10-K405 1 d10k405.txt FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- 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, 2001 Commission File Number 0-13823 ----------------- 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 15, 2002, the Registrant had 4,758,147 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 $62,844,000. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 14, 2002 are incorporated by reference in Part III of this report. ================================================================================ CROSS REFERENCE INDEX
Page ----- Part I Item 1 Business...................................................................................... 3-7 Item 2 Properties.................................................................................... 7 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..................... 29 Item 6 Selected Financial Data....................................................................... 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9-29 Item 7a Quantitative and Qualitative Disclosures about Market Risk.................................... 17-18 Item 8 Financial Statements and Supplementary Data Independent Auditors' Report.................................................................. 30 Consolidated Balance Sheets at December 31, 2001 and 2000..................................... 31 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2001............................................................................. 32 Consolidated Statements of Shareholders' Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2001........................................ 33 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001............................................................................. 34 Notes to Consolidated Financial Statements.................................................... 35-58 Quarterly Financial Data for 2001 and 2000.................................................... 29 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 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................................................................................... 60 (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 2002 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". 2 BUSINESS General FNB Corp. 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, FNB Corp. acquired its wholly-owned bank subsidiary, First National Bank and Trust Company (the "Bank"), a national banking association founded in 1907. FNB Corp. 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. Three 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, 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. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. 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 of 2000 was related to aligning the credit risk methodologies of FNB Corp. and 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. On February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger will be accounted for as a purchase business combination and is subject to several conditions, including approval by the shareholders of Rowan Bancorp and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the third quarter of 2002. Rowan Bancorp shareholders will be permitted to elect FNB Corp. common stock or cash, or a combination of each. Subject to the Corporation's ability to limit the overall stock consideration to 45%, each share of Rowan Bancorp common stock, at the election of the shareholder, will be converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash. At December 31, 2001, Rowan Bancorp operated three offices through Rowan Bank and had approximately $116,033,000 in total assets, $96,494,000 in deposits and $10,043,000 in shareholders' equity. 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 3 assets on the consolidated balance sheet. Income relating to the bank owned life insurance is being 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. 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 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 was completed in February 2002, resulting in a total capital outlay of approximately $1,400,000. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, was operated at this site. In March 2002, the Bank filed for regulatory approval for establishment of a new branch office in Pinehurst, North Carolina. The current intent is to lease a facility which had previously been used as a banking office by another financial institution. No significant capital outlay is expected. 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 22 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. Regulation and Supervision The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries. It also provides certain specific information relevant to FNB Corp. This regulatory framework is intended primarily for the protection of depositors and the deposit insurance funds that insure deposits of banks and savings institutions, and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to FNB Corp. or the Bank may have a material effect on the business of the Corporation. Additional information related to regulatory matters is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. General As a bank holding company, FNB Corp. is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Federal Reserve Board. Under the Bank Holding Company Act, bank holding companies, such as FNB Corp., that have not elected to become financial holding companies under the Gramm-Leach Bliley Financial Modernization Act of 1999 generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve Board's prior approval. As a national banking association, the Bank is subject to regulation and examination primarily by the Office of the Comptroller of the Currency (OCC). It is also regulated by the Federal Deposit Insurance Corporation (FDIC) and the 4 Federal Reserve Board. The Bank's deposits are insured by the FDIC through the Bank Insurance Fund and the Savings Association Insurance Fund. The OCC and the FDIC impose various requirements and restrictions on First National, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged on loans, limitations on the types of investments that may be made and the types of services that may be offered, and requirements governing capital adequacy, liquidity, earnings, dividends, management practices and branching. As a member of the Federal Reserve System, the Bank is 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. Various consumer laws and regulations also affect the operations of the Corporation. In addition to the impact of regulation, financial institutions may be significantly affected by legislation, which can change the statutes affecting them in substantial and unpredictable ways, and by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability to influence the economy. 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. Liability for Bank Subsidiaries Under current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary banks and to maintain resources adequate to support each subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, the cross-guaranty provisions of the Federal Deposit Insurance Act provide that if the FDIC suffers or anticipates a loss as a result of a default by a banking subsidiary or by providing assistance to a subsidiary in danger of default, then any other bank subsidiaries may be assessed for the FDIC's loss. Capital Requirements FNB Corp. and the Bank are required to comply with federal regulations on capital adequacy. There are two measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be considered in compliance. For additional information, see "Capital Adequacy" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. Dividend Restrictions FNB Corp. is a legal entity separate and distinct from its bank subsidiary. Because the principal source of FNB Corp. revenues is dividends from the Bank, the ability of FNB Corp. to pay dividends to its shareholders depends largely upon the amount of dividends the Bank may pay to its parent holding company. There are statutory and regulatory limitations on the payment of dividends by the Bank to FNB Corp., as well as by FNB Corp. to its shareholders. The Bank must obtain the prior approval of the OCC to pay dividends if the total of all dividends declared by the Bank in any calendar year will exceed the sum of its net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that in the aggregate would be greater than the Bank's undivided profits after deducting statutory bad debts in excess of the Bank's loan loss allowance. FNB Corp. and the Bank are also subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. Community Reinvestment Act The Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA). Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with their safe and sound operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does 5 not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the appropriate federal bank regulatory agency, in connection with its examination of the bank, to assess the bank's record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Interstate Banking and Branching The Interstate Banking Act permits interstate acquisitions of banks by bank holding companies. FNB Corp. and any other bank holding company located in North Carolina may acquire a bank located in any other state, and any bank holding company located outside North Carolina may lawfully acquire any North Carolina-based bank, regardless of state law to the contrary, in either case subject to certain deposit-percentage limitations, aging requirements and other restrictions. The Interstate Banking Act also generally provides that national and state-chartered banks may branch interstate through acquisitions of banks in other states. It allowed, however, any state to elect prior to June 1, 1997 either to "opt in" and accelerate the date after which interstate branching was permissible or to "opt out" and prohibit interstate branching altogether. North Carolina enacted "opt in" legislation permitting interstate branching. The Interstate Banking Act may have the effect of increasing competition within the markets in which FNB Corp. operates. The extent and timing of any such increase cannot be predicted. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Financial Modernization Act of 1999 allows bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in the securities and insurance businesses. Under the Gramm-Leach Bliley Act, a bank holding company that elects to become a financial holding company may engage in any activity that is financial in nature, is incidental to financial activity or complements financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Activities cited by the law as being "financial in nature" include securities underwriting, dealing in securities and market making, insurance underwriting and agency, providing financial, investment or economic advisory services, and activities that the Federal Reserve Board has determined to be closely related to banking. Subject to certain limitations on investment, a national bank or its financial subsidiary may also engage in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, so long as the bank is well-capitalized, well-managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well-capitalized and well-managed to continue to engage in activities that are financial in nature. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has at least a satisfactory Community Reinvestment Act rating. The Gramm-Leach Bliley Act also contains a number of other provisions that will affect the Corporation's operations and the operations of all financial institutions. One of the new provisions relates to the financial privacy of consumers, authorizing federal banking regulators to adopt rules that will limit the ability of banks and other financial entities to disclose nonpublic information about consumers to nonaffiliated entities. These limitations likely will require more disclosure to the Corporation's customers, and in some circumstances, will require consent by the customer before information is allowed to be provided to a third party. International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 On October 26, 2001, the USA Patriot Act of 2001 was signed into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA"), which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial 6 institutions. As of the date of this filing, the Corporation has not determined the impact that the IMLAFA will have on its operations but the impact is not expected to be material. The Corporation will establish policies and procedures to ensure compliance with the IMLAFA. Employees As of December 31, 2001, FNB Corp. had three officers, all of whom were also officers of the Bank. On that same date, the Bank had 193 full-time employees and 22 part-time employees. The Bank considers its relationship with its employees to be excellent. The Bank provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings (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 FNB Corp. 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 (two 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 Bush Hill office in Archdale is under a lease expiring January 31, 2003, with lease renewal options for up to an additional 19-year term. The Laurinburg office is under a lease expiring August 31, 2003. 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. 7 FNB CORP. AND SUBSIDIARY FIVE YEAR FINANCIAL HISTORY /(1)/
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (dollars in thousands, except per share data) Summary of Operations Interest income...................................... $ 41,260 $ 41,936 $ 35,822 $ 35,111 $ 32,242 Interest expense..................................... 20,492 20,908 16,203 15,713 14,463 -------- -------- -------- -------- -------- Net interest income.................................. 20,768 21,028 19,619 19,398 17,779 Provision for loan losses............................ 1,200 1,802 511 482 670 -------- -------- -------- -------- -------- Net interest income after provision for loan losses.. 19,568 19,226 19,108 18,916 17,109 Noninterest income................................... 5,900 4,501 4,068 3,756 3,346 Noninterest expense.................................. 16,077 18,497 15,082 14,473 13,382 -------- -------- -------- -------- -------- Income before income taxes........................... 9,391 5,230 8,094 8,199 7,073 Income taxes......................................... 2,663 1,714 2,504 2,568 2,220 -------- -------- -------- -------- -------- Net income........................................... $ 6,728 $ 3,516 $ 5,590 $ 5,631 $ 4,853 ======== ======== ======== ======== ======== Per Share Data /(2)/ Net income: Basic............................................... $ 1.35 $ .70 $ 1.11 $ 1.12 $ 1.08 Diluted............................................. 1.32 .69 1.09 1.09 1.07 Cash dividends declared /(3)/........................ .53 .51 .51 .45 .38 Book value........................................... 11.74 10.89 10.13 9.76 11.24 Balance Sheet Information Total assets......................................... $593,742 $565,639 $517,468 $472,188 $437,743 Investment securities................................ 163,150 132,384 119,786 121,471 112,278 Loans................................................ 391,632 395,737 360,840 314,839 296,525 Deposits............................................. 480,230 472,448 427,010 400,218 365,349 Shareholders' equity................................. 55,907 55,122 52,068 50,390 57,349 Ratios (Averages) Return on assets..................................... 1.15% .65% 1.15% 1.23% 1.16% Return on shareholders' equity....................... 11.63 6.59 10.85 9.55 9.78 Shareholders' equity to assets....................... 9.93 9.86 10.57 12.88 11.86 Dividend payout ratio................................ 38.91 76.05 40.88 36.71 29.86 Loans to deposits.................................... 81.71 84.79 80.63 80.36 77.71 Net yield on earning assets, taxable equivalent basis 4.03 4.28 4.48 4.71 4.72
