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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-13823
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FNB CORP.
(Exact name of Registrant as specified in its charter)
North Carolina 56-1456589
(State of incorporation) (I.R.S. Employer Identification No.)
101 Sunset Avenue, Asheboro, North Carolina 27203
(Address of principal executive offices)
(336) 626-8300
(Registrant's telephone number, including area code)
Securities pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 22, 2001, the Registrant had 5,065,942 shares of $2.50 par value
common stock outstanding. The aggregate market value of voting stock held by
nonaffiliates of the Registrant, assuming, without admission, that all directors
and officers of the Registrant may be deemed affiliates, was $56,730,000.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on May 8, 2001 are incorporated by reference in Part III
of this report.
CROSS REFERENCE INDEX
Page
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Part I Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable.
Part II Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2000
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for each of the years in the three-year
period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000
Notes to Consolidated Financial Statements
Quarterly Financial Data for 2000 and 1999
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
Page
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Part III Item 10 Directors and Executive Officers of the Registrant *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management *
Item 13 Certain Relationships and Related Transactions *
Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable.
(3) Exhibits have been filed separately with the Commission and
are available upon written request.
(b) Reports on Form 8-K (None were filed during the last
quarter of the period covered by this Form 10-K).
- -------------
* Information called for by Part III is incorporated herein by reference to
portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Shareholders, as follows:
Item 10 - See information that appears under the headings "Election of
Directors" and "Executive Officers".
Item 11 - See information that appears under the heading "Executive
Compensation".
Item 12 - See information that appears under the headings "Voting
Securities Outstanding and Principal Shareholders" and "Security
Ownership of Management".
Item 13 - See information that appears under the heading "Indebtedness
of Officers and Directors".
BUSINESS
General
FNB Corp. (the "Parent Company") is a bank holding company incorporated
under the laws of the State of North Carolina in 1984. On July 2, 1985, through
an exchange of stock, the Parent Company acquired its wholly-owned bank
subsidiary, First National Bank and Trust Company (the "Bank"), a national
banking association founded in 1907. The Parent Company and the Bank are
collectively referred to as the "Corporation".
The Bank, a full-service commercial bank, currently conducts all of its
operations in Chatham, Montgomery, Moore, Randolph, Richmond and Scotland
counties in North Carolina. Four offices, including the main office, are located
in Asheboro. Additional community offices are located in Archdale (two offices),
Biscoe, Ellerbe, Laurinburg, Ramseur, Randleman, Rockingham (two offices),
Seagrove, Siler City, Southern Pines and Trinity. Some of the major banking
services offered include regular checking accounts, interest checking accounts
(including package account versions that offer a variety of products and
services), money market accounts, savings accounts, certificates of deposit,
holiday club accounts, individual retirement accounts, debit cards, credit cards
and loans, both secured and unsecured, for business, agricultural and personal
use. Other services offered include internet banking, cash management,
investment and trust services. The Bank also has automated teller machines and
is a member of Plus, a national teller machine network, and Star, a regional
network.
On April 10, 2000, the Corporation completed a merger for the
acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for
Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in
Rockingham, North Carolina, in a transaction accounted for as a pooling of
interests. Pursuant to the terms of the merger, each share of Carolina Fincorp
common stock was converted into .79 of a share of FNB Corp. common stock, for a
total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings
was merged into First National Bank and Trust Company. At March 31, 2000,
Carolina Fincorp operated five offices through Richmond Savings and had
approximately $125,943,000 in total assets, $108,848,000 in deposits and
$16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were
recorded in the second quarter of 2000. Upon the change in control, the Carolina
Fincorp ESOP plan terminated according to its terms and unvested MRP shares
became fully vested. Included in merger-related expenses were $385,000 of
expense related to the termination of these plans. Additionally, approximately
$450,000 of the total provision for loan losses of $835,000 in the second
quarter was related to aligning the credit risk methodologies of FNB Corp. and
Carolina Fincorp. Historical financial information included in the consolidated
financial statements has been restated to include the account balances and
results of operations of Carolina Fincorp.
In connection with the merger of the Bank with Richmond Savings, the
Bank acquired a financial subsidiary, Richmond Investment Services, Inc., which
changed its name after the acquisition to First National Investor Services, Inc.
This financial subsidiary acts as an agent in the sale of annuities, Medicare
and Medicaid supplements, and major medical and life insurance policies. It also
provides investment brokerage services.
Prior to March 26, 1999, the Bank's data processing, item capture and
statement rendering operations were outsourced under a service bureau
arrangement. Commencing in the 1998 fourth quarter, the Bank began the process
of converting these operations to an in-house basis. Conversion to the
replacement systems occurred on March 26, 1999. Richmond Savings, however, was
on a service bureau arrangement until its merger into the Bank on June 26, 2000.
The total capital expenditure outlay for hardware and software amounted to
approximately $1,700,000, of which approximately one-half was
recorded in 1998 and the remainder in 1999. In addition to capital expenditures
for the new system, the Bank incurred certain expenses in 1998, totaling
approximately $302,000, related to deconversion from the prior arrangement.
In the 1998 fourth quarter, the Bank received regulatory approval for
establishment of a new branch office in Trinity, North Carolina. Construction of
the permanent Trinity facility is expected to be complete in 2001, resulting in
a total capital outlay of approximately $1,000,000, of which approximately
one-third was recorded in 1998 related to the purchase of land. Prior to
completion of the permanent facility, a temporary mobile office, which opened in
August 1999, is being operated at this site.
In the 2000 fourth quarter, management adopted a balance sheet
restructuring project to reduce the level of lower yielding, 1-4 family
residential mortgage loans by selling those loans and redeploying the funds in
other types of assets, including specific purchases of bank owned life insurance
and a more general redeployment to other loan programs and investment
securities. 1-4 family residential mortgage loans totaling $20,938,000 were
transferred to loans held for sale, and of that amount, $12,199,000 were sold in
2000 and the remainder were sold in the first quarter of 2001. In December 2000,
single premium purchases of life insurance amounting to $10,000,000 were
recorded as bank owned life insurance in other assets on the consolidated
balance sheet. Income relating to the cash surrender value of the bank owned
life insurance will be recorded as noninterest income, while the loans sold had
generated interest income. The effective reduction of interest income will tend
to lower the net yield on earning assets and net interest spread in future
periods. Management believes that the income resulting from the bank owned life
insurance, which is not subject to income tax, will produce a greater
contribution to net income than did the income from the loans sold.
Competition
The commercial banking industry within the Bank's marketing area is
extremely competitive. The Bank faces direct competition in Chatham, Montgomery,
Moore, Randolph, Richmond and Scotland counties from approximately twenty-one
different financial institutions, including commercial banks, savings
institutions and credit unions. Although none of these entities is dominant, the
Bank considers itself one of the major financial institutions in the area in
terms of total assets and deposits. Further competition is provided by banks
located in adjoining counties, as well as other types of financial institutions
such as insurance companies, finance companies, pension funds and brokerage
houses and other money funds. The principal methods of competing in the
commercial banking industry are improving customer service through the quality
and range of services provided, improving cost efficiencies and pricing services
competitively.
Supervision and Regulation
The following discussion sets forth a summary of some of the material
statutes and regulations applicable to FNB and its subsidiaries. Further
information is provided under the heading "Capital Adequacy" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.
The summaries do not purport to be comprehensive. The regulatory framework is
intended primarily for the protection of depositors and not for the protection
of security holders.
The Parent Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered
as such with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). A bank holding company is required to file with the Federal
Reserve Board annual reports and other information regarding its
business operations and those of its subsidiaries. It is also subject to
examination by the Federal Reserve Board and is required to obtain Federal
Reserve Board approval prior to acquiring, direct or indirect ownership or
control of more than five percent of the voting shares of any bank; acquiring
all or substantially all of the assets of any bank; or merging or consolidating
with any other bank holding company. In addition, the BHC Act prohibits a bank
holding company that does not qualify as a financial holding company under the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLB Act"), as
more fully discussed below, from engaging in activities other than banking,
managing, or controlling banks or other permissible subsidiaries; and acquiring
or retaining direct or indirect control of any company engaged in any activities
determined by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
In determining whether a particular activity is permissible, the
Federal Reserve Board considers whether the performance of such an activity
reasonably can be expected to produce benefits to the public that outweigh
possible adverse effects. Possible benefits the Federal Reserve Board considers
include greater convenience, increased competition, or gains in efficiency.
Possible adverse effects include undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices.
