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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000
-----------------
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________
Commission file number 0-13086
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FNB Financial Services Corporation
-------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1382275
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
202 South Main Street Reidsville, North Carolina 27320
------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (336) 342-3346
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $1.00 Per Share
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 in
response 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 ]
The aggregate market value of the registrant's Common Stock at
March 9, 2001, held by those persons deemed by the registrant to be
non-affiliates, based on the average bid and asked price of the Common Stock on
that day, was approximately $51.4 million.
As of March 9, 2001, (the most recent practicable date), the
registrant had outstanding 4,493,202 shares of Common Stock, $1.00 per value.
Documents Incorporated By Reference
Document Where Incorporated
-------- ------------------
1. Proxy Statement for the Annual Meeting of Shareholders Part III
to be held May 17, 2001 to be mailed to shareholders
within 120 days of December 31, 2000.
2. Registrant's Statement on Form S-2 (File No. Part IV
333-47203). Filed with the Securities and Exchange
Commission on March 3, 1998.
Form 10-K Table of Contents
Index PAGE
- ----- ----
PART I
Item 1. Business.............................................................. 1
Item 2. Properties............................................................ 18
Item 3. Legal................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders................... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................. 19
Item 6. Selected Financial Data............................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 27
Item 8. Financial Statements and Supplementary Data........................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 61
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 61
Item 11. Executive Compensation................................................. 61
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 61
Item 13. Certain Relationships and Related Transactions......................... 61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 61
PART I
Item 1. Business
General
FNB Financial Services Corporation (the "Company") is a North
Carolina financial holding company with consolidated assets of $685.9 million,
deposits of $569.4 million and shareholders' equity of $56.4 million, each as of
December 31, 2000. The Company was organized in 1984 as a North Carolina bank
holding company, although its predecessor and wholly-owned subsidiary, FNB
Southeast (the "Bank" or "Subsidiary Bank"), opened as Rockingham Savings Bank
and Trust in 1910, and was then chartered as a national bank in 1918 under the
name of First National Bank of Reidsville. Effective March 15, 1999, FNB
Southeast changed its charter from a national bank to a North Carolina state
bank. The Company filed an election with the Federal Reserve Board to become a
financial holding company on January 23, 2001, and became a financial holding
company effective February 12, 2001, under the Gramm-Leach-Bliley Act. A
financial holding company is permitted to engage in activities that are
financial in nature or incidental to a financial activity. The permitted
activities of a financial holding company are broader than for a bank holding
company.
Historically, the Company has served the Rockingham County area
of North Carolina through three branches in Reidsville and two in Eden, North
Carolina. In 1995, the Company initiated a strategic growth plan beginning with
the hiring of a new chief executive officer. On August 31, 1999, the Company
acquired Black Diamond Savings Bank, FSB ("Black Diamond"), a federal savings
bank headquartered in Norton, Virginia. By the end of 2000, FNB Southeast had
increased its number of North Carolina branches from five to thirteen by closing
a branch in Eden and opening nine new branches in the Rockingham County towns of
Eden, Ruffin and Madison and in the new markets of Greensboro, Burgaw and
Wilmington. The acquisition of Black Diamond added five branches in Norton,
Harrisonburg, Pennington Gap and Richlands, Virginia. As of, and for the twelve
months ended December 31, 1995, the Company reported net interest income, loans
and deposits of $10.6 million, $200.1 million and $261.8 million, respectively.
As a result of its growth strategy, at December 31, 2000, the Company reported
net interest income of $22.7 million, loans of $500.6 million and deposits of
$569.4 million.
FNB Southeast is community oriented and focuses primarily on
offering commercial, real estate and consumer loans, and deposit and other
financial services to individuals, small to medium-sized businesses and other
organizations in its market areas. The Company emphasizes its individualized
services and community involvement, while at the same time providing its
customers with the financial sophistication and array of products typically
offered by larger banks. The Company competes successfully with larger banks
located within and outside North Carolina and Virginia by retaining its
personalized approach and community focus.