-------- (1) Financial data for all prior 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) Cash dividends declared represent FNB Corp. historical cash dividends declared. 8 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. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. 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 of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. On February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger will be accounted for as a purchase business combination and is subject to several conditions, including approval by the shareholders of Rowan Bancorp and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the third quarter of 2002. Rowan Bancorp shareholders will be permitted to elect FNB Corp. common stock or cash, or a combination of each. Subject to the Corporation's ability to limit the overall stock consideration to 45%, each share of Rowan Bancorp common stock, at the election of the shareholder, will be converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash. At December 31, 2001, Rowan Bancorp operated three offices through Rowan Bank and had approximately $116,033,000 in total assets, $96,494,000 in deposits and $10,043,000 in shareholders' equity. 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 bank owned life insurance is being 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. The Corporation earned $6,728,000 in 2001, a 91.4% increase in net income from 2000. Basic earnings per share increased from $.70 in 2000 to $1.35 in 2001 and diluted earnings per share increased from $.69 to $1.32. Total assets were $593,742,000 at December 31, 2001, up 5.0% from year-end 2000. Loans amounted to $391,632,000 at December 31, 2001, decreasing 1.0% from the prior year. Total deposits grew 1.6% to $480,230,000 in 2001. 9 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, resulting in a comparative 14.9% increase in 2001 net income, with basic and diluted earnings per share amounts of $1.16 and $1.15, respectively. Critical Accounting Policies The Corporation's significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements. Of these significant accounting policies, the Corporation considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management's most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation's allowance for loan losses and related matters, see "Asset Quality". 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 $874,000 in 2001, up 14.9% over 2000. Earnings were positively impacted in 2001 by a $1,399,000 increase in noninterest income and by a $152,000 decrease in the provision for loan losses, excluding merger-related charges. These gains were partially offset, however, by a $376,000 increase in noninterest expense, excluding merger-related charges, and by a $260,000 or 1.2% decrease in net interest income, which reflected the effects of interest rate declines in 2001 and the balance sheet restructuring project discussed in the "Overview". The interest rate declines, resulting from actions taken by the Federal Reserve, caused a greater reduction in the average yield on earning assets than in the average rate paid on interest-bearing liabilities. As noted in the discussion of the restructuring project, non-taxable income related to bank owned life insurance, which replaced a portion of certain loans sold, is recorded as noninterest income, while income on loans sold was recorded as interest income. Income on bank owned life insurance amounted to $638,000 in 2001 compared to $12,000 in 2000. The net gain on loans sold, which amounted to $831,000 in 2001 compared to $153,000 in 2000, included a net gain of $151,000 in the 2001 first quarter and $50,000 in the 2000 fourth quarter related to loans sold in connection with the restructuring project. The Corporation's net income, after exclusion of the merger-related charges, 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. Excluding the merger-related charges, return on average assets declined from 1.15% in 1999 to 1.08% in 2000 and subsequently improved to 1.15% in 2001. Return on average shareholders' equity improved from 10.85% in 1999 to 10.97% in 2000 to 11.63% in 2001. 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 $20,768,000 in 2001 compared to $21,028,000 in 2000. The decrease of $260,000 or 1.2% resulted primarily from the effect of the balance sheet restructuring project as discussed in the "Overview" and from a decline in the net yield on earning assets, or net interest margin, from 4.28% in 2000 to 4.03% in 2001, the effect of which 10 more than offset the benefit of a 5.9% increase in the level of average earning assets. In 2000, there was a $1,409,000 or 7.2% increase in net interest income reflecting a 11.7% increase in average earning assets, the effect of which was partially offset by a decline in the net interest margin from 4.48% in 1999 to 4.28% in 2000. On a taxable equivalent basis, the decrease in net interest income in 2001 was $73,000 and the increase in 2000 was $1,377,000, 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
2001 2000 1999 ---------------------------- ---------------------------- ----------------- Interest Average Interest Average Interest Average Income/ Rates Average Income/ Rates Average Income/ Balance Expense Earned/Paid Balance Expense Earned/Paid Balance Expense -------- -------- ----------- -------- -------- ----------- -------- -------- (taxable equivalent basis, dollars in thousands) EARNING ASSETS Loans (1) (2)............................ $391,127 $31,992 8.18% $385,299 $34,296 8.88% $328,450 $28,016 Investment securities (1): Taxable income......................... 128,610 8,738 6.79 103,636 6,772 6.53 104,438 6,893 Non-taxable income..................... 20,026 1,541 7.69 19,684 1,508 7.66 19,832 1,537 Other earning assets..................... 5,352 199 3.73 6,296 383 6.06 8,446 431 -------- ------- ---- -------- ------- ---- -------- ------- Total earning assets................. 545,115 42,470 7.79 514,915 42,959 8.33 461,166 36,877 -------- ------- ---- -------- ------- ---- -------- ------- Cash and due from banks.................. 12,327 13,955 14,371 Other assets, net........................ 25,083 11,968 11,895 -------- -------- -------- TOTAL ASSETS......................... $582,525 $540,838 $487,432 ======== ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing deposits: Demand deposits........................ $ 55,656 446 .80 $ 57,332 907 1.58 $ 55,129 826 Savings deposits....................... 34,351 499 1.45 35,844 827 2.30 37,571 849 Money market deposits.................. 42,886 1,339 3.12 34,798 1,463 4.19 31,839 1,154 Certificates and other time deposits... 299,787 16,469 5.49 279,586 16,304 5.82 239,289 12,354 Retail repurchase agreements............. 13,010 419 3.22 11,091 516 4.64 12,971 501 Federal Home Loan Bank advances.......... 24,770 1,273 5.14 15,178 819 5.38 8,567 433 Other borrowed funds..................... 940 47 5.04 1,112 72 6.47 1,616 86 -------- ------- ---- -------- ------- ---- -------- ------- Total interest-bearing liabilities... 471,400 20,492 4.35 434,941 20,908 4.79 386,982 16,203 -------- ------- ---- -------- ------- ---- -------- ------- Noninterest-bearing demand deposits...... 46,012 46,859 43,546 Other liabilities........................ 7,242 5,692 5,360 Shareholders' equity..................... 57,871 53,346 51,544 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $582,525 $540,838 $487,432 ======== ======== ======== NET INTEREST INCOME AND SPREAD............................. $21,978 3.44% $22,051 3.54% $20,674 ======= ==== ======= ==== ======= EARNING ASSETS......................... 4.03% 4.28% ==== ====
Average Rates Earned/Paid ----------- (taxable equivalent basis, dollars in thousands) EARNING ASSETS Loans (1) (2)............................ 8.53% Investment securities (1): Taxable income......................... 6.60 Non-taxable income..................... 7.75 Other earning assets..................... 5.10 ---- Total earning assets................. 8.00 ---- Cash and due from banks.................. Other assets, net........................ TOTAL ASSETS......................... INTEREST-BEARING LIABILITIES Interest-bearing deposits: Demand deposits........................ 1.50 Savings deposits....................... 2.26 Money market deposits.................. 3.62 Certificates and other time deposits... 5.16 Retail repurchase agreements............. 3.87 Federal Home Loan Bank advances.......... 5.05 Other borrowed funds..................... 5.30 ---- Total interest-bearing liabilities... 4.19 ---- Noninterest-bearing demand deposits...... Other liabilities........................ Shareholders' equity..................... TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... NET INTEREST INCOME AND SPREAD............................. 3.81% ==== EARNING ASSETS......................... 4.48% ====
-------- (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. 11 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. Until the significant interest rate declines in 2001, there had been a much greater degree of stability for several years in the interest rates both earned and paid by the Bank. The prime rate, which fell to 4.75% by December 31, 2001, averaged 6.99% in 2001 compared to the average prime rates of 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998, respectively. In all of these periods, however, the actual level of the prime rate has changed with some frequency as the Federal Reserve has responded to various economic scenarios. Due to concern about inflationary pressures that appeared to be building in the 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 increased it from 7.75% to 8.50%, thereby effectively reversing similar 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 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 increased by a greater amount, negatively impacting the net interest margin and net interest spread. Due to a general slowdown in the economy that began to be perceived in the 2000 fourth quarter, the Federal Reserve acted to provide a stimulus through a series of interest rate reductions commencing in the 2001 first quarter, resulting in eight 50 basis point reductions and three 25 basis point reductions in the prime rate that lowered it to the 4.75% level at December 31, 2001. This decrease in the prime rate, through the reduction of the average yield on earning assets without a commensurate reduction in the average rate paid on interest bearing liabilities, has tended to negatively impact the net interest margin and net interest spread. In 2001, the net interest spread declined by 10 basis points from 3.54% in 2000 to 3.44% in 2001, reflecting the effect of a decrease in the average total yield on earning assets that was only partially offset by a decrease in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets decreased by 54 basis points from 8.33% in 2000 to 7.79% in 2001, while the cost of funds decreased by 44 basis points in moving from 4.79% to 4.35%. In 2000, the 27 basis points decrease in net interest spread resulted from a 33 basis points increase in the yield on earning assets that was more than offset by a 60 basis points increase in the cost of funds. Due to significant progress made in lowering the cost of deposits during the second half of 2001, the net interest margin and spread improved during the 2001 fourth quarter to 4.38% and 3.92%, respectively, compared to 4.12% and 3.33% in the 2000 fourth quarter and 4.03% and and 3.44% for the entire year of 2001. During these same periods, the cost of funds was 3.46%, 5.13% and 4.35%, respectively, while the yield on earning assets was 7.38%, 8.46% and 7.79%. 12 The 2001 and 2000 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
2001 Versus 2000 2000 Versus 1999 ---------------------------- ---------------------------- 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).............................. $ 498 $(2,802) $(2,304) $5,077 $1,203 $6,280 Investment securities (2): Taxable income....................... 1,687 279 1,966 (51) (70) (121) Non-taxable income................... 27 6 33 (11) (18) (29) Other earning assets................... (52) (132) (184) (121) 73 (48) ------ ------- ------- ------ ------ ------ Total interest income............ 2,160 (2,649) (489) 4,894 1,188 6,082 ------ ------- ------- ------ ------ ------ Interest Expense Interest-bearing deposits: Demand deposits...................... (26) (435) (461) 35 46 81 Savings deposits..................... (33) (295) (328) (38) 16 (22) Money market deposits................ 296 (420) (124) 115 194 309 Certificates and other time deposits. 1,126 (961) 165 2,245 1,705 3,950 Retail repurchase agreements........... 79 (176) (97) (78) 93 15 Federal Home Loan Bank advances........ 492 (38) 454 356 30 386 Other borrowed funds................... (10) (15) (25) (30) 16 (14) ------ ------- ------- ------ ------ ------ Total interest expense........... 1,924 (2,340) (416) 2,605 2,100 4,705 ------ ------- ------- ------ ------ ------ Net Interest Income............... $ 236 $ (309) $ (73) $2,289 $ (912) $1,377 ====== ======= ======= ====== ====== ======
-------- (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 provisions of $1,200,000 in 2001 and $511,000 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 increases in historical charge-off trends. The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.17% at December 31, 2001, 1.13% at December 31, 2000 and .91% at December 31, 1999. 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, while the increase from December 31, 2000 to December 31, 2001 related primarily to asset quality considerations and increases in historical charge-off trends. 13 Noninterest Income Noninterest income increased $1,399,000 or 31.1% in 2001 and $433,000 or 10.6% in 2000, reflecting in part the general increase in the volume of business. The 2001 increase was primarily due to a $678,000 increase in the net gain on sales of loans and to a $626,000 increase in income on bank owned life insurance. As discussed in the "Overview", a balance sheet restructuring project resulted in single premium purchases of life insurance amounting to $10,000,000 in December 2000. Income resulting from the bank owned life insurance is not subject to income tax. The net gain on loans sold included a net gain of $151,000 in the 2001 first quarter and $50,000 in the 2000 fourth quarter related to loans sold in connection with the restructuring project. The increase in service charges on deposit accounts in both 2001 and 2000 was primarily due to the improved fee collection efforts that became effective in 2000 subsequent to the first quarter. The decrease in annuity and brokerage commissions in both 2001 and 2000 was largely related to a general decrease in the volume of sales of annuity products. Other income was positively impacted in 2000 by a $76,000 gain on the sale of an investment and by a net gain on sales of other real estate that exceeded the net gain recorded in 1999 while a net loss was incurred on these sales in 2001. Noninterest Expense Excluding merger-related expenses of $2,796,000 recorded in the second quarter of 2000, noninterest expense was $376,000 or 2.4% higher in 2001. The nominal increase in the level of noninterest expense in 2001 reflects in part the successful implementation of synergies following the merger with Carolina Fincorp on April 10, 2000 as discussed in the "Overview". Personnel expense was impacted by increased staffing requirements and by normal salary adjustments. The decrease in furniture and equipment expense was due mainly to the reduction in depreciation expense related to computer networks that became fully depreciated in the third and fourth quarters of 2000. The cost of data processing services was higher in 2000 than in 2001 because of the outside data processing services employed by Richmond Savings until its merger into First National Bank and Trust Company on June 26, 2000. While benefiting from a reduction in advertising and marketing expense, other expense was negatively impacted in 2001 by increased expenses related to nonperforming assets. Noninterest expense, excluding merger-related expenses, 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. 14 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 declined from 32.8% in 2000 to 28.4% in 2001 due principally to the nondeductibility of certain merger-related expenses in 2000 and to a decrease in the ratio of taxable to tax-exempt income. 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. 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 $71,200,000 line of credit established at the Federal Home Loan Bank, less existing advances against that line, and (e) the investment securities portfolio. 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. 15 Contractual Obligations Under existing contractual obligations, the Bank will be required to make payments in future periods. The following table presents aggregated information about the payments due under such contractual obligations at December 31, 2001. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in one year or less. Table 4 Contractual Obligations
Payments due by Period at December 31, 2001 ------------------------------------------- One One to Three to Over Year or Three Five Five Less Years Years Years Total -------- ------- -------- ------- -------- (dollars in thousands) Deposits.............................. $426,720 $38,325 $15,185 $ -- $480,230 Retail repurchase agreements.......... 14,812 -- -- -- 14,812 Federal Home Loan Bank advances....... -- -- -- 30,000 30,000 Federal funds purchased............... 6,000 -- -- -- 6,000 Lease obligations..................... 48 33 16 50 147 -------- ------- ------- ------- -------- Total contractual cash obligations. $447,580 $38,358 $15,201 $30,050 $531,189 ======== ======= ======= ======= ========