Activities that the Federal Reserve Board has permitted for bank holding
companies include: (1) making, acquiring or servicing loans or other extensions
of credit such as consumer finance, credit card, mortgage, commercial finance
and factoring companies would make; (2) acting as an investment or financial
advisor; (3) leasing real or personal property or acting as agent, broker, or
advisor in leasing such property if the lease is to serve as the functional
equivalent of an extension of credit to the lessee of the property and certain
other conditions are met; (4) providing bookkeeping or data processing services
under certain circumstances; (5) acting as an insurance agent or broker with
respect to insurance that is directly related to the extension of credit with
other financial services; (6) acting as an underwriter for credit life insurance
and credit accident and health insurance directly related to extensions of
credit by the holding company system; and (7) providing securities brokerage
services and related securities credit activities.
As a national banking association, the Bank is subject to regulatory
supervision, of which regular bank examinations by the Comptroller of the
Currency are a part. The Bank is a member of the Federal Deposit Insurance
Corporation (the "FDIC"), which currently insures the deposits of each member
bank to a maximum of $100,000 per depositor. For this protection, each bank pays
a quarterly statutory assessment and is subject to the rules and regulations of
the FDIC. The Bank is also a member of the Federal Reserve System and is
therefore subject to the applicable provisions of the Federal Reserve Act, which
imposes restrictions on loans by subsidiary banks to a holding company and its
other subsidiaries and on the use of stock or securities as collateral security
for loans by subsidiary banks to any borrower.
The GLB Act, signed into law in November 1999, establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. The GLB Act
allows bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range of
nonbanking activities than was permissible prior to enactment, including
insurance underwriting and making merchant banking investments in commercial and
financial companies; allows insurers and other financial services companies to
acquire banks; removes various restrictions that applied to bank holding
ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations. The act also
broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries and
provides an enhanced framework for protecting the privacy of consumer
information. In addition and in a change from prior law, bank
holding companies will be in a position to be owned, controlled or acquired by
any company engaged in financially related activities.
The ability of the Parent Company to pay dividends depends to a large
extent upon the amount of dividends the Bank pays to the Parent Company.
Approval of the Comptroller of the Currency, or his designate, will be required
for any dividend to the Parent Company by the Bank if the total of all
dividends, including any proposed dividend, declared by the Bank in any calendar
year exceeds the total of its net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus or a fund for the retirement of any preferred stock.
Effect of Governmental Policies
The operations and earnings of the Bank and, therefore, of the Parent
Company are affected by legislative changes and by the policies of various
regulatory agencies. In particular, the Bank is affected by the monetary and
fiscal policies of the Federal Reserve Board. The instruments of monetary policy
used by the Federal Reserve Board include its open market operations in U.S.
Government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements on member bank deposits. The actions of the
Federal Reserve Board influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans or paid on deposits.
Employees
As of December 31, 2000, the Parent Company had three officers, all of
whom were also officers of the Bank. On that same date, the Bank had 187
full-time employees and 23 part-time employees. The Bank considers its
relationship with its employees to be excellent. The Bank provides employee
benefit programs, including a noncontributory defined benefit pension plan,
matching retirement/savings (401(k)) plan, group life, health and dental
insurance, paid vacations, sick leave, and health care and life insurance
benefits for retired employees.
Properties
The main offices of the Bank and the principal executive offices of the
Parent Company are located in an office building at 101 Sunset Avenue, Asheboro,
North Carolina. The premises contain approximately 36,500 square feet of office
space. The Bank also has other community offices in Asheboro (three offices),
Archdale (two offices), Biscoe, Ellerbe, Laurinburg, Ramseur, Randleman,
Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity,
North Carolina. Except as noted below, all premises are owned by the Bank in
fee. The Randolph Mall office in Asheboro is under a lease expiring January 31,
2002. The Bush Hill office in Archdale is under a lease expiring January 31,
2002, with lease renewal options for up to an additional 20-year term. The
Laurinburg office is under a lease expiring February 28, 2002. The land on which
the Seagrove office is situated is under a lease expiring June 30, 2016. At that
time, the land is subject to a purchase option at a fixed price or lease renewal
options for up to an additional 30-year term.
FNB CORP. AND SUBSIDIARY
FIVE YEAR FINANCIAL HISTORY (1)
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Summary of Operations
Interest income $ 41,936 $ 35,822 $ 35,111 $ 32,242 $ 29,142
Interest expense 20,908 16,203 15,713 14,463 13,561
-------- -------- -------- -------- --------
Net interest income 21,028 19,619 19,398 17,779 15,581
Provision for loan losses 1,802 511 482 670 526
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 19,226 19,108 18,916 17,109 15,055
Noninterest income 4,501 4,068 3,756 3,346 2,918
Noninterest expense 18,497 15,082 14,473 13,382 11,570
-------- -------- -------- -------- --------
Income before income taxes 5,230 8,094 8,199 7,073 6,403
Income taxes 1,714 2,504 2,568 2,220 1,975
-------- -------- -------- -------- --------
Net income $ 3,516 $ 5,590 $ 5,631 $ 4,853 $ 4,428
======== ======== ======== ======== ========
Per Share Data (2,3)
Net income:
Basic $ .70 $ 1.11 $ 1.12 $ 1.08 $ 1.23
Diluted .69 1.09 1.09 1.07 1.22
Cash dividends declared (4) .51 .51 .45 .38 .33
Book value 10.89 10.13 9.76 11.24 10.35
Balance Sheet Information
Total assets $565,639 $517,468 $472,188 $437,743 $401,909
Investment securities 132,384 119,786 121,471 112,278 107,412
Loans 395,737 360,840 314,839 296,525 264,020
Deposits 472,448 427,010 400,218 365,349 356,230
Shareholders' equity 55,122 52,068 50,390 57,349 37,408
Ratios (Averages)
Return on assets .65% 1.15% 1.23% 1.16% 1.15%
Return on shareholders' equity 6.59 10.85 9.55 9.78 12.34
Shareholders' equity to assets 9.86 10.57 12.88 11.86 9.34
Dividend payout ratio 76.05 40.88 36.71 29.86 26.87
Loans to deposits 84.79 80.63 80.36 77.71 75.93
Net yield on earning assets,
taxable equivalent basis 4.28 4.48 4.71 4.72 4.52
- -----------------
(1) Financial data for all periods has been restated to reflect the merger with
Carolina Fincorp, Inc., which became effective on April 10, 2000 and was
accounted for as a pooling of interests.
(2) All per share data has been retroactively adjusted to reflect the FNB Corp.
two-for-one stock split effected in the form of a 100% stock dividend paid
in the first quarter of 1998.
(3) FNB Corp. historical shares were used for 1996 as Carolina Fincorp, Inc.
had no shares outstanding.
(4) Cash dividends declared represent FNB Corp. historical cash dividends
declared.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The purpose of this discussion and analysis is to assist in the
understanding and evaluation of the financial condition, changes in financial
condition and results of operations of FNB Corp. (the "Parent Company") and its
wholly-owned subsidiary, First National Bank and Trust Company (the "Bank"),
collectively referred to as the "Corporation". This discussion should be read in
conjunction with the consolidated financial statements and supplemental
financial information appearing elsewhere in this report.
Overview
On April 10, 2000, the Corporation completed a merger for the
acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for
Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in
Rockingham, North Carolina, in a transaction accounted for as a pooling of
interests. Pursuant to the terms of the merger, each share of Carolina Fincorp
common stock was converted into .79 of a share of FNB Corp. common stock, for a
total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings
was merged into First National Bank and Trust Company. At March 31, 2000,
Carolina Fincorp operated five offices through Richmond Savings and had
approximately $125,943,000 in total assets, $108,848,000 in deposits and
$16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were
recorded in the second quarter of 2000. Upon the change in control, the Carolina
Fincorp ESOP plan terminated according to its terms and unvested MRP shares
became fully vested. Included in merger-related expenses were $385,000 of
expense related to the termination of these plans. Additionally, approximately
$450,000 of the total provision for loan losses of $835,000 in the second
quarter was related to aligning the credit risk methodologies of FNB Corp. and
Carolina Fincorp. Historical financial information included in the consolidated
financial statements has been restated to include the account balances and
results of operations of Carolina Fincorp.
The Corporation earned $3,516,000 in 2000, a 37.1% decrease in net
income from 1999. Basic earnings per share decreased from $1.11 in 1999 to $.70
in 2000 and diluted earnings per share decreased from $1.09 to $.69. Total
assets were $565,639,000 at December 31, 2000, up 9.3% from year-end 1999. Loans
amounted to $395,737,000 at December 31, 2000, up 9.7% from the prior year.