Under the leadership of Ernest J. Sewell, who became President
and Chief Executive Officer in January 1995, the Company adopted the following
three-part strategy: (1) increase market share and geographic reach through
opportunistic acquisitions in markets where the mix of economic, operational,
cultural and other factors are favorable; (2) position the Company to manage its
planned growth by adding experienced personnel and upgrading its internal
systems and procedures; and (3) generate internal growth at its existing banking
offices by offering new and complementary services and products. To accomplish
these objectives, during the past five years the Company has: (a) increased the
number of its North Carolina banking offices to thirteen by opening new offices
in Eden, Ruffin, Madison, Greensboro (three offices), Burgaw and Wilmington (two
offices); (b) expanded the number of its full-time personnel by adding new
employees, including several new vice presidents and senior vice presidents; (c)
completed the merger with Black Diamond to extend the Company's reach into
Virginia in the Norton and Harrisonburg markets; (d) completed a systematic
review and revision of its loan administration, loan policy and credit
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procedures; and (e) enhanced its mix of products and services by forming an
investment services subsidiary, broadening the scope of its commercial lending
activities, and by updating and extending its ATM terminals and network.
The Company plans to continue to pursue these objectives by
strengthening its presence in existing markets and opportunistically reaching
into new markets in North Carolina, Virginia and South Carolina. The Company
intends to hire qualified personnel to help manage its planned growth and to
develop new products that are uniquely consistent with the Company's customer
service orientation. The Company also plans, where appropriate, to upgrade its
systems and procedures and refine its ability to offer customers sophisticated
services without sacrificing its personalized approach.
Strategy
Expand Banking Operations. Throughout most of its 91-year
history, the Company's banking activities were centered in Reidsville, North
Carolina, located in Rockingham County in the north central part of the State.
Beginning in 1995, however, the Company initiated a growth strategy to further
penetrate markets in which it had an existing market share and expand into and
develop new and contiguous markets, such as Wilmington and Greensboro in North
Carolina and into Virginia. Management selects its target markets based on a
number of factors, including market size and growth potential, banking
relationships developed by members of management during their careers and the
ability to integrate the targeted market into the Company's community oriented
culture.
The Company's expansion strategy, both within and outside of its
existing markets, involves three key elements: (i) ascertain which markets may
be underserved by financial institutions whose primary focus is to cater to the
individualized needs of the customer; (ii) install high-quality, well-trained
management to serve the market; and (iii) find reasonably priced facilities.
Management believes that it has been successful in implementing these strategic
elements in its expansion program to date.
In August 1999, the Company merged with Black Diamond and
acquired offices in Norton, Harrisonburg, Pennington Gap and Richlands,
Virginia. These branches serve the market areas of Wise, Tazewell, Russell, Lee,
Rockingham and Augusta Counties in Virginia. In December 1999, the Company
opened a full service banking office in Burgaw, North Carolina. This office
serves the Pender County market plus the surrounding area and compliments the
Company's presence in adjacent New Hanover County. In April 2000, a second
office was opened in Wilmington, North Carolina. This office will service the
residential construction market. The Company also opened two additional branches
in Greensboro, North Carolina, during April 2000. These two newly constructed
facilities supplement the existing office, and the Company now has three full
service offices in this dynamic market.
Seize Market Expansion Opportunities. The Company intends to
continue to capitalize on opportunities to enter new and contiguous markets
which it believes are underserved as a result of banking consolidation and in
which the Company's community oriented philosophy and culture might flourish.
The Company believes that there is value to be added by providing the
opportunity for greater personalized banking relationships that exist with
2
larger commercial banks in its markets, although the Company also recognizes the
need to carefully analyze markets that are already well served by numerous
institutions. The Company will continue to distinguish itself by emphasizing
high quality, sophisticated services in a hometown environment.
Establish a Platform for Future Growth. The Company seeks to
position itself to manage its expected growth in two fundamental ways: (1)
attract, retain and reward experienced personnel who are committed both to
conducting business in a friendly and personable manner and to serving the
communities in which they work and live; and (2) finalize a program to upgrade,
modify and expand its internal systems, procedures, equipment and software
designed to improve marketing and operating efficiencies. The Company will
continue to analyze technological developments in the banking industry for
opportunities to improve or augment its services and products; however,
management will continue to make every effort to maintain the Company's
personalized approach as pressures to succumb to technological advances mount.
