interest income, net interest spread and net
yield on earning assets. Net interest spread refers to the difference between
the average yield on earning assets and the average rate paid on
interest-bearing liabilities. Net yield on earning assets, or net interest
margin, refers to net interest income divided by average earning assets and is
influenced by the level and relative mix of earning assets and interest-bearing
liabilities. Changes in net interest income on a taxable equivalent basis, as
measured by volume and rate variances, are also analyzed in Table 1. Volume
refers to the average dollar level of earning assets and interest-bearing
liabilities.
Changes in the net interest margin and net interest spread tend to
correlate with movements in the prime rate of interest. There are variations,
however, in the degree and timing of rate changes, compared to prime, for the
different types of earning assets and interest-bearing liabilities.
The prime rate of interest has been relatively stable in recent years
averaging 8.28% in 1996 and 8.44% in 1997. For the first quarter of 1998, the
average prime rate was 8.50% compared to 8.27% 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 first quarter periods, the net interest spread
increased by 9 basis points from 4.17% in 1997 to 4.26% in 1998, 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 17 basis points from
8.49% in 1997 to 8.66% in 1998, while the cost of funds increased by 8 basis
points from 4.32% to 4.40%.
PROVISION FOR LOAN LOSSES
This provision is the charge against earnings to provide an allowance
or reserve for possible future losses on loans. The amount of each period's
charge is affected by several considerations including management's evaluation
of various risk factors in determining the adequacy of the allowance (see "Asset
Quality"), actual loan loss experience and loan portfolio growth. Earnings were
negatively impacted in the first quarter of 1998 compared to the same period in
1997 by a $35,000 increase in the provision.
OTHER OPERATING INCOME
Total other operating income, or noninterest income, increased $51,883
or 7.8% in the first quarter of 1998 compared to the same period 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
8
<PAGE>
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 increases in trust revenues and in gains on loan sales.
OTHER OPERATING EXPENSE
Total other operating expense, or noninterest expense, was $263,518 or
11.0% higher in the first quarter of 1998 compared to the same period in 1997
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 $98,691 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 phrase "Yes You Can".
INCOME TAXES
The effective income tax rate increased from 29.9% in the first quarter
of 1997 to 30.9% in the same period of 1998 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 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.
9
<PAGE>
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 March 31,
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 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
March 31, 1998, FNB Corp. and the Bank had total capital ratios of 15.38% and
14.99%, respectively, and Tier I capital ratios of 14.33% and 13.94%.
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 March 31, 1998, FNB
Corp. and the Bank had leverage capital ratios of 9.88% and 9.61%, 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 March 31, 1998 and, accordingly, is well-capitalized under the regulatory
framework for prompt corrective action.
10
<PAGE>
BALANCE SHEET REVIEW
Total assets at March 31, 1998 were higher than at March 31, 1997 and
December 31, 1997 by $30,844,000 or 9.9% and $15,328,000 or 4.7%, respectively;
deposits were ahead by $21,987,000 or 8.1% and $14,416,000 or 5.1%. A portion of
the asset growth was funded by retail repurchase agreements, which had increased
at March 31, 1998 by $4,877,000 or 106.9% from March 31, 1997 and by $2,004,000
or 26.9% from December 31, 1997. Average assets increased $21,967,000 or 7.1% in
the first quarter of 1998 compared to the same period in 1997, while average
deposits increased $14,156,000 or 5.2% and average retail repurchase agreements
increased $4,238,000 or 99.6%.
INVESTMENT SECURITIES
Additions to the investment securities portfolio depend to a large
extent on the availability of investable funds that are not otherwise needed to
satisfy loan demand. During the twelve-month period ended March 31, 1998, there
was a net reduction in the level of investment securities of $182,000 or 0.2%,
with a similar reduction of $799,000 or 0.9% occurring in the 1998 first
quarter. 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 $25,621,000 or 12.7%
during the twelve-month period ended March 31, 1998. The net loan increase
during the first quarter of 1998 was $9,357,000 or 4.3%. Average loans were
$25,055,000 or 12.7% higher in the first quarter of 1998 than in the same period
of 1997. The ratio of average loans to average deposits, in comparing first
quarter periods, increased from 72.6% in 1997 to 77.8% in 1998. The ratio of
loans to deposits at March 31, 1998 was 76.9%.