Total deposits grew 10.6% to $472,448,000 in 2000.
Excluding $2,338,000 in after-tax charges associated with the merger,
which includes the $450,000 provision for loan losses discussed above, net
income for 2000 amounted to $5,854,000, a 4.7% increase over 1999, with basic
and diluted earnings per share amounts of $1.16 and $1.15, respectively.
Earnings Review
After exclusion of after-tax, merger-related charges of $2,338,000
recorded in the second quarter of 2000 and associated with the merger with
Carolina Fincorp as discussed in the "Overview", the Corporation's net income
increased $264,000 in 2000, up 4.7% over 1999. Earnings were positively impacted
in 2000 by increases of $1,409,000 or 7.2% in net interest income and $433,000
in noninterest income. These gains were significantly offset, however, by an
increase of $619,000 in noninterest expense and by an increase of $841,000 in
the provision for loan losses, excluding merger-related charges. Results for
2000 were negatively affected by a special group medical insurance assessment of
$176,000 recorded in the second quarter, the effect of which was only partially
offset by a $76,000 gain on the sale of an investment recorded in the same
quarter.
The Corporation's net income decreased $41,000 in 1999, down 0.7% from
1998. Earnings were positively impacted in 1999 by increases of $221,000 or 1.1%
in net interest income and $312,000 in noninterest income. These gains were more
than offset, however, by an increase of $609,000 in noninterest expense and by
an increase of $29,000 in the provision for loan losses. Special noninterest
expense charges, relating to a major data processing conversion, significantly
affected the 1998 fourth quarter operating results,
such charges amounting to $302,000 during that period, and to a lesser extent
affected the 1999 operating results, especially in the first quarter.
Excluding the merger-related charges, return on average assets declined
from 1.23% in 1998 to 1.15% in 1999 to 1.08% in 2000. Return on average
shareholders' equity improved from 9.55% in 1988 to 10.85% in 1999 to 10.97% in
2000. Including the effect of the merger-related charges, return on average
assets was .65% in 2000 and return on average shareholders' equity was 6.59%.
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 $21,028,000 in 2000 compared to $19,619,000 in
1999. The increase of $1,409,000 or 7.2% resulted primarily from a 11.7%
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 4.48% in 1999 to 4.28% in 2000. In 1999, there was a
$221,000 or 1.1% increase in net interest income reflecting a 6.5% increase in
average earning assets, the effect of which was largely offset by a decline in
the net interest margin from 4.71% in 1998. On a taxable equivalent basis, the
increases in net interest income in 2000 and 1999 were $1,377,000 and $271,000,
respectively, reflecting changes in the relative mix of taxable and non-taxable
earning assets in each year.
Table 1 sets forth for the periods indicated information with respect
to the Corporation's average balances of assets and liabilities, as well as the
total dollar amounts of interest income (taxable equivalent basis) from earning
assets and interest expense on interest-bearing liabilities, resultant rates
earned or paid, net interest income, net interest spread and net yield on
earning assets. Net interest spread refers to the difference between the average
yield on earning assets and the average rate paid on interest-bearing
liabilities. Net yield on earning assets, or net interest margin, refers to net
interest income divided by average earning assets and is influenced by the level
and relative mix of earning assets and interest-bearing liabilities.
Table 1
Average Balances and Net Interest Income Analysis
2000 1999
-------------------------------------- --------------------------------------
Average Interest Average Rates Average Interest Average Rates
Balance Income/Expense Earned/Paid Balance Income/Expense Earned/Paid
------- -------------- ----------- ------- -------------- -----------
(taxable equivalent basis, dollars in thousands)
EARNING ASSETS
Loans (1) (2) $385,299 $ 34,296 8.88% $328,450 $ 28,016 8.53%
Investment securities (1):
Taxable income 103,636 6,772 6.53 104,438 6,893 6.60
Non-taxable income 19,684 1,508 7.66 19,832 1,537 7.75
Other earning assets 6,296 383 6.06 8,446 431 5.10
------- ------ ---- ------- ------ ----
Total earning assets 514,915 42,959 8.33 461,166 36,877 8.00
------- ------ ---- ------- ------ ----
Cash and due from banks 13,955 14,371
Other assets, net 11,968 11,895
-------- --------
TOTAL ASSETS $540,838 $487,432
======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand deposits $ 57,332 907 1.58 $ 55,129 826 1.50
Savings deposits 35,844 827 2.30 37,571 849 2.26
Money market deposits 34,798 1,463 4.19 31,839 1,154 3.62
Certificates and other time deposits 279,586 16,304 5.82 239,289 12,354 5.16
Retail repurchase agreements 11,091 516 4.64 12,971 501 3.87
Federal Home Loan Bank advances 15,178 819 5.38 8,567 433 5.05
Other borrowed funds 1,112 72 6.47 1,616 86 5.30
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities 434,941 20,908 4.79 386,982 16,203 4.19
------- ------ ---- ------- ------ ----
Noninterest-bearing demand deposits 46,859 43,546
Other liabilities 5,692 5,360
Shareholders' equity 53,346 51,544
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $540,838 $487,432
======== ========
NET INTEREST INCOME AND SPREAD $ 22,051 3.54% $ 20,674 3.81%
======== ==== ======== ====
NET YIELD ON EARNING ASSETS 4.28% 4.48%
==== ====
1998
-------------------------------------
Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
EARNING ASSETS
Loans (1) (2) $307,613 $ 27,375 8.90%
Investment securities (1):
Taxable income 98,090 6,780 6.91
Non-taxable income 19,780 1,546 7.82
Other earning assets 7,381 415 5.62
------- ------ ----
Total earning assets 432,864 36,116 8.34
------- ------ ----
Cash and due from banks 13,200
Other assets, net 11,938
--------
TOTAL ASSETS $458,002
========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand deposits $ 51,179 894 1.75
Savings deposits 38,595 944 2.44
Money market deposits 25,430 977 3.84
Certificates and other time deposits 226,914 12,411 5.47
Retail repurchase agreements 10,169 444 4.37
Federal Home Loan Bank advances -- -- --
Other borrowed funds 742 43 5.80
------- ------ ----
Total interest-bearing liabilities 353,029 15,713 4.45
------- ------ ----
Noninterest-bearing demand deposits 40,697
Other liabilities 5,304
Shareholders' equity 58,972
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $458,002
========
NET INTEREST INCOME AND SPREAD $ 20,403 3.89%
======== ====
NET YIELD ON EARNING ASSETS 4.71%
====
(1) Interest income and yields related to certain investment securities and
loans exempt from both federal and state income tax or from state income
tax alone are stated on a fully taxable equivalent basis, assuming a 34%
federal tax rate and applicable state tax rate, reduced by the
nondeductible portion of interest expense.
(2) Nonaccrual loans are included in the average loan balance. Loan fees and
the incremental direct costs associated with making loans are deferred and
subsequently recognized over the life of the loan as an adjustment of
interest income.
Changes in the net interest margin and net interest spread tend to
correlate with movements in the prime rate of interest. There are variations,
however, in the degree and timing of rate changes, compared to prime, for the
different types of earning assets and interest-bearing liabilities.
The average prime rate of interest has remained in a fairly narrow band
in recent years, amounting to 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998,
respectively. This situation has tended to create a degree of stability in the
interest rates both earned and paid by the Bank. Nonetheless, the actual level
of the prime rate has changed with some frequency as the Federal Reserve has
responded to various economic scenarios. After remaining unchanged in the first
three quarters of 1998, a significant change occurred in the level of the prime
rate during the last three months of that year when the Federal Reserve took
action in response to the downturn of the economies of certain Asian and Latin
American countries and the effects or potential effects of those downturns on
the U.S. economy. In rapid succession, three 25 basis point cuts were recorded
in the prime rate, lowering it from 8.50% to 7.75%. This decrease in the prime
rate, through the effect on the average yield on total earning assets, tended to
negatively impact the Corporation's net interest margin and net interest spread.
Due to subsequent concern about inflationary pressures that appeared to
be building in the U. S. economy, the Federal Reserve elected to raise the level
of interest rates in the third and fourth quarters of 1999, resulting in three
25 basis point increases in the prime rate that raised it from 7.75% to 8.50%,
thereby effectively reversing the rate reductions that had occurred in 1998.