The Company believes that FNB Southeast's change from a nationally-chartered
bank to a state-chartered bank in March 1999 and its acquisition of Black
Diamond are ways in which the Company solidified its foundation for future
growth.
Maintain a Friendly Environment for Employees and Customers. The
Company has instituted various programs to instill high morale among its
employees, which the Company believes translates into exceptional customer
service. The Company holds weekly sales meetings to elicit ideas about featured
products and services and to develop and communicate ideas for expanding banking
relationships with existing and potential customers. The Company believes that
the overall effect of these programs is to improve morale, customer service and
financial performance.
Market Areas
For operational purposes, the Company groups its markets into
four regions: the Triad and Wilmington regions of North Carolina, and the Norton
and Harrisonburg regions of Virginia. The Company's deposit market share in
Rockingham County, North Carolina as of June 2000, the most recent date for
which data are available, was 28.4%, which ranked first among banks and thrift
institutions. The following table summarizes the banking offices and deposit
totals for the Company's offices, categorized by city.
Region and City
- --------------- Deposits at December 31,
---------------------------------------------
2000 1999 1998
--------- --------- ---------
(In thousands)
Triad Region:
Reidsville (1) $219,474 $177,480 $171,389
Eden (2) 55,417 59,406 54,040
Madison 23,387 22,891 21,576
Ruffin 10,793 9,244 7,418
Greensboro (3) 57,109 39,614 32,825
-------- -------- --------
Subtotal 366,180 308,635 287,248
-------- -------- --------
Wilmington Region:
Wilmington (4) 47,051 42,332 57,757
Burgaw 21,125 6,995 --
-------- -------- --------
Subtotal 68,176 49,327 57,757
-------- -------- --------
Norton Region:
Norton 57,936 55,436 53,165
Pennington Gap 26,772 25,913 22,720
Richlands 26,258 23,018 21,408
-------- -------- --------
Subtotal 110,966 104,367 97,293
-------- -------- --------
Harrisonburg Region:
Harrisonburg (5) 24,129 21,913 17,297
-------- -------- --------
Total deposits $569,451 $484,242 $459,595
======== ======== ========
(1) Includes three banking offices for all years.
(2) Includes two banking offices for 2000 and 1999, and three offices for 1998.
(3) Includes three banking offices for 2000, and one office for 1999 and 1998.
(4) Includes two banking offices for 2000, and one office for 1999 and 1998.
(5) Includes two banking offices for 2000 and 1999, and one office for 1998.
3
The following is a summary description of the Company's market areas.
Triad Region - Rockingham County. Rockingham County was formed in
1785 and is located in the north central area of North Carolina. It has a land
area of 565 square miles and a population of approximately 90,000. Surrounding
counties are Guilford to the south, Caswell to the east, and Stokes to the west.
The county is bordered on the north by the Commonwealth of Virginia. Piedmont
Triad International Airport is located twenty miles away, and Norfolk Southern
has two rail connection lines in the county. The area is served by U.S. Highways
29, 158 and 220. The county, which consists of several community oriented towns,
provides a full range of municipal services and extends financial support to
certain boards, agencies, and commissions to assist its effort to serve its
citizens. The North Carolina Employment Security Commission reported a January
2001 unemployment rate of 6.3% for Rockingham County. Business and government
leaders in the county have made progress in diversifying the area's economy to
make up for job losses in the textile and tobacco industries.
Triad Region - Greensboro. Greensboro has a diverse economy
attributable to a blend of trade, manufacturing and service businesses. Local
industry is characterized by the production of a wide range of products,
including textiles, apparel, tobacco, machinery, pharmaceuticals, microchips and
electronics equipment. Guilford County, with a population of 397,000, has access
to major domestic and international markets from Interstate Highways 40 and 85;
U.S. Highways 29, 70, 220 and 421; major rail connections; and the Piedmont
Triad International Airport. According to the North Carolina Employment Security
Commission, Guilford County reported an unemployment rate of 3.5% for January
2001, compared to a statewide rate of 4.7%.