Commitments, Contingencies and Off-Balance Sheet Risk In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 2001, a summary of significant commitments is as follows: Commitments to extend credit $103,135,000 Standby letters of credit... 351,000
In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. Commitments to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower. Standby letters of credit are commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that in extending loans to customers. There were no binding commitments for the origination of mortgage loans intended to be held for sale at December 31, 2001 and 2000. The Corporation does not have any special purpose entities or other similar forms of off-balance sheet financing. Asset/Liability Management and Interest Rate Sensitivity One of the primary objectives of asset/liability management is to maximize the 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. 16 The Bank's balance sheet was liability-sensitive at December 31, 2001. 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 5 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2001 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 5 Interest Rate Sensitivity Analysis
December 31, 2001 ------------------------------------------------ Rate Maturity In Days ---------------------------- Beyond 1-90 91-180 181-365 One Year Total -------- -------- -------- -------- -------- (dollars in thousands) Earning Assets Loans................................ $187,696 $ 17,354 $ 27,492 $159,090 $391,632 Investment securities................ 579 929 646 160,996 163,150 Federal funds sold................... 127 -- -- -- 127 -------- -------- -------- -------- -------- Total earning assets............... 188,402 18,283 28,138 320,086 554,909 -------- -------- -------- -------- -------- Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits.................... 29,603 -- -- 29,604 59,207 Savings deposits................... 17,209 -- -- 17,210 34,419 Money market deposits.............. 23,435 -- -- 23,435 46,870 Time deposits of $100,000 or more.. 50,048 29,335 18,621 11,183 109,187 Other time deposits................ 46,702 36,862 58,016 39,878 181,458 Retail repurchase agreements......... 14,812 -- -- -- 14,812 Federal Home Loan Bank advances...... -- -- -- 30,000 30,000 Federal funds purchased.............. 6,000 -- -- -- 6,000 -------- -------- -------- -------- -------- Total interest-bearing liabilities. 187,809 66,197 76,637 151,310 481,953 -------- -------- -------- -------- -------- Interest Sensitivity Gap.............. $ 593 $(47,914) $(48,499) $168,776 $ 72,956 ======== ======== ======== ======== ======== Cumulative gap........................ $ 593 $(47,321) $(95,820) $ 72,956 $ 72,956 Ratio of interest-sensitive assets to interest-sensitive liabilities....... 100% 28% 37% 212% 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. 17 Table 6 presents information about the contractual maturities, average interest rates and estimated fair values of financial instruments considered market risk sensitive at December 31, 2001. Table 6 Market Risk Analysis of Financial Instruments
Contractual Maturities at December 31, 2001 ----------------------------------------------------------- Beyond Average Estimated Five Interest Fair 2002 2003 2004 2005 2006 Years Total Rate (1) Value -------- ------- ------- ------- ------- -------- --------- -------- --------- (dollars in thousands) Financial Assets Debt securities (2).... $ 2,121 $ 2,818 $ 1,724 $ 2,355 $ 959 $148,727 $158,704 6.95% $160,144 Loans (3): Fixed rate........... 51,493 19,885 21,996 13,854 13,753 47,804 168,785 8.40 181,970 Variable rate........ 70,359 32,334 35,743 15,891 13,741 54,779 222,847 6.13 223,061 Federal funds sold..... -- -- -- -- -- -- 127 1.65 127 -------- ------- ------- ------- ------- -------- --------- -------- Total.............. $123,973 $55,037 $59,463 $32,100 $28,453 $251,310 $550,463 7.06 $565,302 ======== ======= ======= ======= ======= ======== ========= ======== Financial Liabilities Interest-bearing demand deposits............. $ -- $ -- $ -- $ -- $ -- $ -- $ 59,207 .61 $ 59,207 Savings deposits....... -- -- -- -- -- -- 34,419 .99 34,419 Money market deposits............. -- -- -- -- -- -- 46,870 1.93 46,870 Time deposits: Fixed rate........... 233,167 15,294 14,596 2,149 12,890 -- 278,096 4.06 284,383 Variable rate........ 3,968 7,885 550 146 -- -- 12,549 4.65 12,918 Retail repurchase agreements........... -- -- -- -- -- -- 14,812 1.92 14,812 Federal Home Loan Bank advances........ -- -- -- -- -- 30,000 30,000 4.82 33,168 Federal funds purchased............ -- -- -- -- -- -- 6,000 1.71 6,000 -------- ------- ------- ------- ------- -------- --------- -------- Total.............. $237,135 $23,179 $15,146 $ 2,295 $12,890 $ 30,000 $481,953 3.18 $491,777 ======== ======= ======= ======= ======= ======== ========= ========
-------- (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. 18 At December 31, 2001, 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, 2001, FNB Corp. and the Bank had total capital ratios of 14.29% and 13.56%, respectively, and Tier 1 capital ratios of 13.22% and 12.50%. 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, 2001, FNB Corp. and the Bank had leverage capital ratios of 9.39% and 8.87%, 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, 2001 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Balance Sheet Review Asset growth, affected by the general slowdown in the economy, was at a much lower rate in 2001 than in 2000. Total assets increased $28,103,000 or 5.0% in 2001 compared to $48,171,000 or 9.3% in 2000. Deposits grew $7,782,000 or 1.6% and $45,438,000 or 10.6%, respectively, in the same periods. A significant portion of the 2001 asset growth was funded by advances totaling $15,000,000 from the Federal Home Loan Bank, which added to the initial $15,000,000 level of advances obtained from the FHLB in 1999. Retail repurchase agreements increased $3,611,000 in 2001 following a $534,000 increase in 2000. The average asset growth rates were 7.7% in 2001 and 11.0% in 2000. The corresponding average deposit growth rates were 5.3% and 11.5%. Certain balance sheet restructuring matters are discussed in the "Overview". 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 7 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years. As discussed in "Accounting Pronouncement Matters", on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio in connection with the adoption of Statement of Financial Accounting Standards No. 133. 19 Table 7 Investment Securities Portfolio Analysis
December 31 ------------------------------------------------ 2001 2000 1999 ----------------------------- -------- -------- 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.......................... $ -- $ -- --% $ 753 $ 758 One to five years........................ -- -- -- -- 250 -------- -------- ------- ------- Total.................................. -- -- -- 753 1,008 -------- -------- ------- ------- U.S. Government agencies and corporations: Within one year.......................... 1,000 1,021 6.23 3,240 1,492 One to five years........................ 2,749 2,909 6.56 25,975 13,131 Five to ten years........................ 79,844 81,072 6.84 38,563 43,214 Over ten years........................... 46,138 45,782 6.69 1,494 -- -------- -------- ------- ------- Total.................................. 129,731 130,784 6.78 69,272 57,837 -------- -------- ------- ------- Mortgage-backed securities................ 330 341 7.04 -- -- -------- -------- ------- ------- State, county and municipal: Within one year.......................... 1,118 1,130 9.06 -- -- One to five years........................ 4,321 4,471 7.93 -- -- Five to ten years........................ 10,231 10,556 7.93 -- -- Over ten years........................... 9,372 9,067 6.99 -- -- -------- -------- ------- ------- Total.................................. 25,042 25,224 7.63 -- -- -------- -------- ------- ------- Other debt securities: Within one year.......................... -- -- -- -- -- One to five years........................ 500 521 6.48 -- -- Five to ten years........................ 493 504 6.66 -- -- Over ten years........................... 2,608 2,770 9.29 -- -- -------- -------- ------- ------- Total.................................. 3,601 3,795 8.61 -- -- -------- -------- ------- ------- Total debt securities..................... 158,704 160,144 6.95 70,025 58,845 Equity securities......................... 2,981 3,006 2,998 2,220 -------- -------- ------- ------- Total available-for-sale securities.... $161,685 $163,150 $73,023 $61,065 ======== ======== ======= ======= Held to Maturity U.S. Government agencies and corporations: Within one year.......................... $ -- $ -- -- $ 3,499 $ 1,001 One to five years........................ -- -- -- 28,190 7,796 Five to ten years........................ -- -- -- 4,400 28,292 -------- -------- ------- ------- Total.................................. -- -- -- 36,089 37,089 -------- -------- ------- ------- Mortgage-backed securities................ -- -- -- 483 594 -------- -------- ------- ------- State, county and municipal: Within one year.......................... -- -- -- 1,092 1,330 One to five years........................ -- -- -- 4,483 4,495 Five to ten years........................ -- -- -- 7,637 6,645 Over ten years........................... -- -- -- 6,523 7,578 -------- -------- ------- ------- Total.................................. -- -- -- 19,735 20,048 -------- -------- ------- ------- Other debt securities: Within one year.......................... -- -- -- -- -- One to five years........................ -- -- -- 499 499 Five to ten years........................ -- -- -- 492 491 Over ten years........................... -- -- -- 2,063 -- -------- -------- ------- ------- Total.................................. -- -- -- 3,054 990 -------- -------- ------- ------- Total held-to-maturity securities......... $ -- $ -- -- $59,361 $58,721 ======== ======== ======= =======
-------- (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. 20 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. In general, since there was growth in total assets in 2001 but a decrease in loans outstanding, the level of investment securities was increased $30,766,000 or 23.2%. This growth in investment securities also related to certain balance sheet strategies, including a restructuring project that commenced in the 2000 fourth quarter (see "Overview") whereby certain loans were sold with the reinvestment of such funds planned for other asset categories including investment securities. Additionally, the funds obtained from advances totaling $15,000,000 from the Federal Home Loan Bank in 2001 were primarily utilized for the purchase of investment securities. In 2000, because the growth in total assets exceeded that for loans and as investments were further impacted by the balance sheet restructuring project, the level of investment securities was increased $12,598,000 or 10.5%. 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, 2001. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Reflecting the general slowdown in the economy and as further impacted by the balance sheet restructuring project discussed below, loans decreased $4,105,000 or 1.0% in 2001 after experiencing growth of $34,897,000 or 9.7% in 2000. Average loans increased $5,828,000 or 1.5% and $56,849,000 or 17.3%, respectively. The ratio of average loans to average deposits decreased from 84.8% in 2000 to 81.7% in 2001. The ratio of loans to deposits at December 31, 2001 was 81.6%. Table 8 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, 2001 are presented in Table 9. Table 8 Loan Portfolio Composition
December 31 -------------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------------- -------------- -------------- -------------- -------------- Amount % Amount % Amount % Amount % Amount % -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Commercial and agricultural.. $177,577 46.9 $160,057 41.5 $125,331 34.7 $ 99,055 32.0 $ 84,221 28.6 Real estate -- construction.. 11,249 3.0 5,734 1.5 5,472 1.5 8,056 2.6 7,801 2.6 Real estate -- mortgage: 1-4 family residential... 146,347 38.6 165,057 42.8 170,577 47.3 151,552 49.0 146,588 49.7 Commercial and other..... 15,269 4.0 16,050 4.2 22,214 6.2 21,423 6.9 24,535 8.3 Consumer..................... 20,978 5.5 25,290 6.5 30,340 8.4 29,477 9.5 31,772 10.8 Leases....................... 7,376 2.0 13,679 3.5 6,832 1.9 -- -- -- -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Loans held for investment.... 378,796 100.0 385,867 100.0 360,766 100.0 309,563 100.0 294,917 100.0 ===== ===== ===== ===== ===== Loans held for sale.......... 12,836 9,870 74 5,276 1,608 -------- -------- -------- -------- -------- Gross loans.................. $391,632 $395,737 $360,840 $314,839 $296,525 ======== ======== ======== ======== ========
Table 9 Selected Loan Maturities
December 31, 2001 --------------------------------------- One Year One to Over or Less Five Years Five Years Total -------- ---------- ---------- -------- (in thousands) Commercial and agricultural. $63,534 $81,569 $32,474 $177,577 Real estate -- construction. 6,410 3,428 1,411 11,249 ------- ------- ------- -------- Total selected loans.... $69,944 $84,997 $33,885 $188,826 ======= ======= ======= ======== Sensitivity to rate changes: Fixed interest rates...... $18,592 $33,644 $12,817 $ 65,053 Variable interest rates... 51,352 51,353 21,068 123,773 ------- ------- ------- -------- Total................... $69,944 $84,997 $33,885 $188,826 ======= ======= ======= ========
21 While the level of the entire loan portfolio was adversely impacted in 2001 by the general slowdown of the economy, the commercial and agricultural loan portfolio did experience a gain. The level of the 1-4 family residential mortgage loan portfolio has been specifically affected by the balance sheet restructuring project adopted in the 2000 fourth quarter and discussed in the "Overview". The specific aim of the restructuring project was 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. Funds obtained from these sales were primarily redeployed to single premium purchases of life insurance amounting to $10,000,000 in December 2000 and to purchases of investment securities. 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 a review of individual loans, 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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. At December 31, 2001, the Bank had impaired loans which totaled $512,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $155,000. 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. A model that considers both allocated and unallocated components of the allowance for loan losses is used on a quarterly basis to analyze the adequacy of the allowance to absorb probable losses inherent in the loan portfolio. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades derived from regulatory guidelines. Allocations of estimated reserves are assigned to the most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. The reserve is allocated to each pool, and remaining classifications within pools, based upon a two-year historical loss ratio, concentrations within industries, economic and industry-specific trends, portfolio trends, and other subjective factors. An additional portion of the reserve is unallocated to any specific portion of the loan portfolio, and is based upon the mix and weight of the several homogeneous pools. The determination within the allowance model of allocated and unallocated components is not necessarily indicative of future losses or allocations. The entire balance of the allowance for loan losses is available to absorb losses in the loan portfolio. The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.17% at December 31, 2001, 1.13% at December 31, 2000 and .91% at December 31, 1999. The increase in the allowance percentage from December 31, 1999 to December 31, 2000 resulted largely from the merger-related component of the provision for loan losses of approximately $450,000 in 2000 to align the credit risk methodologies of FNB Corp. and Carolina Fincorp, Inc., while the increase from December 31, 2000 to December 31, 2001 related primarily to asset quality considerations and increases in historical charge-off trends. Management believes the allowance for loan losses of $4,417,000 at December 31, 2001 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable 22 judgment. Management's judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no asssurance that loan losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management's ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Corporation. Table 10 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 11. Table 10 Allowance for Loan Losses and Nonperforming Assets