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 $9,668,456 during the twelve-month period ended March 31, 1998.
Consequently, total consumer loans declined significantly during that period.
The commercial and agricultural loan portfolio and the 1-4 family residential
mortgage loan portfolio have each experienced strong gains during both the
twelve-month period ended March 31,1998 and the first quarter of 1998.
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.
11
<PAGE>
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 of $100,000 or more increased $13,506,000
during the twelve-month period ended March 31, 1998. Similarly, money market
accounts grew $5,775,000 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 $25,905,000, $21,504,000 and
$24,431,000 at March 31, 1998, March 31, 1997 and December 31, 1997,
respectively.
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 $7,591,349,
$17,259,805 and $9,674,229 at March 31, 1998, March 31, 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.
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.
12
<PAGE>
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, the majority of such cost
relating to computer equipment expected to be replaced in 1998 and 1999. Through
March 31, 1998, the cost related to year 2000 compliance was immaterial.
13
<PAGE>
TABLE 1
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Taxable Equivalent Basis, Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------
THREE MONTHS ENDED MARCH 31 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 (2) (3) $ 222,585 $ 5,080 9.23% $ 197,530 $ 4,441 9.09%
Investment securities (2):
Taxable income 65,806 1,187 7.22 73,533 1,294 7.04
Non-taxable income 18,926 369 7.80 17,345 356 8.20
Federal funds sold 4,446 61 5.57 2,171 28 5.26
----------- ------------ ------- ---------- ---------- -------
Total earning assets 311,763 6,697 8.66 290,579 6,119 8.49
----------- ------------ ------- ---------- ---------- -------
Cash and due from banks 10,380 9,752
Other assets, net 8,407 8,252
----------- ----------
TOTAL ASSETS $ 330,550 $ 308,583
=========== ==========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts $ 39,740 173 1.76 $ 36,318 157 1.76
Savings deposits 28,076 160 2.31 29,538 173 2.38
Money market accounts 23,051 221 3.89 17,837 146 3.31
Certificates and other time deposits 159,426 2,158 5.49 152,066 2,034 5.42
Retail repurchase agreements 8,494 96 4.57 4,256 44 4.22
Federal funds purchased 84 1 6.11 345 5 5.42
----------- ------------ ------- ---------- ---------- -------
Total interest-bearing liabilities 258,871 2,809 4.40 240,360 2,559 4.32
----------- ------------ ------- ---------- ---------- -------
Noninterest-bearing demand deposits 35,895 36,273
Other liabilities 3,206 2,628
Shareholders' equity 32,578 29,322
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 330,550 $ 308,583
=========== ==========
NET INTEREST INCOME AND SPREAD $ 3,888 4.26% $ 3,560 4.17%
============ ======= ========== =======
NET YIELD ON EARNING ASSETS 5.01% 4.92%
======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 Versus 1997
-------------------------------
THREE MONTHS ENDED MARCH 31 Interest Variance
due to (1)
-------------------- Net
Volume Rate Change
--------- -------- --------
<S> <C> <C> <C>
EARNING ASSETS
Loans (2) (3) $ 570 $ 69 $ 639
Investment securities (2):
Taxable income (139) 32 (107)
Non-taxable income 31 (18) 13
Federal funds sold 31 2 33
--------- -------- --------
Total earning assets 493 85 578
--------- -------- --------
Cash and due from banks
Other assets, net
TOTAL ASSETS
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts 16 - 16
Savings deposits (8) (5) (13)
Money market accounts 47 28 75
Certificates and other time deposits 98 26 124
Retail repurchase agreements 48 4 52
Federal funds purchased (5) 1 (4)
--------- -------- --------
Total interest-bearing liabilities 196 54 250
--------- -------- --------
Noninterest-bearing demand deposits
Other liabilities
Shareholders' equity
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
NET INTEREST INCOME AND SPREAD $ 297 $ 31 $ 328
========= ======== ========
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.
14
<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.
15
<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 17 and 18 of this report.
(b) Reports on Form 8-K.