Continued concerns about possible inflationary pressures caused the Federal
Reserve to further raise the level of interest rates in the first six months of
2000, resulting in two additional 25 basis point increases and one 50 basis
point increase in the prime rate that raised it to the 9.50% level. While the
Corporation has tended to see some improvement in the average total yield on
earning assets due to the prime rate increases, the average rate paid on
interest-bearing liabilities has increased by a greater amount, which has
further negatively impacted the net interest margin and net interest spread.
In 2000, the net interest spread declined by 27 basis points from 3.81%
in 1999 to 3.54% in 2000, reflecting the effect of an increase in the average
total yield on earning assets that was more than offset by an increase in the
average rate paid on interest-bearing liabilities, or cost of funds. The yield
on earning assets increased by 33 basis points from 8.00% in 1999 to 8.33% in
2000, while the cost of funds increased by 60 basis points in moving from 4.19%
to 4.79%. In 1999, the 8 basis points decrease in net interest spread resulted
from a 34 basis points decrease in the yield on earning assets as partially
offset by a 26 basis points decrease in the cost of funds.
The 2000 and 1999 changes in net interest income on a taxable
equivalent basis, as measured by volume and rate variances, are analyzed in
Table 2. Volume refers to the average dollar level of earning assets and
interest-bearing liabilities.
Table 2
Volume and Rate Variance Analysis
2000 Versus 1999 1999 Versus 1998
----------------------------- --------------------------------
Variance due to(1) Variance due to(1)
------------------ ------------------
Volume Rate Net Change Volume Rate Net Change
------- ------- ---------- ------- ------- ----------
(taxable equivalent basis, in thousands)
Interest Income
Loans (2) $ 5,077 $ 1,203 $ 6,280 $ 1,807 $(1,166) $ 641
Investment securities (2):
Taxable income (51) (70) (121) 426 (313) 113
Non-taxable income (11) (18) (29) 4 (13) (9)
Other earning assets (121) 73 (48) 57 (41) 16
------- ------- ------- ------- ------- -------
Total interest income 4,894 1,188 6,082 2,294 (1,533) 761
------- ------- ------- ------- ------- -------
Interest Expense
Interest-bearing deposits:
Demand deposits 35 46 81 66 (134) (68)
Savings deposits (38) 16 (22) (25) (70) (95)
Money market deposits 115 194 309 235 (58) 177
Certificates and other time deposits 2,245 1,705 3,950 662 (719) (57)
Retail repurchase agreements (78) 93 15 112 (55) 57
Federal Home Loan Bank advances 356 30 386 433 -- 433
Other borrowed funds (30) 16 (14) 47 (4) 43
------- ------- ------- ------- ------- -------
Total interest expense 2,605 2,100 4,705 1,530 (1,040) 490
------- ------- ------- ------- ------- -------
Net Interest Income $ 2,289 $ (912) $ 1,377 $ 764 $ (493) $ 271
======= ======= ======= ======= ======= =======
(1) The mix variance, not separately stated, has been proportionally allocated
to the volume and rate variances based on their absolute dollar amount.
(2) Interest income related to certain investment securities and loans exempt
from both federal and state income tax or from state income tax alone is
stated on a fully taxable equivalent basis, assuming a 34% federal tax rate
and applicable state tax rate, reduced by the nondeductible portion of
interest expense.
Provision for Loan Losses
This provision is the charge against earnings to provide an allowance
or reserve for probable losses inherent in the loan portfolio. The amount of
each year's charge is affected by several considerations including management's
evaluation of various risk factors in determining the adequacy of the allowance
(see "Asset Quality"), actual loan loss experience and loan portfolio growth.
Earnings were negatively impacted in 2000 by a $1,802,000 provision for loan
losses compared to a $511,000 provision in 1999. Of the total 2000 provision,
$835,000 was recorded in the second quarter, which amount included approximately
$450,000 that was merger related as discussed below, while the remainder
resulted from additional loan writedowns and charge-offs taken in the same
quarter. The additional increase in the provision for 2000 was due to continued
loan growth, higher loan losses and uncertain economic conditions.
The allowance for loan losses, as a percentage of loans outstanding and
reflecting the restatement of historical information for the merger, amounted to
1.13% at December 31, 2000, .91% at December 31, 1999 and .95% at December 31,
1998. The increase in the allowance percentage from December 31, 1999 to
December 31, 2000 resulted largely from the provision component of approximately
$450,000 for the second quarter of 2000 to align the credit risk methodologies
of FNB Corp. and Carolina Fincorp.
Noninterest Income
Noninterest income increased $433,000 or 10.6% in 2000 and $312,000 or
8.3% in 1999, reflecting in part the general increase in the volume of business.
The increase in service charges on deposit accounts in 2000 was primarily due to
improved fee collection efforts in 2000, but also reflected the implementation
for a full year of the selected increases in service charge rates that became
effective in the 1999 first quarter. The 1999 increase in service charges on
deposit accounts primarily reflected the rate increases that became effective in
the 1999 first quarter. The decrease in annuity and brokerage commissions in
2000 related to a general decrease in both sales of annuity products and the
volume of brokerage services, while the opposite was true in 1999 when such
commissions increased. Other income was impacted in 2000 by a $76,000 gain on
the sale of an investment.
Noninterest Expense
Excluding merger-related expenses of $2,796,000 recorded in the second
quarter of 2000, noninterest expense was $619,000 or 4.1% higher in 2000 due
largely to increased personnel expense and the continuing effects of inflation.
The level of noninterest expense was further affected by the opening of a new
branch office in August 1999 (see "Business Development Matters"). The
components of noninterest expense were affected by the major data processing
conversion completed in the first quarter of 1999, which conversion ultimately
resulted in a major reduction in the cost of data processing services provided
by outside processors. The cost of outside data processing services continued
for Richmond Savings until its merger into First National Bank and Trust Company
on June 26, 2000. Personnel expense was impacted by increased staffing
requirements, especially as related to the data processing conversion and to the
opening of the new branch office, and by normal salary adjustments. Personnel
expense was further negatively affected in 2000 by a special group medical
insurance assessment of $176,000 in the second quarter. Additionally, group
medical insurance rates were increased approximately 39% in the 2000 second
quarter. Furniture and equipment expense increased largely as a result of the
data processing conversion, especially for depreciation and maintenance charges.
The major data processing conversion from a service bureau arrangement
to an in-house basis, completed on March 26, 1999 and discussed in "Business
Development Matters", significantly affected operating results for the 1999
first quarter. The cost of data processing services in the 1999 first quarter
was impacted by the higher rate charged by the service bureau on a
month-to-month basis, subsequent to the termination of the prior long-term
agreement in late 1998. Also, personnel expense was negatively affected by the
staffing and training requirements that were preliminary to the implementation
of the new system.
Subsequent to the 1999 first quarter, the total cost related to data
processing operations on an in-house basis compares favorably to the cost that
was being experienced under the service bureau arrangement prior to the start of
the conversion
process in the 1998 fourth quarter. Noninterest expense components are being
significantly affected, however, as there is a major decrease in the direct cost
of data processing services, but increases in the levels of personnel expense
and furniture and equipment expense.
Noninterest expense was $609,000 or 4.2% higher in 1999 due largely to
increased personnel expense, the effect of a major data processing conversion
(as discussed above) and the continuing effects of inflation. The level of
noninterest expense was further affected by the opening of a new branch office
in August 1999, as noted above. Personnel expense was impacted by increased
staffing requirements, especially as related to the data processing conversion
and the opening of the new branch office, and by normal salary adjustments. Net
occupancy expense was affected by increased maintenance charges. Furniture and
equipment expense increased largely as a result of the data processing
conversion, especially for depreciation charges.
Merger-Related Expenses and Charges
In connection with the merger acquisition of Carolina Fincorp,
merger-related expenses of $2,796,000 were recorded in the second quarter of
2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated
according to its terms and unvested restricted stock plan shares became fully
vested, resulting in certain expenses considered merger-related. Other primary
components of merger-related expenses were professional fees, investment banking
fees, contract termination costs, data processing conversion fees and severance
payments. Additionally, approximately $450,000 of the total provision for loan
losses of $835,000 in the second quarter was related to aligning the credit risk
methodologies of FNB Corp. and Carolina Fincorp. The primary components of
merger-related expenses are summarized in Table 3.