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (dollars in thousands) Allowance for Loan Losses Balance at beginning of year..................... $4,352 $3,289 $2,954 $2,694 $2,375 Charge-offs: Commercial and agricultural.................... 152 603 49 9 66 Real estate -- construction.................... -- -- -- -- -- Real estate -- mortgage........................ 10 21 2 -- 2 Consumer....................................... 395 277 306 387 449 Leases......................................... 702 12 -- -- -- ------ ------ ------ ------ ------ Total charge-offs............................ 1,259 913 357 396 517 ------ ------ ------ ------ ------ Recoveries: Commercial and agricultural.................... 63 117 16 16 14 Real estate -- construction.................... -- -- -- -- -- Real estate -- mortgage........................ 8 6 -- -- 11 Consumer....................................... 96 130 138 158 141 Leases......................................... -- -- -- -- -- ------ ------ ------ ------ ------ Total recoveries............................. 167 253 154 174 166 ------ ------ ------ ------ ------ Net loan charge-offs............................. 1,092 660 203 222 351 Provision for loan losses (1).................... 1,200 1,802 511 482 670 Allowance adjustment for loans sold.............. (43) (79) -- -- -- Adjustment to conform fiscal periods............. -- -- 27 -- -- ------ ------ ------ ------ ------ Balance at end of year........................... $4,417 $4,352 $3,289 $2,954 $2,694 ====== ====== ====== ====== ====== Nonperforming Assets, at end of year Nonaccrual loans................................. $4,144 $1,478 $1,602 $ 855 $ 257 Accruing loans past due 90 days or more.......... 609 367 298 263 167 ------ ------ ------ ------ ------ Total nonperforming loans.................... 4,753 1,845 1,900 1,118 424 Foreclosed assets................................ 123 33 3 -- 23 Other real estate owned.......................... 758 163 423 20 27 ------ ------ ------ ------ ------ Total nonperforming assets................... $5,634 $2,041 $2,326 $1,138 $ 474 ====== ====== ====== ====== ====== Ratios Net loan charge-offs to average loans............ .28% .17% .06% .07% .13% Net loan charge-offs to allowance for loan losses 24.72 15.17 6.17 7.52 13.03 Allowance for loan losses to loans held for investment..................................... 1.17 1.13 .91 .95 .91 Total nonperforming loans to loans held for investment..................................... 1.25 .48 .53 .36 .14
-------- (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. 23 Table 11 Allocation of Allowance For Loan Losses
December 31 ---------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (in thousands) Commercial and agricultural............ $1,590 $1,714 $1,070 $ 821 $ 719 Real estate -- construction............ 15 21 14 31 23 Real estate -- mortgage................ 776 982 735 643 633 Consumer............................... 934 1,076 1,023 1,027 971 Leases................................. 734 201 58 -- -- Unallocated............................ 368 358 389 432 348 ------ ------ ------ ------ ------ Total allowance for loan losses... $4,417 $4,352 $3,289 $2,954 $2,694 ====== ====== ====== ====== ======
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. Money market deposits, which increased $10,969,000 in 2001, were the most significant factor resulting in the 2001 gain in deposits. Time deposits, reflecting the effect of promotions for premium-rate certificates of deposits, grew $43,867,000 in 2000, accounting for the majority of total deposit growth in that year. In 2001, time deposits decreased by $9,079,000. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $53,573,000, $46,800,000, and $39,179,000 at December 31, 2001, 2000 and 1999, respectively. 24 Table 12 shows the year-end and average deposit balances for the years 2001, 2000 and 1999 and the changes in 2001 and 2000. Table 12 Analysis of Deposits
2001 2000 1999 ---------------------- ---------------------- -------- Change from Change from Prior Year Prior Year ------------- ------------- Balance Amount % Balance Amount % Balance -------- ------- ---- -------- ------- ---- -------- (dollars in thousands) Year-End Balances Interest-bearing deposits: Demand deposits......................... $ 59,207 $ 2,726 4.8 $ 56,481 $(1,532) (2.6) $ 58,013 Savings deposits........................ 34,419 (22) (.1) 34,441 (1,438) (4.0) 35,879 Money market deposits................... 46,870 10,969 30.6 35,901 1,974 5.8 33,927 -------- ------- -------- ------- -------- Total............................... 140,496 13,673 10.8 126,823 (996) (.8) 127,819 Certificates and other time deposits.... 290,645 (9,079) (3.0) 299,724 43,867 17.1 255,857 -------- ------- -------- ------- -------- Total interest-bearing deposits..... 431,141 4,594 1.1 426,547 42,871 11.2 383,676 Noninterest-bearing demand deposits..... 49,089 3,188 6.9 45,901 2,567 5.9 43,334 -------- ------- -------- ------- -------- Total deposits...................... $480,230 $ 7,782 1.6 $472,448 $45,438 10.6 $427,010 ======== ======= ======== ======= ======== Average Balances Interest-bearing deposits: Demand deposits......................... $ 55,656 $(1,676) (2.9) $ 57,332 $ 2,203 4.0 $ 55,129 Savings deposits........................ 34,351 (1,493) (4.2) 35,844 (1,727) (4.6) 37,571 Money market deposits................... 42,886 8,088 23.2 34,798 2,959 9.3 31,839 -------- ------- -------- ------- -------- Total............................... 132,893 4,919 3.8 127,974 3,435 2.8 124,539 Certificates and other time deposits.... 299,787 20,201 7.2 279,586 40,297 16.8 239,289 -------- ------- -------- ------- -------- Total interest-bearing deposits..... 432,680 25,120 6.2 407,560 43,732 12.0 363,828 Noninterest-bearing demand deposits..... 46,012 (847) (1.8) 46,859 3,313 7.6 43,546 -------- ------- -------- ------- -------- Total deposits...................... $478,692 $24,273 5.3 $454,419 $47,045 11.5 $407,374 ======== ======= ======== ======= ========
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. As further discussed in the "Overview" and in Note 2 to Consolidated Financial Statements, on February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger is anticipated to close early in the third quarter of 2002. As discussed in the "Overview", management adopted a balance sheet restructuring project in the 2000 fourth quarter that has affected loans and other balance sheet categories in both the 2000 fourth quarter and the 2001 first quarter. 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 25 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 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 was completed in February 2002, resulting in a total capital outlay of approximately $1,400,000. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, was operated at this site. In March 2002, the Bank filed for regulatory approval for establishment of a new branch office in Pinehurst, North Carolina. The current intent is to lease a facility which had previously been used as a banking office by another financial institution. No significant capital outlay is expected. 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. 133" (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 Unrealized Amortized 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 Corporation had no embedded derivative instruments requiring separate accounting treatment. The Corporation does not engage in hedging activities and has identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation's consolidated financial statements. The fair value of these commitments at December 31, 2001 was not material to the Corporation's consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at December 31, 2001. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of SFAS No. 125" ("SFAS No. 140"), which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosure. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures related to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Corporation adopted the provisions of SFAS No. 140 effective April 1, 2001 with no material impact. 26 In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Also, SFAS No. 142 will require that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Corporation was required to adopt the provisions of SFAS No. 141 as of June 30, 2001 and will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature issued prior to SFAS No. 142. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized in 2001 prior to the adoption of SFAS No. 142 on January 1, 2002. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Corporation evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, The Corporation will be required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, any intangible asset classified as goodwill under SFAS No. 142 will be subjected to a transitional impairment test during the first six months of 2002 based on the level of goodwill as of January 1, 2002. Any impairment losses identified as a result of this transitional impairment test will be recognized in the 2002 statement of income as the effect of a change in accounting principle. As of December 31, 2001, the Corporation had no goodwill and had intangible assets, totaling $1,000, related to deposit and branch purchase acquisitions that are being accounted for in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions". SFAS No. 72, which was not amended by SFAS No. 142, requires that identified intangible assets and unidentified intangible assets associated with deposit and branch purchase acquisitions be amortized into expense. Accordingly, these intangible assets will continue to be amortized over their useful lives (generally ten years). Management periodically reviews the useful lives of these assets and adjusts them downward where appropriate. The amortization expense associated with these intangible assets was $9,000, $14,000, and $19,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS No. 143 requires the Corporation to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Corporation also is to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. This statement is effective for fiscal years beginning after June 15, 2002. At this time, the Corporation is assessing the impact of SFAS No. 143 on its financial condition and results of operations. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance on differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Statement 144 also supersedes APB Opinion No. 30, "Reporting the Results of Operations-Reporting 27 the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Corporation does not expect adoption of SFAS No. 144 to have a material effect on its 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. 28 Table 13 Quarterly Financial Data
First Second Third Fourth ------- ------- ------- ------- (in thousands, except per share data) 2001 Interest income.................................... $10,677 $10,519 $10,269 $ 9,795 Interest expense................................... 5,769 5,565 5,015 4,143 ------- ------- ------- ------- Net interest income................................ 4,908 4,954 5,254 5,652 Provision for loan losses.......................... 120 165 205 710 ------- ------- ------- ------- Net interest income after provision for loan losses 4,788 4,789 5,049 4,942 Noninterest income................................. 1,426 1,488 1,453 1,533 Noninterest expense................................ 3,839 4,071 4,097 4,070 ------- ------- ------- ------- Income before income taxes......................... 2,375 2,206 2,405 2,405 Income taxes....................................... 693 608 685 677 ------- ------- ------- ------- Net income......................................... $ 1,682 $ 1,598 $ 1,720 $ 1,728 ======= ======= ======= ======= Per share data: Net income: Basic........................................... $ .33 $ .32 $ .34 $ .36 Diluted......................................... .33 .31 .34 .35 Cash dividends declared........................... .12 .12 .12 .17 Common stock price (1): High............................................ 15.00 14.90 15.75 15.99 Low............................................. 11.88 12.00 13.65 13.85 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 expense............................. -- 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
-------- (1) FNB Corp. common stock is traded on the NASDAQ National Market System under the symbol FNBN. At December 31, 2001, there were 1,653 shareholders of record. 29 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Greenville, South Carolina March 7, 2002 30 FNB CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31 -------------------- 2001 2000 -------- -------- (in thousands, excep share data) Assets Cash and due from banks........................................................................ $ 13,490 $ 14,108 Federal funds sold............................................................................. 127 94 Investment securities: Available for sale, at estimated fair value (amortized cost of $161,685 in 2001 and $73,572 in 2000)....................................................................................... 163,150 73,023 Held to maturity (estimated fair value of $59,727 in 2000).................................... -- 59,361 Loans: Loans held for sale........................................................................... 12,836 9,870 Loans held for investment..................................................................... 378,796 385,867 Less allowance for loan losses................................................................ (4,417) (4,352) -------- -------- Net loans................................................................................. 387,215 391,385 -------- -------- Premises and equipment, net.................................................................... 10,268 9,596 Other assets................................................................................... 19,492 18,072 -------- -------- Total Assets.............................................................................. $593,742 $565,639 ======== ======== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand deposits........................................................... $ 49,089 $ 45,901 Interest-bearing deposits: Demand, savings and money market deposits................................................... 140,496 126,823 Time deposits of $100,000 or more........................................................... 109,187 101,584 Other time deposits......................................................................... 181,458 198,140 -------- -------- Total deposits............................................................................ 480,230 472,448 Retail repurchase agreements................................................................... 14,812 11,201 Federal Home Loan Bank advances................................................................ 30,000 15,000 Federal funds purchased........................................................................ 6,000 4,750 Other liabilities.............................................................................. 6,793 7,118 -------- -------- Total Liabilities......................................................................... 537,835 510,517 -------- -------- 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 4,763,261 shares in 2001 and 5,059,641 shares in 2000................................................................ 11,908 12,649 Surplus....................................................................................... -- 2,836 Retained earnings............................................................................. 43,032 40,000 Accumulated other comprehensive income (loss)................................................. 967 (363) -------- -------- Total Shareholders' Equity................................................................ 55,907 55,122 -------- -------- Total Liabilities and Shareholders' Equity................................................ $593,742 $565,639 ======== ========