During the quarter ended March 31, 1998, the Registrant filed
a Current Report on Form 8-K dated January 28, 1998, which reported under "Item
5" the termination by Home Savings Bank of Siler City, Inc., SSB ("Home
Savings") of a definitive agreement entered into on June 3, 1997 by the
Registrant and Home Savings, pursuant to which the Registrant intended to
acquire Home Savings. This matter is further discussed in Note 6 to Consolidated
Financial Statements.
------------------------------
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: May 13, 1998 By: /s/ Jerry A. Little
-------------------
Jerry A. Little
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
16
<PAGE>
FNB CORP.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
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.
3.20 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 the Registrant's Form
10-Q Quarterly Report for the quarter ended June 30, 1997.
17
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.31 Form of Incentive Stock Option Agreement between FNB Corp. and
certain of its key employees, pursuant to the Registrant's Stock
Compensation Plan, incorporated herein by reference to Exhibit 10.31
to the Registrant's Form 10-KSB Annual Report for the fiscal year ended
December 31, 1994.
10.32 Form of Nonqualified Stock Option Agreement between FNB Corp. and
certain of its directors, pursuant to the Registrant's Stock Compensation
Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant's
Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
10.40 Copy of 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 three months ended March 31, 1998.
27.11 Restated Financial Data Schedule for the three months ended March 31, 1997.
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form
10-Q for the quarterly period ended March 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,001,249
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,276,116
<INVESTMENTS-CARRYING> 48,805,769
<INVESTMENTS-MARKET> 0
<LOANS> 226,807,950
<ALLOWANCE> 2,374,454
<TOTAL-ASSETS> 340,982,972
<DEPOSITS> 294,964,426
<SHORT-TERM> 9,441,323
<LIABILITIES-OTHER> 3,858,345
<LONG-TERM> 0
0
0
<COMMON> 9,126,715
<OTHER-SE> 23,523,690
<TOTAL-LIABILITIES-AND-EQUITY> 340,982,972
<INTEREST-LOAN> 5,074,452
<INTEREST-INVEST> 1,347,379
<INTEREST-OTHER> 61,078
<INTEREST-TOTAL> 6,482,909
<INTEREST-DEPOSIT> 2,711,950
<INTEREST-EXPENSE> 2,808,829
<INTEREST-INCOME-NET> 3,674,080
<LOAN-LOSSES> 160,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,663,224
<INCOME-PRETAX> 1,556,628
<INCOME-PRE-EXTRAORDINARY> 1,556,628
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,085,957
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 4.73
<LOANS-NON> 80,000
<LOANS-PAST> 208,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,294,000
<CHARGE-OFFS> 129,000
<RECOVERIES> 50,000
<ALLOWANCE-CLOSE> 2,375,000
<ALLOWANCE-DOMESTIC> 2,135,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 240,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-Q for the quarterly period ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,279,668
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,750,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,622,493
<INVESTMENTS-CARRYING> 58,641,746
<INVESTMENTS-MARKET> 0
<LOANS> 201,186,836
<ALLOWANCE> 2,043,565
<TOTAL-ASSETS> 310,139,143
<DEPOSITS> 272,976,890
<SHORT-TERM> 4,564,338
<LIABILITIES-OTHER> 3,177,499
<LONG-TERM> 0
0
0
<COMMON> 4,527,760
<OTHER-SE> 24,892,656
<TOTAL-LIABILITIES-AND-EQUITY> 310,139,143
<INTEREST-LOAN> 4,428,072
<INTEREST-INVEST> 1,436,446
<INTEREST-OTHER> 28,151
<INTEREST-TOTAL> 5,892,669
<INTEREST-DEPOSIT> 2,509,933
<INTEREST-EXPENSE> 2,558,846
<INTEREST-INCOME-NET> 3,333,823
<LOAN-LOSSES> 125,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,399,706
<INCOME-PRETAX> 1,473,006
<INCOME-PRE-EXTRAORDINARY> 1,473,006
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,032,750
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 4.61
<LOANS-NON> 20,000
<LOANS-PAST> 221,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,986,000
<CHARGE-OFFS> 101,000
<RECOVERIES> 34,000
<ALLOWANCE-CLOSE> 2,044,000
<ALLOWANCE-DOMESTIC> 1,884,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 160,000
</TABLE>