Wilmington Region. Wilmington is the county seat and industrial
center of New Hanover County. The total population of New Hanover County is
approximately 156,000. The county is served by Interstate Highway 40 and U.S.
Highways 17 and 74, as well as major rail connections. This area is serviced by
national and regional airlines through facilities at the New Hanover
International Airport located near Wilmington. The New Hanover County area has
experienced extensive industrial development and service/trade sector growth
over the past twenty years. Industries in the Wilmington region produce fiber
optic cables for the communications industry, aircraft engine parts,
pharmaceuticals, nuclear fuel components and various textile products. The New
Hanover County area economy has become broadly diversified and has developed
into a major resort area, a busy sea port (one of North Carolina's two deep
water ports), a light manufacturing center, chemical manufacturing center and
the distribution hub of southeastern North Carolina. The North Carolina
Employment Security Commission reported a January 2001 unemployment rate of 4.1%
for New Hanover County.
Norton Region. Norton is located in southwestern Virginia in the
midst of the Appalachian Mountains. The mining, retail and service industries of
this region operate from an abundant natural resource base that includes natural
gas, coal, timber and mineral deposits. The area is served by several U.S.
Highways and by major rail connections. The Subsidiary Bank operates branches in
Norton (Wise County), Pennington Gap (Lee County) and Richlands (Tazewell
County). For October 2000, the Virginia Employment Commission reported the
unemployment rate in Wise County was 5.9%, an improvement over recent years.
Harrisonburg Region. Rockingham County is centrally located in
the Shenandoah Valley in west central Virginia. Harrisonburg, the county seat
with a population of 40,000, is an important educational, industrial, retail,
tourism, commercial, agricultural and governmental center. The area is served by
Interstate Highway 81, several primary U. S. highways, the Shenandoah Valley
Regional Airport and a major rail connection. FNB Southeast operates two
branches in Harrisonburg, serving the counties of Rockingham and Augusta.
According to the Virginia Employment Commission, the October 2000 unemployment
rate for Harrisonburg was 1.3%.
4
Lending Activities
General. The Company offers a broad array of lending services,
including real estate, commercial and consumer loans, to individuals and small
to medium-sized business and other organizations that are located in or conduct
a substantial portion of their business in the Company's market areas. The
Company has also established niche markets such as residential construction
lending in local markets and airplane lending in markets throughout the
southeastern United States. The Company's total loans at December 31, 2000, were
$500.6 million, or 95.0% of total earning assets. The Company also makes secured
construction loans to homebuilders and residential mortgages, which are often
secured by first and second real estate mortgages. At December 31, 2000, the
Company had no large loan concentrations (exceeding ten percent of its
portfolio) in any particular industry.
Loan Composition. The following table summarizes, at the dates
indicated, the composition of the Company's loan portfolio and the related
percentage composition.
(In thousands) As of December 31
-------------------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- ----------------------
Real Estate:
Commercial $119,584 23.9% $115,434 27.9% $ 94,798 26.2%
Residential 150,825 30.1 130,676 31.6 120,143 33.2
Construction 66,148 13.2 34,680 8.4 29,794 8.2
-------- ----- -------- ----- -------- -----
Total real estate 336,557 67.2% 280,790 67.9% 244,735 67.6%
Commercial, financial and
agricultural 74,981 15.0% 58,002 14.0% 49,822 13.8%
-------- ----- -------- ----- -------- -----
Consumer:
Direct 46,463 9.3% 32,778 7.9% 32,368 8.9%
Home Equity 39,204 7.8 32,836 7.9 26,723 7.4
Revolving 3,432 0.7 9,605 2.3 8,604 2.3
-------- ----- -------- ----- -------- -----
Total consumer 89,099 17.8% 75,219 18.1% 67,695 18.6%
-------- ----- -------- ----- -------- -----
Total loans $500,637 100.0% $414,011 100.0% $362,252 100.0%
======== ===== ======== ===== ======== =====
Real Estate Loans. Loans secured by real estate for a variety of
purposes constituted $336.6 million or 67.2%, of the Company's total loans at
December 31, 2000. The Company held at December 31, 2000, real estate loans of
various sizes ranging up to $4.0 million, secured by office buildings, retail
establishments, warehouses, motels, restaurants and other types of property.