- --------------------------------------------------------------------------------
Table 3
Merger-Related Expenses
2000
----
(in thousands)
Professional fees $ 569
Investment banking fees 558
Contract termination costs 467
ESOP and restricted stock
plan termination costs 385
Data processing conversion fees 209
Severance payments 161
Other merger expenses 447
------
Total $2,796
======
- --------------------------------------------------------------------------------
Income Taxes
The effective income tax rate increased from 30.9% in 1999 to 32.8% in
2000 due principally to the nondeductibility of certain merger-related expenses.
Reflecting a reduction in the state income tax rate, the effective income tax
rate declined from 31.3% in 1998 to 30.9% in 1999.
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 $67,800,000
line of credit established at the Federal Home Loan Bank, less existing advances
against that line, 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. 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 primarily on a core of local deposits
and the Bank's capital position. To date, the steady increase in deposits,
retail repurchase agreements and capital, supplemented by Federal Home Loan Bank
advances, 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 was liability-sensitive at December 31, 2000.
A liability-sensitive position means that in gap measurement periods of one year
or less there are more liabilities than assets subject to immediate repricing as
market rates change. Because immediately rate sensitive interest-bearing
liabilities exceed rate sensitive assets, the earnings position could improve in
a declining rate environment and could deteriorate in a rising rate environment,
depending on the correlation of rate changes in these two categories. Included
in interest-bearing liabilities subject to rate changes within 90 days is a
portion of the interest-bearing demand, savings and money market deposits. These
types of deposits historically have not repriced coincidentally with or in the
same proportion as general market indicators.
Table 4 presents information about the periods in which the
interest-sensitive assets and liabilities at December 31, 2000 will either
mature or be subject to repricing in accordance with market rates, and the
resulting interest-sensitivity gaps. This table shows the sensitivity of the
balance sheet at one point in time and is not necessarily indicative of what the
sensitivity will be on other dates. As a simplifying assumption concerning
repricing behavior, 50% of the interest-bearing demand, savings and money market
deposits are assumed to reprice immediately and 50% are assumed to reprice
beyond one year.
Table 4
Interest Rate Sensitivity Analysis
December 31, 2000
--------------------------------------------------------
Rate Maturity In Days
------------------------------ Beyond
1-90 91-180 181-365 One Year Total
-------- -------- --------- --------- --------
(dollars in thousands)
Earning Assets
Loans $154,209 $ 16,352 $ 29,335 $195,841 $395,737
Investment securities 2,830 2,008 3,746 123,800 132,384
-------- -------- --------- -------- --------
Total earning assets 157,039 18,360 33,081 319,641 528,121
-------- -------- --------- -------- --------
Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits 28,240 - - 28,241 56,481
Savings deposits 17,220 - - 17,221 34,441
Money market deposits 17,950 - - 17,951 35,901
Time deposits of $100,000 or more 43,060 18,884 26,760 12,880 101,584
Other time deposits 54,640 26,477 84,016 33,007 198,140
Retail repurchase agreements 11,201 - - - 11,201
Federal Home Loan Bank advances - - - 15,000 15,000
Federal funds purchased 4,750 - - - 4,750
-------- -------- --------- -------- --------
Total interest-bearing liabilities 177,061 45,361 110,776 124,300 457,498
-------- -------- --------- -------- --------
Interest Sensitivity Gap $(20,022) $(27,001) $ (77,695) $195,341 $ 70,623
======== ======== ========= ======== ========
Cumulative gap $(20,022) $(47,023) $(124,718) $ 70,623 $ 70,623
Ratio of interest-sensitive assets to
interest-sensitive liabilities 89% 40% 30% 257% 115%
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 in
"Asset/Liability Management and Interest Rate Sensitivity" above.
Table 5 presents information about the contractual maturities, average
interest rates and estimated fair values of financial instruments considered
market risk sensitive at December 31, 2000.
Table 5
Market Risk Analysis of Financial Instruments
Contractual Maturities at December 31, 2000
--------------------------------------------------------------------
Beyond Average Estimated
Five Interest Fair
2001 2002 2003 2004 2005 Years Total Rate (1) Value
-------- -------- -------- -------- -------- -------- -------- -------- ---------
(dollars in thousands)
Financial Assets
Debt securities (2) $ 8,590 $ 2,131 $ 8,974 $ 7,723 $ 40,968 $ 61,578 $129,964 6.88% $129,752
Loans (3):
Fixed rate 53,593 25,336 21,251 16,012 16,700 62,257 195,149 8.75 189,238
Variable rate 63,989 27,730 29,419 16,392 14,265 48,793 200,588 9.08 200,812
Federal funds sold - - - - - - 94 6.49 94
-------- -------- -------- -------- -------- -------- -------- --------
Total $126,172 $ 55,197 $ 59,644 $ 40,127 $ 71,933 $172,628 $525,795 8.41 $519,896
======== ======== ======== ======== ======== ======== ======== ========
Financial Liabilities
Interest-bearing
demand deposits $ - $ - $ - $ - $ - $ - $ 56,481 1.43 $ 56,481
Savings deposits - - - - - - 34,441 1.99 34,441
Money market
deposits - - - - - - 35,901 4.16 35,901
Time deposits:
Fixed rate 241,264 35,179 7,749 1,155 1,815 - 287,162 6.34 289,370
Variable rate 7,644 3,884 945 85 4 - 12,562 5.83 12,562
Retail repurchase
agreements - - - - - - 11,201 4.82 11,201
Federal Home Loan
Bank advances - - - - - 15,000 15,000 5.44 15,219
Federal funds
purchased - - - - - - 4,750 6.84 4,750
-------- -------- -------- -------- -------- -------- -------- --------
Total $248,908 $ 39,063 $ 8,694 $ 1,240 $ 1,819 $ 15,000 $457,498 5.16 $459,925
======== ======== ======== ======== ======== ======== ======== ========
(1) The average interest rate related to debt securities is stated on a fully
taxable equivalent basis, assuming a 34% federal income tax rate and
applicable state income tax rate, reduced by the nondeductible portion of
interest expense.
(2) Debt securities are reported on the basis of amortized cost. Mortgage-backed
securities which have monthly curtailments of principal are categorized by
final maturity.
(3) Nonaccrual loans are included in the balance of loans. The allowance for
loan losses is excluded.
Capital Adequacy
Under guidelines established by the Board of Governors of the Federal
Reserve System, capital adequacy is currently measured for regulatory purposes
by certain risk-based capital ratios, supplemented by a leverage capital ratio.
The risk-based capital ratios are determined by expressing allowable capital
amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of
risk-weighted assets, which are computed by measuring the relative credit risk
of both the asset categories on the balance sheet and various off-balance sheet
exposures. Tier 1 capital consists primarily of common shareholders' equity and
qualifying perpetual preferred stock, net of goodwill and other disallowed
intangible assets. Tier 2 capital, which is limited to the total of Tier 1
capital, includes allowable amounts of subordinated debt, mandatory convertible
debt, preferred stock and the allowance for loan losses. Tier 3 capital,
applicable only to financial institutions subject to certain market risk capital
guidelines, is capital allocated to support the market risk related to a
financial institution's ongoing trading activities. At December 31, 2000, FNB
Corp. and the Bank were not subject to the market risk capital guidelines and,
accordingly, had no Tier 3 capital allocation. Total capital, for risk-based
purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under
current requirements, the minimum total capital ratio is 8.00% and the minimum
Tier 1 capital ratio is 4.00%. At December 31, 2000, FNB Corp. and the Bank had
total capital ratios of 15.15% and 14.69%, respectively, and Tier 1 capital
ratios of 14.05% and 13.58%.
The leverage capital ratio, which serves as a minimum capital standard,
considers Tier 1 capital only and is expressed as a percentage of average total
assets for the most recent quarter, after reduction of those assets for goodwill
and other disallowed intangible assets at the measurement date. As currently
required, the minimum leverage capital ratio is 4.00%. At December 31, 2000, FNB
Corp. and the Bank had leverage capital ratios of 9.92% and 9.58%, respectively.
The Bank is also required to comply with prompt corrective action
provisions established by the Federal Deposit Insurance Corporation Improvement
Act. To be categorized as well-capitalized, the Bank must have a minimum ratio
for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage
capital of 5.00%. As noted above, the Bank met all of those ratio requirements
at December 31, 2000 and, accordingly, is well-capitalized under the regulatory
framework for prompt corrective action.
Balance Sheet Review
Asset growth was slightly higher in 2000 than in 1999. Total assets
increased $48,171,000 or 9.3% in 2000 compared to $45,280,000 or 9.6% in 1999.