Commitments (Note 17) See accompanying notes to consolidated financial statements. 31 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 ------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (in thousands, except per share data) Interest Income Interest and fees on loans........................ $ 31,872 $ 34,241 $ 27,970 Interest and dividends on investment securities: Taxable income.................................. 8,203 6,331 6,430 Non-taxable income.............................. 986 981 991 Other interest income............................. 199 383 431 ---------- ---------- ---------- Total interest income......................... 41,260 41,936 35,822 ---------- ---------- ---------- Interest Expense Deposits.......................................... 18,753 19,501 15,183 Retail repurchase agreements...................... 419 516 501 Federal Home Loan Bank advances................... 1,273 819 433 Other borrowed funds.............................. 47 72 86 ---------- ---------- ---------- Total interest expense........................ 20,492 20,908 16,203 ---------- ---------- ---------- Net Interest Income................................ 20,768 21,028 19,619 Provision for loan losses......................... 1,200 1,802 511 ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 19,568 19,226 19,108 ---------- ---------- ---------- Noninterest Income Service charges on deposit accounts............... 2,537 2,236 2,058 Annuity and brokerage commissions................. 271 414 482 Cardholder and merchant services income........... 609 524 450 Other service charges, commissions and fees....... 720 674 583 Bank owned life insurance......................... 638 12 -- Net gain on sales of loans........................ 831 153 238 Other income...................................... 294 488 257 ---------- ---------- ---------- Total noninterest income...................... 5,900 4,501 4,068 ---------- ---------- ---------- Noninterest Expense Personnel expense................................. 9,137 8,534 7,792 Occupancy expense................................. 824 835 788 Furniture and equipment expense................... 1,423 1,709 1,472 Data processing services.......................... 703 831 1,188 Merger related expenses........................... -- 2,796 -- Other expense..................................... 3,990 3,792 3,842 ---------- ---------- ---------- Total noninterest expense..................... 16,077 18,497 15,082 ---------- ---------- ---------- Income Before Income Taxes......................... 9,391 5,230 8,094 Income taxes....................................... 2,663 1,714 2,504 ---------- ---------- ---------- Net Income......................................... $ 6,728 $ 3,516 $ 5,590 ========== ========== ========== Net income per common share: Basic............................................. $ 1.35 $ .70 $ 1.11 Diluted........................................... $ 1.32 $ .69 $ 1.09 Weighted average number of shares outstanding: Basic............................................. 4,988,084 5,035,529 5,022,403 Diluted........................................... 5,080,767 5,077,937 5,138,365
See accompanying notes to consolidated financial statements. 32 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Common Stock ESOP and Other ------------------ Retained Restricted Comprehensive Shares Amount Surplus Earnings Stock Plans Income (Loss) Total --------- ------- ------- -------- ----------- ------------- ------- (in thousands, except share data) Balance, December 31, 1998........................ 5,160,756 $12,902 $ 4,205 $35,763 $(2,531) $ 51 $50,390 Comprehensive income:............................. Net income...................................... -- -- -- 5,590 -- -- 5,590 Other comprehensive income: Unrealized securities losses, net of income tax benefit of $1,037........................ -- -- -- -- -- (2,009) (2,009) ------- Total comprehensive income...................... 3,581 ------- Cash dividends declared, $.51 per share........... -- -- -- (2,285) -- -- (2,285) ESOP and restricted stock plan transactions....... -- -- (64) -- 295 -- 231 Common stock issued through: Dividend reinvestment plan...................... -- -- -- -- -- -- -- Stock option plan............................... 7,224 19 77 -- -- -- 96 Common stock repurchased.......................... (28,460) (72) (71) (184) -- -- (327) Equity adjustment to conform fiscal periods....... -- -- (16) 274 144 (20) 382 --------- ------- ------- ------- ------- ------- ------- Balance, December 31, 1999........................ 5,139,520 12,849 4,131 39,158 (2,092) (1,978) 52,068 Comprehensive income: Net income...................................... -- -- -- 3,516 -- -- 3,516 Other comprehensive income: Unrealized securities gains, net of income taxes of $834................................ -- -- -- -- -- 1,615 1,615 ------- Total comprehensive income...................... 5,131 ------- Cash dividends declared, $.51 per share........... -- -- -- (2,674) -- -- (2,674) Cash paid for fractional shares in merger......... (122) -- (1) -- -- -- (1) ESOP and restricted stock plan transactions: Termination of plans............................ (93,113) (233) (1,342) -- 1,960 -- 385 Other transactions.............................. -- -- (17) -- 132 -- 115 Common stock issued through: Dividend reinvestment plan...................... 4,701 12 39 -- -- -- 51 Stock option plan............................... 15,355 38 114 -- -- -- 152 Common stock repurchased.......................... (6,700) (17) (88) -- -- -- (105) --------- ------- ------- ------- ------- ------- ------- Balance, December 31, 2000........................ 5,059,641 12,649 2,836 40,000 -- (363) 55,122 Comprehensive income: Net income...................................... -- -- -- 6,728 -- -- 6,728 Other comprehensive income: Unrealized securities gains, net of income taxes of $684................................ -- -- -- -- -- 1,330 1,330 ------- Total comprehensive income........................ 8,058 ------- Cash dividends declared, $.53 per share........... -- -- -- (2,618) -- -- (2,618) Common stock issued through: Stock option plan............................... 24,461 61 189 -- -- -- 250 Common stock repurchased.......................... (320,841) (802) (3,025) (1,078) -- -- (4,905) --------- ------- ------- ------- ------- ------- ------- Balance, December 31, 2001........................ 4,763,261 $11,908 $ -- $43,032 $ -- $ 967 $55,907 ========= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 33 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 ----------------------------- 2001 2000 1999 --------- -------- -------- (in thousands) Operating Activities Net income........................................................................ $ 6,728 $ 3,516 $ 5,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment......................... 1,144 1,465 1,359 Provision for loan losses....................................................... 1,200 1,802 511 Deferred income taxes........................................................... 20 (398) (191) Deferred loan fees and costs, net............................................... 110 (22) 115 Premium amortization and discount accretion of investment securities, net....... (20) 47 (1) ESOP and restricted stock plan expenses......................................... -- 500 231 Amortization of intangibles..................................................... 9 14 19 Net decrease (increase) in loans held for sale.................................. (2,966) 11,142 5,096 Decrease (increase) in other assets............................................. (931) 631 436 Increase (decrease) in other liabilities........................................ (452) 2,057 (354) --------- -------- -------- Net Cash Provided by Operating Activities...................................... 4,842 20,754 12,811 --------- -------- -------- Investing Activities Available-for-sale securities: Proceeds from sales............................................................. -- 77 500 Proceeds from maturities and calls.............................................. 131,739 2,250 17,965 Purchases....................................................................... (160,460) (11,761) (30,039) Held-to-maturity securities: Proceeds from maturities and calls.............................................. -- 2,434 13,039 Purchases....................................................................... -- (3,117) (6,941) Net decrease (increase) in loans held for investment.............................. 5,063 (47,948) (46,246) Purchases of premises and equipment............................................... (1,818) (922) (2,341) Purchases of life insurance contracts............................................. -- (10,000) -- Other, net........................................................................ (373) (108) 340 --------- -------- -------- Net Cash Used in Investing Activities.......................................... (25,849) (69,095) (53,723) --------- -------- -------- Financing Activities Net increase in deposits.......................................................... 7,782 45,438 26,645 Increase (decrease) in retail repurchase agreements............................... 3,611 534 (817) Increase in Federal Home Loan Bank advances....................................... 15,000 -- 15,000 Increase (decrease) in other borrowed funds....................................... 1,250 (2,985) 2,990 Common stock issued............................................................... 250 203 96 Common stock repurchased.......................................................... (4,905) (105) (327) Cash dividends and fractional shares paid......................................... (2,566) (2,465) (2,284) --------- -------- -------- Net Cash Provided by Financing Activities...................................... 20,422 40,620 41,303 --------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents................................ (585) (7,721) 391 Cash and cash equivalents at beginning of year...................................... 14,202 21,923 23,253 Adjustment to conform fiscal periods................................................ -- -- (1,721) --------- -------- -------- Cash and Cash Equivalents at End of Year............................................ $ 13,617 $ 14,202 $ 21,923 ========= ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest........................................................................ $ 21,502 $ 19,333 $ 16,128 Income taxes.................................................................... 2,994 1,879 3,025 Noncash transactions: Transfer of held-to-maturity securities to available-for-sale securities........ 59,361 -- -- Loans held for investment transferred to loans held for sale.................... -- 20,938 -- Foreclosed loans transferred to other real estate............................... 673 1,173 549 Unrealized securities gains (losses), net of income taxes....................... 1,330 1,615 (2,009)
See accompanying notes to consolidated financial statements. 34 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations/Consolidation FNB Corp. is a one-bank holding company whose wholly-owned subsidiary is the First National Bank and Trust Company (the "Bank"). The Bank, which has one wholly-owned subsidiary, First National Investor Services, Inc., offers a complete line of financial services, including loan, deposit, cash management, investment and trust services, to individual and business customers primarily in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The consolidated financial statements include the accounts of FNB Corp. and the Bank (collectively the "Corporation"). All significant intercompany balances and transactions have been eliminated. The chief operating decision maker reviews the results of operations of the Corporation and its subsidiary as a single enterprise. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. As discussed in Note 2 below, the Corporation in 2000 completed a merger for the acquisition of Carolina Fincorp, Inc. in a transaction accounted for as a pooling of interests. Historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp, Inc. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Investment Securities Investment securities are categorized and accounted for as follows: . Held-to-maturity securities--Debt securities that the Corporation has the positive intent and ability to hold to maturity are reported at amortized cost. . Trading securities--Debt and equity securities bought and held principally for the purpose of being sold in the near future are reported at fair value, with unrealized gains and losses included in earnings. . Available-for-sale securities--Debt and equity securities not classified as either held-to-maturity securities or trading securities are reported at fair value, with unrealized gains and losses, net of related tax effect, included as an item of other comprehensive income and reported as a separate component of shareholders' equity. The Corporation intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Corporation has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities. As permitted in connection with the adoption of SFAS No. 133 on January 1, 2001, as discussed under "Derivatives" below, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio. As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion of discounts. The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities. 35 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) Loans Interest income on loans is generally calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectibility cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. A loan is considered impaired when, based on current information or events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. 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. When the ultimate collectibility of the impaired loan's principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are first recorded as recoveries of any amounts previously charged-off and are then applied to interest income, to the extent that any interest has been foregone. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis. Allowance for Loan Losses The allowance for loan losses represents an amount considered adequate to absorb loan losses inherent in the portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. 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. Losses are charged and recoveries are credited to the allowance for loan losses. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. Other Real Estate Other real estate, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu thereof and is carried at the lower of cost or fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in other real estate below carrying value are recognized by a charge to income. Mortgage Servicing Rights (MSRs) The rights to service mortgage loans for others are included in other assets on the consolidated balance sheet. MSRs are capitalized based on the allocated cost which is determined when the underlying loans are sold. MSRs are amortized over the life of the underlying loan as an adjustment of servicing income. Impairment reviews of MSRs are performed on a quarterly basis. 36 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: buildings and improvements, 10 to 50 years and furniture and equipment, 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated life of the improvement or the term of the lease. Intangible Assets In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Also, SFAS No. 142 will require that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Corporation was required to adopt the provisions of SFAS No. 141 as of June 30, 2001 and will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature issued prior to SFAS No. 142. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized in 2001 prior to the adoption of SFAS No. 142 on January 1, 2002. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Corporation evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Corporation will be required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, any intangible asset classified as goodwill under SFAS No. 142 will be subjected to a transitional impairment test during the first six months of 2002 based on the level of goodwill as of January 1, 2002. Any impairment losses identified as a result of this transitional impairment test will be recognized in the 2002 statement of income as the effect of a change in accounting principle. As of December 31, 2001, the Corporation had no goodwill and had intangible assets, totaling $1,000, related to deposit and branch purchase acquisitions that are being accounted for in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions". SFAS No. 72, which was not amended by SFAS No. 142, requires that identified intangible assets and unidentified intangible assets associated with deposit and branch purchase acquisitions be amortized into expense. Accordingly, these intangible assets will continue to be amortized over their useful lives (generally ten years). Management periodically reviews the useful lives of these assets and adjusts them downward where appropriate. The amortization expense associated with these intangible assets was $9,000, $14,000, and $19,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Income Taxes Income tax expense includes both a current provision based on the amounts computed for income tax return purposes and a deferred provision that results from application of the asset and liability method of accounting for deferred taxes. 