Loan terms are typically limited to five years, with payments through the date
of maturity generally based on a 15-year amortization schedule. Interest rates
may be fixed or adjustable, based on market conditions, and the Company
generally charges an origination fee. Management has attempted to reduce credit
risk in the real estate portfolio by emphasizing loans on owner occupied office
and retail buildings where the loan to value ratio, established by independent
appraisals, does not exceed 80%, and net projected cash flow available for debt
service equals 120% of the debt service requirement. The Company also often
requires personal guarantees of the principal owners of the property and obtains
personal financial statements of the principal owners in such cases. The Company
experienced net credit losses of $346,000 in 2000, and no net credit losses in
1999 and 1998.
The Company originates residential loans for its portfolio on
single and multi-family properties, both owner occupied and non-owner occupied,
and at December 31, 2000, it held $150.8 million of such loans. Loan terms are
typically limited to five years, with payments through the date of maturity
5
generally based on a 15 or 30 year amortization schedule. Rates may be fixed or
variable, and the Company typically charges an origination fee. The Company
attempts to minimize credit risk by requiring a loan to value ratio of 80% or
less. The Company experienced net credit losses of $13,000 in 2000, no net
credit losses in 1999, and net credit losses of $4,000 in 1998.
The Company also originates residential loans for sale into the
secondary market. Through its mortgage banking division, the Company originates
both fixed and variable rate residential mortgage loans for sale with servicing
released. The Company is able to generate loan origination fees, typically
ranging from 1.0% to 1.5% of the loan balance, which are recognized as income
when the loan is sold. During 2000, 1999 and 1998, the Company earned loan
origination fees of $264,000, $249,000 and $258,000, respectively. At December
31, 2000, the Company held $712,000 of such loans for sale, and during 2000 the
Company sold an aggregate of $4.4 million of such loans. The Company sells these
loans on a non-recourse basis.
The Company's current lending strategy is for the majority of
construction and development loans on commercial and residential projects to be
in the range of $0.3 million to $4.0 million. At December 31, 2000, 1999 and
1998, the Company held $66.1 million, $34.7 million and $29.8 million,
respectively, of such loans. To reduce credit risk associated with such loans,
the Company limits its lending to projects involving small commercial centers
that have strong anchor tenants and are substantially pre-leased, or residential
projects built in strong, proven markets. The leases on commercial projects must
generally result in a loan to appraised value of 80% and a net cash flow to debt
service at no less than 120%. The Company historically has required a personal
guarantee from the developer or builder. Loan terms are typically twelve to
fifteen months on a commercial project and twelve to fifteen months on a
residential project, although the Company occasionally will make a
"mini-permanent" loan for purposes of construction and development up to a three
to five year term. Rates are typically variable, and the Company typically
charges an origination fee. The Company experienced no net credit losses during
2000 or 1999 and net credit losses of $48,000 in 1998.
Commercial Loans. The Company makes loans for commercial purposes
to various types of businesses. At December 31, 2000, the Company held $75.0
million of commercial loans, or 15.0% of its total loan portfolio. Equipment
loans are typically made on terms up to five years at fixed or variable rates,
with the financed equipment pledged as collateral to the Company. The Company
attempts to reduce its credit risk on these loans by limiting the loan to value
ratio to 80%. Working capital loans are made on terms typically not exceeding
one year. These loans may be secured or unsecured, but the Company attempts to
limit its credit risk by requiring the borrower to demonstrate its capacity to
produce net cash flow available for debt service equal to 110% to 150% of its
debt service requirements. During 2000, the Company experienced a $62,000 net
loss on commercial loans, net loan recoveries of $5,000 in 1999, and net credit
losses of $537,000 in 1998.
Consumer Loans. The Company makes a variety of loans to
individuals for personal and household purposes, including (i) secured and
unsecured installment and term loans originated directly by the Company; (ii)
home equity revolving lines of credit; and (iii) unsecured revolving lines of
credit. The home equity loans and certain of the direct loans are secured by the
borrower's residence. At December 31, 2000, the Company held $89.1 million of
consumer loans, including home equity revolving lines of credit. During 2000,
1999, and 1998, respectively, the Company experienced net consumer credit losses
of $258,000, $249,000 and $204,000.