Deposits grew $45,438,000 or 10.6% and $26,792,000 or 6.7%, respectively, in the
same periods. Retail repurchase agreements increased $534,000 in 2000 after
declining $817,000 in 1999. A portion of the 1999 asset growth was funded by
initial advances totaling $15,000,000 from the Federal Home Loan Bank, which was
also the level of these advances at December 31, 2000. The average asset growth
rates were 11.0% in 2000 and 6.4% in 1999. The corresponding average deposit
growth rates were 11.5% and 6.4%.
Certain balance sheet restructuring matters are discussed in "Business
Development Matters".
Investment Securities
Investments are carried on the consolidated balance sheet at estimated
fair value for available-for-sale securities and at amortized cost for
held-to-maturity securities. Table 6 presents information, on the basis of
selected maturities, about the composition of the investment securities
portfolio for each of the last three years. A change in the classification of
investment securities on January 1, 2001 is discussed in "Accounting
Pronouncement Matters".
Table 6
Investment Securities Portfolio Analysis
December 31
-------------------------------------------------------
2000 1999 1998
------------------------------------- ------ ------
Estimated Taxable
Amortized Fair Equivalent Carrying Carrying
Cost Value Yield (1) Value Value
--------- -------- ---------- -------- --------
(dollars in thousands)
Available for Sale
U.S. Treasury:
Within one year $ 749 $ 753 7.20% $ 758 $ 1,258
One to five years - - - 250 1,543
------- ------- ------- -------
Total 749 753 7.20 1,008 2,801
------- ------- ------- -------
U.S. Government agencies and
corporations:
Within one year 3,250 3,240 6.05 1,492 2,344
One to five years 26,221 25,975 6.44 13,131 8,465
Five to ten years 38,883 38,563 6.84 43,214 40,267
Over ten years 1,500 1,494 7.63 - -
------- ------- ------- -------
Total 69,854 69,272 6.68 57,837 51,076
------- ------- ------- -------
Mortgage-backed securities - - - - 230
------- ------- ------- -------
Total debt securities 70,603 70,025 6.68 58,845 54,107
Equity securities 2,969 2,998 2,220 1,881
------- ------- ------- -------
Total available-for-sale
securities $73,572 $73,023 $61,065 $55,988
======= ======= ======= =======
Held to Maturity
U.S. Treasury:
Within one year $ - $ - - $ - $ 502
------- ------- ------- -------
U.S. Government agencies and
corporations:
Within one year 3,499 3,491 6.11 1,001 1,700
One to five years 28,190 27,916 6.48 7,796 9,794
Five to ten years 4,400 4,352 6.55 28,292 31,039
------- ------- ------- -------
Total 36,089 35,759 6.45 37,089 42,533
------- ------- ------- -------
Mortgage-backed securities 483 488 7.13 594 1,168
------- ------- ------- -------
State, county and municipal:
Within one year 1,092 1,098 9.21 1,330 845
One to five years 4,483 4,561 8.13 4,495 5,261
Five to ten years 7,637 7,926 8.07 6,645 6,358
Over ten years 6,523 6,767 7.82 7,578 7,822
------- ------- ------- -------
Total 19,735 20,352 8.07 20,048 20,286
------- ------- ------- -------
Other debt securities:
Within one year - - - - -
One to five years 499 501 6.48 499 994
Five to ten years 492 488 6.66 491 -
Over ten years 2,063 2,139 9.88 - -
------- ------- ------- -------
Total 3,054 3,128 8.81 990 994
------- ------- ------- -------
Total held-to-maturity
securities $59,361 $59,727 7.11 $58,721 $65,483
======= ======= ======= =======
(1) Yields are stated on a fully taxable equivalent basis, assuming a 34%
federal income tax rate and applicable state income tax rate, reduced by the
nondeductible portion of interest expense.
Additions to the investment securities portfolio depend to a large
extent on the availability of investable funds that are not otherwise needed to
satisfy loan demand. Because the growth in total assets exceeded that for loans
in 2000 and as investments were further impacted by the balance sheet
restructuring matters discussed in "Business Development Matters", the level of
investment securities was increased $12,598,000 or 10.5%. In 1999, when the
growth in loans exceeded that for total assets, there was a net decrease of
$1,685,000 or 1.4% in the level of investment securities. Investable funds not
otherwise utilized are temporarily invested on an overnight basis as federal
funds sold, the level of which is affected by such considerations as near-term
loan demand and liquidity needs. Based on funds requirements, the Bank was a net
purchaser of funds at December 31, 2000.
Loans
The Corporation's primary source of revenue and largest component of
earning assets is the loan portfolio. Loans experienced growth of $34,897,000 or
9.7% in 2000 and $46,001,000 or 14.6% in 1999. Average loans increased
$56,849,000 or 17.3% and $20,837,000 or 6.8%, respectively. The ratio of average
loans to average deposits increased from 80.6% in 1999 to 84.8% in 2000. The
ratio of loans to deposits at December 31, 2000 was 83.8%.
Table 7 sets forth the major categories of loans for each of the last
five years. The maturity distribution and interest sensitivity of selected loan
categories at December 31, 2000 are presented in Table 8.
Table 7
Loan Portfolio Composition
December 31
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- -------------- ------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(dollars in thousands)
Commercial and agricultural $160,057 41.5 $125,331 34.7 $ 99,055 32.0 $ 84,221 28.6 $ 62,678 23.8
Real estate - construction 5,734 1.5 5,472 1.5 8,056 2.6 7,801 2.6 5,768 2.2
Real estate - mortgage:
1-4 family residential 165,057 42.8 170,577 47.3 151,552 49.0 146,588 49.7 129,738 49.1
Commercial and other 16,050 4.2 22,214 6.2 21,423 6.9 24,535 8.3 26,220 9.9
Consumer 25,290 6.5 30,340 8.4 29,477 9.5 31,772 10.8 39,616 15.0
Leases 13,679 3.5 6,832 1.9 - - - - - -
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Loans held for investment 385,867 100.0 360,766 100.0 309,563 100.0 294,917 100.0 264,020 100.0
===== ===== ===== ===== =====
Loans held for sale 9,870 74 5,276 1,608 -
-------- -------- -------- -------- --------
Gross loans $395,737 $360,840 $314,839 $296,525 $264,020
======== ======== ======== ======== ========
Table 8
Selected Loan Maturities
December 31, 2000
--------------------------------------------
One Year One to Over
or Less Five Years Five Years Total
-------- ---------- ---------- --------
(in thousands)
Commercial and agricultural $59,701 $67,192 $33,164 $160,057
Real estate - construction 3,267 1,747 720 5,734
-------- --------- ------- --------
Total selected loans $62,968 $68,939 $33,884 $165,791
======== ========= ======= ========
Sensitivity to rate changes:
Fixed interest rates $20,227 $39,100 $18,132 $ 77,459
Variable interest rates 42,741 29,839 15,752 88,332
-------- --------- ------- --------
Total $62,968 $68,939 $33,884 $165,791
======== ========= ======= ========
The commercial and agricultural loan portfolio was primarily
responsible for loan growth in 2000. An increase was also recorded for lease
financing contracts, a new loan product added in 1999. Loan growth and the
composition of the loan portfolio, especially for 1-4 family residential
mortgage loans, are being affected by certain balance sheet restructuring
matters as discussed in "Business Development Matters".
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. For loans
determined to be impaired, the allowance is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans. 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. The unallocated portion of the allowance for loan losses
represents management's estimate of the appropriate level of reserve to provide
for probable losses inherent in the loan portfolio. Considerations in
determining the unallocated portion of the allowance for loan losses include
general economic and lending trends and other factors.
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.
At December 31, 2000, the Bank had impaired loans which totaled
$321,000 and were also on nonaccrual status. The related allowance for loan
losses on these loans amounted to $73,000. At December 31, 1999 the Bank had
impaired loans which totaled $1,420,000 and were also on nonaccrual status. The
related allowance for loan losses on these loans amounted to $289,000.
Table 9 presents an analysis of the changes in the allowance for loan
losses and of the level of nonperforming assets for each of the last five years.
Information about management's allocation of the allowance for loan losses by
loan category is presented in Table 10.
Table 9
Allowance for Loan Losses and Nonperforming Assets
2000 1999 1998 1997 1996.