37 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Corporation's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share (EPS) As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation is provided in a footnote of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Comprehensive Income Comprehensive income is defined as the change in equity of an enterprise during a 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 items of other comprehensive income are included in the consolidated statement of shareholders' equity and comprehensive income. The accumulated balance of other comprehensive income is included in the shareholders' equity section of the consolidated balance sheet. Employee Benefit Plans The Corporation has a defined benefit pension plan covering substantially all full-time employees. Pension costs, which are actuarially determined using the projected unit credit method, are charged to current operations. Annual funding contributions are made up to the maximum amounts allowable for Federal income tax purposes. In 2000, the Corporation adopted a noncontributory, nonqualified supplemental executive retirement plan (the "SERP") covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. SERP costs, which are actuarially determined using the projected unit credit method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet. Medical and life insurance benefits are provided by the Corporation on a postretirement basis under defined benefit plans covering substantially all full-time employees. Postretirement benefit costs, which are actuarially determined using the attribution method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet. Stock Options The Corporation accounts for awards under employee stock-based compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, no compensation cost has been recognized for such awards in the consolidated financial statements. As required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Corporation discloses in a footnote the pro forma effect on net income and earnings per share that would result from the use of the fair value based method to measure compensation costs related to awards granted after December 15, 1994. Derivatives 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. 133" (collectively referred to as "SFAS No. 133"). This statement establishes accounting and reporting 38 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) 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 Unrealized Amortized 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 Corporation had no embedded derivative instruments requiring separate accounting treatment. The Corporation does not engage in hedging activities and has identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation's consolidated financial statements. The fair value of these commitments at December 31, 2001 was not material to the Corporation's consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at December 31, 2001. NOTE 2--MERGER INFORMATION Carolina Fincorp, Inc. 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. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. 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 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 39 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--MERGER INFORMATION--(Continued) severance payments. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. The primary components of merger-related expenses, all recorded in 2000, are as follows (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 ======
For purposes of preparing the 1999 consolidated balance sheet, the year-end for Carolina Fincorp was conformed from a June 30 year-end to the December 31 year-end of the Corporation. In preparing other consolidated financial statements for 1999 and prior years and for the consolidated balance sheets before December 31, 1999, the results of operations for Carolina Fincorp are included based on the June 30 year-end. The net results of operations for Carolina Fincorp for the six months ended December 31, 1999 are included as a conforming adjustment in preparing the consolidated statement of shareholders' equity and comprehensive income and consolidated statement of cash flows for the year ended December 31, 1999. The equity adjustment to conform fiscal periods for the consolidated statement of shareholders' equity and comprehensive income consisted of the following for the operations of Carolina Fincorp for the six months ended December 31, 1999 (in thousands): Net income....................................... $ 476 Cash dividends declared.......................... (202) ESOP and restricted stock plan transactions...... 128 Unrealized securities losses, net of income taxes (20) ----- Equity adjustment to conform fiscal periods... $ 382 =====
Separate financial information for the pooled entities for the year ended December 31, 1999 is as follows:
FNB Carolina Corp. Fincorp Combined -------- -------- -------- (in thousands) Total assets................ $396,067 $121,401 $517,468 Total revenues.............. 30,734 9,156 39,890 Net interest income......... 15,497 4,122 19,619 Net income.................. 4,657 933 5,590 Net income per common share: Basic.................... 1.27 .54 1.11 Diluted.................. 1.23 .54 1.09
Rowan Bancorp, Inc. On February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger will be accounted for as a purchase 40 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--MERGER INFORMATION--(Continued) business combination and is subject to several conditions, including approval by the shareholders of Rowan Bancorp and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the third quarter of 2002. Rowan Bancorp shareholders will be permitted to elect FNB Corp. common stock or cash, or a combination of each. Subject to the Corporation's ability to limit the overall stock consideration to 45%, each share of Rowan Bancorp common stock, at the election of the shareholder, will be converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash. At December 31, 2001, Rowan Bancorp operated three offices through Rowan Bank and had approximately $116,033,000 in total assets, $96,494,000 in deposits and $10,043,000 in shareholders' equity. NOTE 3--INVESTMENT SECURITIES Summaries of the amortized cost and estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair --------- Gains Losses Value (in thousands) Available For Sale December 31, 2001 U.S. Government agencies and corporations. $129,731 $1,668 $ 615 $130,784 Mortgage-backed securities................ 330 11 -- 341 State, county and municipal............... 25,042 574 392 25,224 Other debt securities..................... 3,601 194 -- 3,795 Equity securities......................... 2,981 25 -- 3,006 -------- ------ ------ -------- Total................................... $161,685 $2,472 $1,007 $163,150 ======== ====== ====== ======== December 31, 2000 U.S. Treasury............................. $ 749 $ 4 $ -- $ 753 U.S. Government agencies and corporations. 69,854 67 649 69,272 Equity securities......................... 2,969 29 -- 2,998 -------- ------ ------ -------- Total................................... $ 73,572 $ 100 $ 649 $ 73,023 ======== ====== ====== ======== Held To Maturity December 31, 2000 U.S. Government agencies and corporations. $ 36,089 $ -- $ 330 $ 35,759 Mortgage-backed securities................ 483 5 -- 488 State, county and municipal............... 19,735 622 5 20,352 Other debt securities..................... 3,054 78 4 3,128 -------- ------ ------ -------- Total................................... $ 59,361 $ 705 $ 339 $ 59,727 ======== ====== ====== ========
41 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--INVESTMENT SECURITIES--(Continued) The amortized cost and estimated fair value of investment securities at December 31, 2001, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.
Available For Sale ------------------- Amortized Estimated Cost Fair --------- Value (in thousands) Due in one year or less............... $ 2,118 $ 2,151 Due after one year through five years. 7,570 7,901 Due after five years through ten years 90,568 92,132 Due after ten years................... 58,118 57,619 -------- -------- Total.............................. 158,374 159,803 Mortgage-backed securities............ 330 341 Equity securities..................... 2,981 3,006 -------- -------- Total investment securities........ $161,685 $163,150 ======== ========
Debt securities with an estimated fair value of $75,819,000 at December 31, 2001 and $68,433,000 at December 31, 2000 were pledged to secure public funds and trust funds on deposit. Debt securities with an estimated fair value of $21,128,000 at December 31, 2001 and $18,800,000 at December 31, 2000 were pledged to secure retail repurchase agreements. Proceeds from the sales of investment securities classified as available-for-sale amounted to $77,000 in 2000 and $500,000 in 1999. Gross gains of $76,000 were realized on the sales in 2000. There were no securities sales in 2001. The Bank, as a member of the Federal Home Loan Bank (the "FHLB") of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of residential mortgage loans and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. At December 31, 2001 and 2000, the Bank owned a total of $2,557,000 of FHLB stock. NOTE 4--LOANS Major classifications of loans are as follows:
December 31 ----------------- 2001 2000 -------- -------- (in thousands) Commercial and agricultural $177,577 $160,057 Real estate -- construction 11,249 5,734 Real estate -- mortgage: 1-4 family residential.... 146,347 165,057 Commercial and other...... 15,269 16,050 Consumer................... 20,978 25,290 Leases..................... 7,376 13,679 -------- -------- Loans held for investment.. 378,796 385,867 Loans held for sale........ 12,836 9,870 -------- -------- Gross loans............... $391,632 $395,737 ======== ========
42 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--LOANS--(Continued) Loans as presented are reduced by net deferred loan fees of $514,000 and $405,000 at December 31, 2001 and 2000, respectively. Nonaccrual loans amounted to $4,144,000 at December 31, 2001 and $1,478,000 at December 31, 2000. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2001, 2000 and 1999 had they performed in accordance with their original terms, amounted to approximately $373,000, $137,000 and $153,000, respectively. Interest income on all such loans included in the results of operations amounted to approximately $213,000 in 2001, $98,000 in 2000 and $90,000 in 1999. At December 31, 2001, the Bank had impaired loans which totaled $512,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $155,000. 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. The average carrying value of impaired loans was $536,000 in 2001, $330,000 in 2000 and $1,508,000 in 1999. Interest income recognized on impaired loans amounted to approximately $51,000 in 2001, $17,000 in 2000 and $87,000 in 1999. Loans with outstanding balances of $673,000 in 2001 and $1,173,000 in 2000 were transferred from loans to other real estate acquired through foreclosure. Other real estate acquired through loan foreclosures amounted to $758,000 at December 31, 2001 and $163,000 at December 31, 2000 and is included in other assets on the consolidated balance sheet. Loans are primarily made in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The real estate loan portfolio can be affected by the condition of the local real estate markets. Loans have been made by the Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity during 2001 with respect to related party loans is as follows (in thousands): Balance, December 31, 2000 $ 8,020 New loans during 2001..... 17,055 Repayments during 2001.... (21,791) -------- Balance, December 31, 2001 $ 3,284 ========
NOTE 5--ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
Years Ended December 31 ----------------------- 2001 2000 1999 ------- ------ ------ (in thousands) Balance at beginning of year.............. $ 4,352 $3,289 $2,954 Provision for losses charged to operations 1,200 1,802 511 Loans charged off......................... (1,259) (913) (357) Recoveries on loans previously charged off 167 253 154 Allowance adjustment for loans sold....... (43) (79) -- Adjustment to conform fiscal periods...... -- -- 27 ------- ------ ------ Balance at end of year.................... $ 4,417 $4,352 $3,289 ======= ====== ======
43 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31 --------------- 2001 2000 ------- ------- (in thousands) Land.......................................... $ 2,356 $ 2,342 Buildings and improvements.................... 7,773 6,672 Furniture and equipment....................... 9,834 9,207 Leasehold improvements........................ 434 434 ------- ------- Total........................................ 20,397 18,655 Less accumulated depreciation and amortization 10,129 9,059 ------- ------- Premises and equipment, net................... $10,268 $ 9,596 ======= =======
NOTE 7--INCOME TAXES Income taxes as reported in the consolidated income statement included the following expense (benefit) components:
2001 2000 1999 ------ ------ ------ (in thousands) Current: Federal.............. $2,640 $2,106 $2,633 State................ 3 6 62 ------ ------ ------ Total.............. 2,643 2,112 2,695 ------ ------ ------ Deferred--Federal..... 20 (398) (191) ------ ------ ------ Total income taxes. $2,663 $1,714 $2,504 ====== ====== ======
A reconciliation of income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented below:
2001 2000 1999 ------ ------ ------ (in thousands) Amount of tax computed using Federal statutory tax rate of 34%...................... $3,193 $1,778 $2,752 Increases (decreases) resulting from effects of: Non-taxable income............................. (565) (329) (316) Non-deductible merger-related expenses......... -- 331 -- Other.......................................... 35 (66) 68 ------ ------ ------ Total........................................ $2,663 $1,714 $2,504 ====== ====== ======
44 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--INCOME TAXES--(Continued) The components of deferred tax assets and liabilities and the tax effect of each are as follows:
December 31 -------------- 2001 2000. ------ ------ (in thousands) Deferred tax assets: Allowance for loan losses.................. $1,272 $1,161 Net unrealized securities losses........... -- 186 Compensation and benefit plans............. 927 924 Other...................................... 67 80 ------ ------ Total.................................... 2,266 2,351 ------ ------ Deferred tax liabilities: Depreciable basis of premises and equipment 401 337 Net unrealized securities gains............ 498 -- Prepaid pension cost....................... 250 297 Net deferred loan fees and costs........... 220 225 Mortgage servicing rights.................. 164 47 Other...................................... 157 165 ------ ------ Total.................................... 1,690 1,071 ------ ------ Net deferred tax asset...................... $ 576 $1,280 ====== ======
There is no valuation allowance for deferred tax assets as it is management's contention that realization of the deferred tax assets is more likely than not based upon the Corporation's history of taxable income and estimates of future taxable income. The Corporation is permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This addition differs significantly from the provisions for losses for financial reporting purposes. Under accounting principles generally accepted in the United States of America, the Corporation is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year. Retained earnings at December 31, 2001, includes approximately $1,400,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reductions of such amounts for purposes other than bad debt losses could create income for tax purposes in certain remote instances, which would then be subject to the then current corporate income tax rate. NOTE 8--TIME DEPOSITS The scheduled maturities of time deposits at December 31, 2001 are as follows (in thousands):
Years ending December 31 ------------------------ 2002.................. $237,135 2003.................. 23,179 2004.................. 15,146 2005.................. 2,295 2006.................. 12,890 -------- Total time deposits... $290,645 ========
45 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 9--SHORT-TERM BORROWED FUNDS Funds are borrowed on an overnight basis through retail repurchase agreements with Bank customers and federal funds purchased from other financial institutions. Retail repurchase agreement borrowings are collateralized by securities of the U.S. Treasury and U.S. Government agencies and corporations. Information concerning retail repurchase agreements and federal funds purchased is as follows:
2001 2000 ------------------- ------------------- Retail Federal Retail Federal Repurchase Funds Repurchase Funds Agreements Purchased Agreements Purchased ---------- --------- ---------- --------- (dollars in thousands) Balance at December 31......... $14,812 $6,000 $11,201 $4,750 Average balance during the year 13,010 940 11,091 1,112 Maximum month-end balance...... 14,812 7,900 12,580 5,000 Weighted average interest rate: At December 31................ 1.92% 1.71% 4.82% 6.84% During the year............... 3.22 5.04 4.64 6.47
NOTE 10--FEDERAL HOME LOAN BANK (FHLB) ADVANCES The Bank has a $71,200,000 line of credit with the FHLB, secured by a blanket collateral agreement on qualifying 1-4 family residential mortgage loans. At December 31, 2001, FHLB advances under this line amounted to $30,000,000 and were at interest rates ranging from 3.49% to 5.92%. At December 31, 2000, FHLB advances amounted to $15,000,000 and were at interest rates ranging from 4.92% to 5.92%. The scheduled maturities of FHLB advances at December 31, 2001 are as follows (in thousands):
Years ending December 31 ------------------------ 2009................... $ 7,000 2010................... 8,000 2011................... 15,000 ------- Total FHLB Advances.. $30,000 =======
46 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS Pension Plan The Corporation has a noncontributory defined benefit pension plan covering substantially all full-time employees who qualify as to age and length of service. Benefits are based on the employee's compensation, years of service and age at retirement. The Corporation's funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes. Information concerning the status of the plan is as follows:
2001 2000 ------ ------ (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year......... $6,228 $5,742 Service cost.................................... 238 255 Interest cost................................... 452 428 Net actuarial loss.............................. 184 139 Benefits paid................................... (347) (336) ------ ------ Benefit obligation at end of year............... $6,755 $6,228 ====== ====== Change in Plan Assets: Fair value of plan assets at beginning of year.. $7,448 $7,832 Actual loss on plan assets...................... (774) (192) Employer contributions.......................... -- 56 Benefits paid................................... (347) (336) Other........................................... 48 88 ------ ------ Fair value of plan assets at end of year........ $6,375 $7,448 ====== ====== Prepaid Pension Cost Components: Funded status (liability) of plan................ $ (380) $1,221 Unrecognized net actuarial loss (gain)........... 657 (932) Unrecognized prior service cost.................. 458 565 Unrecognized transition obligation............... -- 21 ------ ------ Prepaid pension cost at end of year.............. $ 735 $ 875 ====== ====== Weighted-Average Plan Assumptions at End of Year: Discount rate................................... 7.25% 7.50% Expected long-term rate of return on plan assets 9.00 9.00 Rate of increase in compensation levels......... 5.50 5.50
Net periodic pension cost included the following components:
2001 2000 1999 ----- ----- ----- (in thousands) Service cost......................... $ 238 $ 255 $ 225 Interest cost........................ 452 428 392 Expected return on plan assets....... (658) (697) (634) Amortization of prior service cost... 107 107 107 Amortization of transition obligation 21 21 21 Recognized net actuarial gain........ (20) (84) (16) ----- ----- ----- Net periodic pension cost............ $ 140 $ 30 $ 95 ===== ===== =====
47 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS--(Continued) Supplemental Executive Retirement Plan In 2000, the Corporation adopted a noncontributory, nonqualified supplemental executive retirement plan (the "SERP") covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. In 2001, the social security offset was changed from 100% to 50%, increasing the net periodic SERP cost, the accrued SERP cost and the benefit obligation by $46,000, $140,000 and $196,000, respectively. Information concerning the status of the plan is as follows:
2001 2000 ----- ----- (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year........ $ 329 $ -- Service cost................................... 38 20 Interest cost.................................. 43 21 Amendments..................................... 196 288 Net actuarial loss............................. 77 -- Benefits paid.................................. (14) -- ----- ----- Benefit obligation at end of year.............. $ 669 $ 329 ===== ===== Change in Plan Assets: Fair value of plan assets at beginning of year. $ -- $ -- Actual return on plan assets................... -- -- Employer contributions......................... 14 -- Benefits paid.................................. (14) -- ----- ----- Fair value of plan assets at end of year....... $ -- $ -- ===== ===== Accrued SERP Cost Components: Funded status (liability) of plan.............. $(669) $(329) Unrecognized net actuarial loss................ 77 -- Unrecognized prior service cost................ 402 256 Unrecognized transition obligation............. -- -- ----- ----- Accrued SERP cost at end of year............... $(190) $ (73) ===== ===== Weighted-Average Plan Assumption at End of Year: Discount rate.................................. 7.25% 7.50%
Net periodic SERP cost included the following components:
2001 2000 ---- ---- (in thousands) Service cost......................... $ 38 $20 Interest cost........................ 43 21 Expected return on plan assets....... -- -- Amortization of prior service cost... 50 32 Amortization of transition obligation -- -- Recognized net actuarial gain........ -- -- ---- --- Net periodic SERP cost............... $131 $73 ==== ===
48 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS--(Continued) Other Postretirement Defined Benefit Plans The Corporation has postretirement medical and life insurance plans covering substantially all full-time employees who qualify as to age and length of service. The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change. The life insurance plan is noncontributory. Information concerning the plans, which are unfunded, is as follows:
2001 2000 ------- ------ (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year................. $ 751 $ 729 Service cost............................................ 43 29 Interest cost........................................... 71 52 Net actuarial gain (loss)............................... 238 (13) Benefits paid........................................... (45) (46) ------- ------ Benefit obligation at end of year....................... $ 1,058 $ 751 ======= ====== Accrued Postretirement Benefit Cost Components: Funded status (liability) of plan....................... $(1,058) $ (751) Unrecognized net actuarial loss......................... 290 64 Unrecognized prior service cost......................... 39 49 Unrecognized transition obligation...................... 223 243 ------- ------ Accrued postretirement benefit cost at end of year...... $ (506) $ (395) ======= ====== Weighted-Average Plan Assumptions at End of Year: Discount rate........................................... 7.25% 7.50% Annual rate of increase in the cost of medical benefits: Current year.......................................... 9.00 10.00 Final constant amount................................. 6.00 6.00 Annual decrease....................................... 1.00 1.00
Increasing or decreasing the assumed medical cost trend rate by one percentage point would not have a significant effect on either the postretirement benefit obligation at December 31, 2001 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2001. Net periodic postretirement benefit cost included the following components:
2001 2000 1999 ---- ---- ---- (in thousands) Service cost............................ $ 43 $ 29 $ 22 Interest Cost........................... 71 52 48 Amortization of prior service cost...... 10 10 10 Amortization of transition obligation... 20 20 20 Recognized net actuarial loss........... 12 -- 4 ---- ---- ---- Net periodic postretirement benefit cost $156 $111 $104 ==== ==== ====
Matching Retirement/Savings Plan The Corporation has a matching retirement/savings plan which permits eligible employees to make contributions to the plan up to a specified percentage of compensation as defined by the plan. A portion of the employee contributions are 49 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS--(Continued) matched by the Corporation based on the plan formula. The matching contributions amounted to $154,000 in 2001, $117,000 in 2000 and $107,000 in 1999. Carolina Fincorp maintained a 401(k) retirement plan. Upon completion of the merger with Carolina Fincorp in 2000, the plan was rolled into the Corporation's matching retirement/savings plan. The matching contributions for the Carolina Fincorp 401(k) retirement plan amounted to $24,000 in 1999. ESOP and Restricted Stock Plans Carolina Fincorp had established an ESOP, or employee stock ownership plan, for the benefit of all qualified employees. Under the terms of the ESOP, shares of Carolina Fincorp common stock, for future allocation to plan participants, were purchased with proceeds from a loan by the parent company with repayments to be made by the subsidiary bank. Under a restricted stock plan for directors, officers and employees, newly issued shares of Carolina Fincorp common stock were awarded to plan participants on a deferred vesting schedule. Compensation expense related to the ESOP and restricted stock plans amounted to $115,000 in 2000 and $231,000 in 1999. Upon the change in control when the merger occurred in 2000, the ESOP plan terminated according to its terms and unvested restricted stock plan shares became fully vested, resulting in $385,000 of merger-related expenses. NOTE 12--LEASES Future obligations at December 31, 2001 for minimum rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows (in thousands):
Years ending December 31 ------------------------ 2002............................ $ 48 2003............................ 24 2004............................ 9 2005............................ 9 2006............................ 7 2007 and later years............ 50 ---- Total minimum lease payments. $147 ====
Net rental expense for all operating leases amounted to $86,000 in 2001, $87,000 in 2000 and $81,000 in 1999. One operating lease for real property contains a purchase option considered to approximate fair market value. NOTE 13--SUPPLEMENTARY INCOME STATEMENT INFORMATION Significant components of other expense were as follows:
2001 2000 1999 ---- ---- ---- (in thousands) Stationery, printing and supplies $518 $521 $493 Advertising and marketing........ 331 392 460
50 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 14--FNB CORP. (PARENT COMPANY) FINANCIAL DATA The Parent Company's principal asset is its investment in the Bank subsidiary, and its principal source of income is dividends from that subsidiary. The Parent Company's condensed balance sheets as of December 31, 2001 and 2000, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2001 are as follows: Condensed Balance Sheets
December 31 --------------- 2001 2000 ------- ------- (in thousands) Assets: Cash......................................... $ 2,961 $ 1,718 Investment in wholly-owned bank subsidiary... 52,902 53,278 Other assets................................. 862 885 ------- ------- Total assets............................... $56,725 $55,881 ======= ======= Liabilities and Shareholders' Equity: Accrued liabilities.......................... $ 818 $ 759 Shareholders' equity......................... 55,907 55,122 ------- ------- Total liabilities and shareholders' equity. $56,725 $55,881 ======= =======
Condensed Statements of Income
Years Ended December 31 ---------------------- 2001 2000 1999 ------- ------ ------ (in thousands) Income: Dividends from bank subsidiary..................................................... $ 8,457 $2,403 $6,554 Other income....................................................................... 24 139 130 ------- ------ ------ Total income..................................................................... 8,481 2,542 6,684 ------- ------ ------ Expenses: Operating.......................................................................... 33 89 170 Merger related..................................................................... -- 146 -- ------- ------ ------ Total expenses................................................................... 33 235 170 ------- ------ ------ Income before income taxes and equity in undistributed net income of bank subsidiary 8,448 2,307 6,514 Income taxes (benefit).............................................................. 15 28 (4) ------- ------ ------ Income before equity in undistributed net income of bank subsidiary................. 8,433 2,279 6,518 Equity in undistributed net income of bank subsidiary............................... (1,705) 1,237 (928) ------- ------ ------ Net income.......................................................................... $ 6,728 $3,516 $5,590 ======= ====== ======
51 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 14--FNB CORP. (PARENT COMPANY) FINANCIAL DATA--(Continued) Condensed Statements of Cash Flows
Years Ended December 31 ------------------------- 2001 2000 1999 ------- ------- ------- (in thousands) Operating activities: Net income....................................................................... $ 6,728 $ 3,516 $ 5,590 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of bank subsidiary.......................... 1,705 (1,237) 928 Other, net..................................................................... (8) 407 (582) ------- ------- ------- Net cash provided by operating activities.................................... 8,425 2,686 5,936 ------- ------- ------- Investing activities: Proceeds from sales of available-for-sale securities............................. -- 77 -- Other, net....................................................................... 39 64 29 ------- ------- ------- Net cash provided by investing activities.................................... 39 141 29 ------- ------- ------- Financing activities: Decrease in borrowed funds....................................................... -- -- (3,200) Common stock issued.............................................................. 250 203 96 Common stock repurchased......................................................... (4,905) (105) (327) Cash dividends and fractional shares paid........................................ (2,566) (2,465) (2,284) ------- ------- ------- Net cash used in financing activities........................................ (7,221) (2,367) (5,715) ------- ------- ------- Net increase in cash.............................................................. 1,243 460 250 Cash at beginning of year......................................................... 1,718 1,258 1,366 Adjustment to conform fiscal periods.............................................. -- -- (358) ------- ------- ------- Cash at end of year............................................................... $ 2,961 $ 1,718 $ 1,258 ======= ======= =======
NOTE 15--CAPITAL ADEQUACY REQUIREMENTS Certain regulatory requirements restrict the lending of funds by the Bank to FNB Corp. and the amount of dividends which can be paid to FNB Corp. In 2002, the maximum amount of dividends the Bank can pay to FNB Corp., without the approval of the Comptroller of the Currency, is equal to the retained net income in 2002 up to the date of any dividend declaration. The Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. For the reserve maintenance period in effect at December 31, 2001, the average daily reserve requirement was $2,155,000. FNB Corp. and the Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System. In addition, the Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Regulatory capital amounts and ratios are set forth in the table below. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 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- 52 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 15--CAPITAL ADEQUACY REQUIREMENTS--(Continued) 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, 2001, 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. The Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must meet minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no events or conditions since the notification that management believes have changed the Bank's category.