------ ------ ------ ------ ------
(dollars in thousands)
Allowance for Loan Losses
Balance at beginning of year $3,289 $2,954 $2,694 $2,375 $2,266
Charge-offs:
Commercial and agricultural 603 49 9 66 24
Real estate - construction - - - - -
Real estate - mortgage 21 2 - 2 12
Consumer 277 306 387 449 543
Leases 12 - - - -
------ ------ ------ ------ ------
Total charge-offs 913 357 396 517 579
------ ------ ------ ------ ------
Recoveries:
Commercial and agricultural 117 16 16 14 12
Real estate - construction - - - - -
Real estate - mortgage 6 - - 11 3
Consumer 130 138 158 141 147
Leases - - - - -
------ ------ ------ ------ ------
Total recoveries 253 154 174 166 162
------ ------ ------ ------ ------
Net loan charge-offs 660 203 222 351 417
Provision for loan losses (1) 1,802 511 482 670 526
Allowance adjustment for loans sold (79) - - - -
Adjustment to conform fiscal periods - 27 - - -
------ ------ ------ ------ ------
Balance at end of year $4,352 $3,289 $2,954 $2,694 $2,375
====== ====== ====== ====== ======
Nonperforming Assets, at end of year
Nonaccrual loans $1,478 $1,602 $ 855 $ 257 $ 92
Accruing loans past due 90 days or more 367 298 263 167 231
------ ------ ------ ------ ------
Total nonperforming loans 1,845 1,900 1,118 424 323
Foreclosed assets 33 3 - 23 38
Other real estate owned 163 423 20 27 29
------ ------ ------ ------ ------
Total nonperforming assets $2,041 $2,326 $1,138 $ 474 $ 390
====== ====== ====== ====== ======
Ratios
Net loan charge-offs to average loans .17% .06% .07% .13% .16%
Net loan charge-offs to allowance for loan losses 15.17 6.17 7.52 13.03 17.56
Allowance for loan losses to year-end loans
excluding loans held for sale 1.13 .91 .95 .91 .90
Total nonperforming loans to year-end loans
excluding loans held for sale .48 .53 .36 .14 .12
(1) Approximately $450,000 of the total provision for loan losses in 2000 was
related to aligning the credit risk methodologies of FNB Corp. and Carolina
Fincorp, Inc.
Table 10
Allocation of Allowance For Loan Losses
December 31
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(in thousands)
Commercial and agricultural $1,714 $1,070 $ 821 $ 719 $ 650
Real estate - construction 21 14 31 23 16
Real estate - mortgage 982 735 643 633 538
Consumer 1,076 1,023 1,027 971 905
Leases 201 58 - - -
Unallocated 358 389 432 348 266
------ ------ ------ ------ ------
Total allowance for loan losses $4,352 $3,289 $2,954 $2,694 $2,375
====== ====== ====== ====== ======
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, reflecting the effect of promotions for
premium-rate certificates of deposits and the increase in time deposits obtained
from governmental units, grew $43,867,000 in 2000 and $23,488,000 in 1999,
accounting for the majority of total deposit growth in each year. The level of
time deposits obtained from governmental units amounted to $46,800,000,
$39,179,000 and $26,555,000 at December 31, 2000, 1999 and 1998, respectively.
Money market deposits increased $1,974,000 in 2000 and $5,247,000 in 1999 due to
a high-yield product that has had steady growth since its introduction in 1996.
Table 11 shows the year-end and average deposit balances for the years
2000, 1999 and 1998 and the changes in 2000 and 1999.
Table 11
Analysis of Deposits
2000 1999 1998
----------------------- ------------------------ -------
Change from Change from
Prior Year Prior Year
------------- --------------
Balance Amount % Balance Amount % Balance
-------- ------ ----- -------- ------- ----- -------
(dollars in thousands)
Year-End Balances
Interest-bearing deposits:
Demand deposits $ 56,481 $(1,532) (2.6) $ 58,013 $2,551 4.6 $ 55,462
Savings deposits 34,441 (1,438) (4.0) 35,879 (2,542) (6.6) 38,421
Money market deposits 35,901 1,974 5.8 33,927 5,247 18.3 28,680
-------- ------- -------- ------- --------
Total 126,823 (996) (.8) 127,819 5,256 4.3 122,563
Certificates and other time
deposits 299,724 43,867 17.1 255,857 23,488 10.1 232,369
-------- ------- -------- ------- --------
Total interest-bearing deposits 426,547 42,871 11.2 383,676 28,744 8.1 354,932
Noninterest-bearing demand deposits 45,901 2,567 5.9 43,334 (1,952) (4.3) 45,286
-------- ------- -------- ------- --------
Total deposits $472,448 $45,438 10.6 $427,010 $26,792 6.7 $400,218
======== ======= ======== ======= ========
Average Balances
Interest-bearing deposits:
Demand deposits $ 57,332 $ 2,203 4.0 $ 55,129 $ 3,950 7.7 $ 51,179
Savings deposits 35,844 (1,727) (4.6) 37,571 (1,024) (2.7) 38,595
Money market deposits 34,798 2,959 9.3 31,839 6,409 25.2 25,430
-------- ------- -------- ------- --------
Total 127,974 3,435 2.8 124,539 9,335 8.1 115,204
Certificates and other time
deposits 279,586 40,297 16.8 239,289 12,375 5.5 226,914
-------- ------- -------- ------- --------
Total interest-bearing deposits 407,560 43,732 12.0 363,828 21,710 6.3 342,118
Noninterest-bearing demand deposits 46,859 3,313 7.6 43,546 2,849 7.0 40,697
-------- ------- -------- ------- --------
Total deposits $454,419 $47,045 11.5 $407,374 $24,559 6.4 $382,815
======== ======= ======== ======= ========
Business Development Matters
As discussed in the "Overview" and in Note 2 to Consolidated Financial
Statements, the Corporation completed a merger on April 10, 2000 for the
acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for
Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in
Rockingham, North Carolina, in a transaction accounted for as a pooling of
interests.
Prior to March 26, 1999, the Bank's data processing, item capture and
statement rendering operations were outsourced under a service bureau
arrangement. Commencing in the 1998 fourth quarter, the Bank began the process
of converting these operations to an in-house basis. Conversion to the
replacement systems occurred on March 26, 1999. Richmond Savings, however, was
on a service bureau arrangement until its merger into the Bank on June 26, 2000.
The total capital expenditure outlay for hardware and software amounted to
approximately $1,700,000, of which approximately one-half was recorded in 1998
and the remainder in 1999. In addition to capital expenditures for the new
system, the Bank incurred certain expenses in 1998, totaling approximately
$302,000, related to deconversion from the prior arrangement.
In the 1998 fourth quarter, the Bank received regulatory approval for
establishment of a new branch office in Trinity, North Carolina. Construction of
the permanent Trinity facility is expected to be complete in 2001, resulting in
a total capital outlay of approximately $1,000,000, of which approximately
one-third was recorded in 1998 related to the purchase of land. Prior to
completion of the permanent facility, a temporary mobile office, which opened in
August 1999, is being operated at this site.
In the 2000 fourth quarter, management adopted a balance sheet
restructuring project to reduce the level of lower yielding, 1-4 family
residential mortgage loans by selling those loans and redeploying the funds in
other types of assets, including specific purchases of bank owned life insurance
and a more general redeployment to other loan programs and investment
securities. 1-4 family residential mortgage loans totaling $20,938,000 were
transferred to loans held for sale, and of that amount, $12,199,000 were sold in
2000 and the remainder were sold in the first quarter of 2001. In December 2000,
single premium purchases of life insurance amounting to $10,000,000 were
recorded as bank owned life insurance in other assets on the consolidated
balance sheet. Income relating to the cash surrender value of the bank owned
life insurance will be recorded as noninterest income, while the loans sold had
generated interest income. The effective reduction of interest income will tend
to lower the net yield on earning assets and net interest spread in future
periods. Management believes that the income resulting from the bank owned life
insurance, which is not subject to income tax, will produce a greater
contribution to net income than did the income from the loans sold.
Accounting Pronouncement Matters
On January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as further amended by Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Financial Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 138" (collectively
referred to as "SFAS No. 133"). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. As permitted by SFAS No. 133, on
January 1, 2001, the Corporation transferred all of its securities from the
held-to-maturity portfolio to the available-for-sale portfolio as follows:
Securities Transferred
------------------------------
Estimated Pretax
Amorized Fair Gain
Cost Value (Loss)
------- ------- ------
(in thousands)
U.S. Government agencies and
corporations $36,089 $35,759 $(330)
Mortgage-backed securities 483 488 5
State, county and municipal 19,735 20,352 617
Other debt securities 3,054 3,128 74
------- ------- -----
Total $59,361 $59,727 $ 366
======= ======= =====
As of January 1, 2001, the transfer of the securities had a net of tax
effect of $242,000 on other comprehensive income.
On January 1, 2001, the Company had no embedded derivative instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only freestanding derivative instruments. The fair value
of these commitments was mot material and therefore the adoption of SFAS No. 133
on January 1, 2001, is not expected to have a material impact on the
Corporation's consolidated financial statements.
The FASB has issued Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140"). This statement replaces SFAS No.
125 ("Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities") and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125 without consideration. SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities, based on application of a financial components approach that
focuses on control. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 2001.
Adoption of SFAS No. 140 is not expected to have a material impact on the
Corporation's consolidated financial statements.
Effects of Inflation
The operations of the Bank and therefore of the Corporation are subject
to the effects of inflation through interest rate fluctuations and changes in
the general price level of noninterest operating expenses. Such costs as
salaries, fringe benefits and utilities have tended to increase at a rate
comparable to or even greater than the general rate of inflation. Broadly
speaking, all operating expenses have risen to higher levels as inflationary
pressures have increased. Management has responded to this situation by
evaluating and adjusting fees charged for specific services and by emphasizing
operating efficiencies.
The level of interest rates is also considered to be influenced by
inflation, rising whenever inflationary expectations and the actual level of
inflation increase and declining whenever the inflationary outlook appears to be
improving. Management constantly monitors this situation, attempting to adjust
both rates received on earning assets and rates paid on interest-bearing
liabilities in order to maintain the desired net yield on earning assets.
Cautionary Statement for Purpose of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The statements contained in this Annual Report on Form 10-K that are
not historical facts are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which can be identified
by the use of forward-looking terminology such as "believes", "expects",
"plans", "projects", "goals", "estimates", "may", "could", "should", or
"anticipates" or the negative thereof or other variations thereon of comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
In addition, from time to time, the Corporation or its representatives have made
or may make forward-looking statements, orally or in writing. Such
forward-looking statements may be included in, but are not limited to, various
filings made by the Corporation with the Securities and Exchange Commission, or
press releases or oral statements made by or with the approval of an authorized
executive officer of the Corporation. Forward-looking statements are based on
management's current views and assumptions and involve risks and uncertainties
that could significantly affect expected results. The Corporation wishes to
caution the reader that factors, such as those listed below, in some cases have
affected and could affect the Corporation's actual results, causing actual
results to differ materially from those in any forward-looking statement. These
factors include: (i) competitive pressure in the banking industry or in the
Corporation's markets may increase significantly, (ii) changes in the interest
rate environment may reduce margins, (iii) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, credit quality deterioration, (iv) changes may occur in
banking legislation and in the environment, (v) changes may occur in general
business conditions and inflation and (vi) changes may occur in the securities
markets.
Table 12
Quarterly Financial Data
First Second Third Fourth
------- ------- ------- -------
(in thousands, except per share data)
2000
Interest income $ 9,814 $10,330 $10,734 $11,058
Interest expense 4,632 5,013 5,445 5,818
------- ------- ------- -------
Net interest income 5,182 5,317 5,289 5,240
Provision for loan losses 157 835 160 650
------- ------- ------- -------
Net interest income after
provision for loan losses 5,025 4,482 5,129 4,590
Noninterest income 1,093 1,147 1,070 1,191
Merger related expenses - 2,796 - -
Noninterest expense 3,948 4,086 3,957 3,710
------- ------- ------- -------
Income (loss)before income taxes 2,170 (1,253) 2,242 2,071
Income taxes (benefit) 689 (278) 698 605
------- -------- ------- -------
Net income (loss) $ 1,481 $ (975) $ 1,544 $ 1,466
======= ======= ======= =======
Per share data:
Net income (loss):
Basic $ .30 $ (.19) $ .31 $ .29
Diluted .29 (.19) .30 .29
Cash dividends declared .12 .12 .12 .15
Common stock price (1):
High 17.00 12.50 12.00 12.13
Low 10.50 6.00 9.50 11.19
1999
Interest income $ 8,721 $ 8,795 $ 8,978 $ 9,328
Interest expense 3,901 3,944 4,033 4,325
------- ------- ------- -------
Net interest income 4,820 4,851 4,945 5,003
Provision for loan losses 99 119 84 209
------- ------- ------- -------
Net interest income after
provision for loan losses 4,721 4,732 4,861 4,794
Noninterest income 1,008 1,027 1,008 1,025
Noninterest expense 3,659 3,701 3,895 3,827
------- ------- ------- -------
Income before income taxes 2,070 2,058 1,974 1,992
Income taxes 646 646 613 599
------- ------- ------- -------
Net income $ 1,424 $ 1,412 $ 1,361 $ 1,393
======= ======= ======= =======
Per share data:
Net income:
Basic $ .28 $ .28 $ .27 $ .28
Diluted .27 .27 .27 .27
Cash dividends declared .12 .12 .12 .15
Common stock price (1):
High 29.00 27.00 24.25 22.00
Low 20.00 20.00 19.00 13.25
(1) FNB Corp. common stock is traded on the NASDAQ National Market System under
the symbol FNBN. At December 31, 2000, there were 1,697 shareholders of
record.
Independent Auditors' Report
The Board of Directors
FNB Corp.
We have audited the accompanying consolidated balance sheets of FNB Corp. and
subsidiary as of December 31, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FNB Corp. and
subsidiary as of December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
Greenville, South Carolina
March 16, 2001
FNB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31
2000 1999
---- ----
(in thousands, except share data)
Assets
Cash and due from banks $ 14,108 $ 18,808
Interest-bearing bank accounts - 3,115
Federal funds sold 94 -
Investment securities:
Available for sale, at estimated fair value
(amortized cost of $73,572 in 2000 and
$64,063 in 1999) 73,023 61,065
Held to maturity (estimated fair value of
$59,727 in 2000 and $56,953 in 1999) 59,361 58,721
Loans:
Loans held for sale 9,870 74
Loans held for investment 385,867 360,766
Less allowance for loan losses (4,352) (3,289)
-------- --------
Net loans 391,385 357,551
-------- --------
Premises and equipment, net 9,596 10,330
Other assets 18,072 7,878
-------- --------
Total Assets $565,639 $517,468
======== ========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand deposits $ 45,901 $ 43,334
Interest-bearing deposits:
Demand, savings and money market deposits 126,823 127,819
Time deposits of $100,000 or more 101,584 86,818
Other time deposits 198,140 169,039
-------- --------
Total deposits 472,448 427,010
Retail repurchase agreements 11,201 10,667
Federal Home Loan Bank advances 15,000 15,000
Federal funds purchased 4,750 7,735
Other liabilities 7,118 4,988
-------- --------
Total Liabilities 510,517 465,400
-------- --------
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 5,059,641 shares
in 2000 and 5,139,520 shares in 1999 12,649 12,849
Surplus 2,836 4,131
Retained earnings 40,000 39,158
ESOP and restricted stock plans - (2,092)
Accumulated other comprehensive loss (363) (1,978)
-------- --------
Total Shareholders' Equity 55,122 52,068
-------- --------
Total Liabilities and Shareholders' Equity $565,639 $517,468
======== ========
Commitments (Note 17)
See accompanying notes to consolidated financial statements.
FNB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
-------------------------------------
2000 1999 1998
(in thousands, except per share data)
Interest Income
Interest and fees on loans $ 34,241 $ 27,970 $ 27,343
Interest and dividends on investment securities:
Taxable income 6,331 6,430 6,359
Non-taxable income 981 991 994
Other interest income 383 431 415
--------- --------- ---------
Total interest income 41,936 35,822 35,111
--------- --------- ---------
Interest Expense
Deposits 19,501 15,183 15,226
Retail repurchase agreements 516 501 444
Federal Home Loan Bank advances 819 433 -
Other borrowed funds 72 86 43
--------- --------- ---------
Total interest expense 20,908 16,203 15,713
--------- --------- ---------
Net Interest Income 21,028 19,619 19,398
Provision for loan losses 1,802 511 482
--------- --------- ---------
Net Interest Income After Provision for Loan Losses 19,226 19,108 18,916
--------- --------- ---------
Noninterest Income
Service charges on deposit accounts 2,236 2,058 1,986
Annuity and brokerage commissions 414 482 294
Cardholder and merchant services income 524 450 368
Other service charges, commissions and fees 674 583 496
Other income