Minimum Ratios ------------------- To Be Well Capitalized Under For Prompt Capital Amount Ratio Capital Corrective --------------- ------------ Adequacy Action 2001 2000 2001 2000 Purposes Provisions ------- ------- ----- ----- -------- ----------- (dollars in thousands) As of December 31 Total capital (to risk-weighted assets): FNB Corp.................. $59,319 $59,833 14.29% 15.15% 8.00% N/A Bank...................... 56,314 57,982 13.56 14.69 8.00 10.00% Tier 1 capital (to risk-weighted assets): FNB Corp.................. 54,891 55,468 13.22 14.05 4.00 N/A Bank...................... 51,886 53,617 12.50 13.58 4.00 6.00% Tier 1 capital (to average assets): FNB Corp.................. 54,891 55,468 9.39 9.92 4.00 N/A Bank...................... 51,886 53,617 8.87 9.58 4.00 5.00%
NOTE 16--SHAREHOLDERS' EQUITY Stock Buyback Program Under a stock buyback program authorized by the Board of Directors for the repurchase of up to 500,000 shares of common stock, the Corporation repurchased 320,841 shares in 2001. Under previous buyback authorizations, there were repurchases of 6,700 shares in 2000 and 28,460 shares in 1999. 53 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--SHAREHOLDERS' EQUITY--(Continued) Earnings Per Share (EPS) Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporation's dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:
2001 2000 1999 --------- --------- --------- Basic EPS denominator--Weighted average number of common shares outstanding 4,988,084 5,035,529 5,022,403 Dilutive share effect arising from assumed exercise of stock options....... 92,683 42,408 115,962 --------- --------- --------- Diluted EPS denominator.................................................... 5,080,767 5,077,937 5,138,365 ========= ========= =========
For the years 2001, 2000 and 1999, there were 134,667, 323,601 and 96,364 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective years. Stock Options The Corporation adopted a stock compensation plan in 1993 that allows for the granting of incentive and nonqualified stock options to key employees and directors. Under terms of the plan, options are granted at prices equal to the fair market value of the common stock on the date of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. A maximum of 720,000 shares of common stock has been reserved for issuance under the stock compensation plan. At December 31, 2001, there were 183,025 shares available under the plan for the granting of additional options. The Corporation assumed a stock compensation plan in its merger acquistion of Carolina Fincorp in 2000. One grant of incentive and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. The total stock options assumed on April 10, 2000, the date of completion of the merger, amounted to 109,300 shares after adjustment for the exchange ratio in converting from Carolina Fincorp shares to FNB Corp. shares. All unvested options of Carolina Fincorp that were outstanding on April 10, 2000 became immediately vested as a result of a change-in-control provision in the plan that was triggered by the merger. Based on the stock options outstanding at December 31, 2001, a maximum of 78,134 shares of common stock has been reserved for issuance under the stock compensation plan. The Corporation applies APB Opinion No. 25 in accounting for stock compensation plans and, accordingly, no compensation cost has been recognized for stock option grants in the consolidated financial statements. As required by Statement of Financial Accounting Standards No. 123, disclosures are presented below for the effect on net income and net income per share that would result from the use of the fair value based method to measure compensation costs related to stock option grants in 1995 and subsequent years. 54 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--SHAREHOLDERS' EQUITY--(Continued)
2001 2000 1999 ------ ------ ------ (in thousands, except per share data) Net Income: As reported......... $6,728 $3,516 $5,590 Pro forma........... 6,345 3,199 5,346 Net Income Per Share: Basic: As reported....... 1.35 .70 1.11 Pro forma......... 1.27 .64 1.06 Diluted: As reported....... 1.32 .69 1.09 Pro forma......... 1.25 .63 1.04
The weighted-average fair value per share of options granted in 2000 and 1999 amounted to $4.16 and $4.21, respectively. There were no options granted in 2001. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 ------- ------- Risk-free interest rate 5.00% 6.23% Dividend yield......... 3.50 3.20 Volatility............. 44.00 41.00 Expected life.......... 6 years 6 years
The following is a summary of stock option activity. For comparison purposes, Carolina Fincorp and the Corporation were consolidated using conforming fiscal years.
Years Ended December 31 ------------------------------------------------------ 2001 2000 1999 ------------------ ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- ------- -------- ------- -------- Outstanding at beginning of year.. 728,145 $12.69 567,315 $14.25 396,089 $15.53 Granted........................... -- -- 222,500 11.74 185,070 11.58 Exercised......................... (24,461) 9.63 (15,355) 9.24 (7,619) 11.29 Forfeited......................... (140,175) 21.05 (46,315) 16.69 (6,225) 19.22 -------- ------- ------- Outstanding at end of year........ 563,509 11.71 728,145 13.44 567,315 14.25 ======== ======= ======= Options exercisable at end of year 349,274 11.37 371,645 12.69 289,359 12.10 ======== ======= =======
55 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--SHAREHOLDERS' EQUITY--(Continued) At December 31, 2001, information concerning stock options outstanding and exercisable is as follows:
Options Outstanding -------------------- Weighted Average Remaining Exercise Contractual Options Price Shares Life (Years) Exercisable ----- ------- ------------ ----------- $ 8.13 71,150 2.96 71,150 12.00 55,900 3.96 55,900 14.00 69,500 4.96 69,500 16.00 2,000 5.75 1,600 17.50 3,000 5.96 2,400 27.00 2,500 6.96 1,500 9.82 78,134 7.13 78,134 14.13 64,125 7.96 25,650 10.00 1,000 8.58 200 11.63 1,000 8.79 200 11.75 215,200 8.96 43,040 ------- ------- 563,509 6.81 349,274 ======= =======
NOTE 17--COMMITMENTS In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 2001, a summary of significant commitments is as follows: Commitments to extend credit $103,135,000 Standby letters of credit... 351,000
In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. Commitments to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower. Standby letters of credit are commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that in extending loans to customers. There were no binding commitments for the origination of mortgage loans intended to be held for sale at December 31, 2001 and 2000. The Corporation does not have any special purpose entities or other similar forms of off-balance sheet financing. 56 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value for each class of financial instruments. Cash and Cash Equivalents. For cash on hand, amounts due from banks, and federal funds sold, the carrying value is considered to be a reasonable estimate of fair value. Investment Securities. The fair value of investment securities is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits. The fair value of demand, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowed Funds. The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar remaining maturities. Commitments. The fair value of commitments to extend credit is considered to approximate carrying value, since the large majority of these commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The various commitment items are disclosed in Note 17. The estimated fair values of financial instruments are as follows:
December 31, 2001 December 31, 2000 ------------------ ------------------ Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value -------- --------- -------- --------- (in thousands) Financial Assets Cash and cash equivalents...... $ 13,617 $ 13,617 $ 14,202 $ 14,202 Investment securities: Available for sale........... 163,150 163,150 73,023 73,023 Held to maturity............. -- -- 59,361 59,727 Net loans...................... 387,215 400,614 391,385 385,698 Financial Liabilities Deposits....................... 480,230 486,886 472,448 474,656 Retail repurchase agreements... 14,812 14,812 11,201 11,201 Federal Home Loan Bank advances 30,000 33,168 15,000 15,219 Federal funds purchased........ 6,000 6,000 4,750 4,750
57 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS--Continued The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be considered in an actual sale considered. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 21, 2002. FNB CORP. (Registrant) By: /s/ MICHAEL C. MILLER ------------------------------ Michael C. Miller Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 21, 2002. Signature Title --------- ----- /s/ MICHAEL C. Chairman and MILLER President (Principal ----------------------------- Executive Officer) Michael C. Miller /s/ JERRY A. Treasurer and LITTLE Secretary (Principal ----------------------------- Financial and Accounting Jerry A. Little Officer) /s/ JAMES M. Director CAMPBELL, JR. ----------------------------- James M. Campbell, Jr /s/ R. LARRY Director CAMPBELL ----------------------------- R. Larry Campbell /s/ DARRELL L. Director FRYE ----------------------------- Darrell L. Frye /s/ WILBERT L. Director HANCOCK ----------------------------- Wilbert L. Hancock /s/ THOMAS A. Director JORDAN ----------------------------- Thomas A. Jordan /s/ COOPER M. Director MCLAURIN ----------------------------- Cooper M. McLaurin /s/ R. REYNOLDS Director NEELY, JR. ----------------------------- R. Reynolds Neely, Jr. /s/ RICHARD K. Director PUGH ----------------------------- Richard K. Pugh /s/ J. M. Director RAMSAY III ----------------------------- J. M. Ramsay III /s/ CHARLES W. Director STOUT, M.D. ----------------------------- Charles W. Stout, M.D. 59 INDEX TO EXHIBITS
Exhibit No. Description of Exhibit ----------- ---------------------- 2.10 Agreement and Plan of Merger dated as of February 11, 2002 by and between the Registrant and Rowan Bancorp, Inc. The schedules to this agreement have been omitted. The Registrant will furnish supplementally a copy of any omitted schedule to the Commission upon request. 3.10 Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985. 3.11 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 3.12 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 3.20 Amended and Restated Bylaws of the Registrant, adopted May 21, 1998, incorporated herein by reference to Exhibit 3.20 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 4 Specimen of Registrant's Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985. 10.10* Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 10.11* Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.20* Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 10.21* 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. 10.22* 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. 10.30* 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. 10.31* Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-54702). 10.32* Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 2000. 10.33* Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc.for the fiscal year ended June 30, 1997. 21 Subsidiaries of the Registrant. 23 Independent Auditors' Consent.
-------- *Management contract, or compensatory plan or arrangement. 60