Credit Card Loans. In 1996, the Company began offering credit
card loans to individuals and businesses that met the Company's underwriting
standards with respect to income, credit rating, established residence and
employment. In February 2000, the Company sold its entire credit card portfolio
6
of $3.4 million to a third party. The Company received approximately a 3%
premium on this sale. The loans were sold without recourse. During 2000, the
Company experienced $29,000 in net recoveries, and net losses of $173,000 in
1999 and $110,000 in 1998.
Loan Approval and Review. The Company has adopted various levels
of officer lending authority in connection with its loan approval policies. When
the aggregate outstanding loans to a single borrower exceed that individual
officer's lending authority, the loan request must be considered and approved by
an officer with a higher lending limit. Branch loan officers and community
executives typically have retail lending limits ranging from $75,000 to
$250,000. Community executives can approve commercial loans up to $500,000. If
the lending request exceeds the community executive's lending limit, the loan
must be submitted to and approved by the appropriate senior credit officer. The
senior credit officer and selected regional executives have authority to approve
a commercial loan up to $750,000. Under joint approval, the senior credit
officer and selected regional executives may approve loans up to $1.5 million.
All loans in excess of $1.5 million must be approved by the President and Chief
Executive Officer, who may approve loans up to $2.5 million.
The Company has a continuous loan review procedure involving
multiple officers of the Company which is designed to promote early
identification of credit quality problems through its credit management
committee. All loan officers are charged with the responsibility of reviewing on
an annual basis all credit relationships in excess of $100,000 in their
respective portfolios. All relationships no more than sixty days old and in
excess of $100,000 are reviewed by a credit management committee comprised of
loan officers and senior management every two weeks. Loan officers also review
all criticized and classified assets in their portfolio quarterly with the
senior loan officers of the Company. The loan officers are responsible for
implementing, where appropriate, approved action plans with respect to such
criticized and classified assets designed to improve the Company's credit
position for an early resolution of the problem loan. As part of its overall
strategy to improve policies and procedures, the Company also engaged a third
party consultant to review its loan portfolio. The first examination occurred in
1998. The Company has used the findings of the examinations to further enhance
credit quality through improved credit administration policies and procedures.
The Company's credit review system supplements the Company's loan
rating system, pursuant to which the Company may place a loan on its criticized
asset list or may classify a loan in one of various other classification
categories. A specified minimum percentage of loans in each adverse asset
classification category, based on the historical loss experience in the Company
in each such category, is used to determine the adequacy of the Company's
allowance for credit losses quarterly. These loans are also individually
reviewed by senior credit officers of the Company to determine whether a greater
allowance allocation is justified due to the facts and circumstances of a
particular adversely classified loan.
See also Note 5 in the Notes to Consolidated Financial Statements
on page 48 of this Annual Report on Form 10-K.
Outsourcing of Certain Operational Functions. The Company has
agreements with third parties to provide a variety of specialized functions to
the Company in connection with its lending operations. In each of the
relationships, the Company benefits from the service provider's expertise and
economies of scale while retaining the flexibility to take advantage of changes
in available technology without adversely affecting customer service.
7
Investments
The Company seeks to maintain an investment portfolio consistent
with the overall financial needs of the Company. The following items may be
considered in the purchase or sale of investment securities: liquidity,
maturity, credit quality, income or other factors. The portfolio consists of
United States treasury obligations, federal agency and municipal securities,
mortgage-backed securities and other investment securities.
See also Note 4 in the Notes to Consolidated Financial Statements
on page 47 of this Annual Report on Form 10-K.
Deposits
The Company offers a variety of deposit programs to individuals
and to small and medium-sized businesses and other organizations at interest
rates generally competitive with local market conditions. The following table
sets forth the mix of depository accounts at the Company as a percentage of
total deposits at the dates indicated.
As of December 31,
----------------------------------------
2000 1999 1998
------- ------- -------
Non-interest bearing demand 9.6% 9.9% 9.8%
Savings, NOW, MMI 14.5 19.2 19.0
Certificates of deposit 75.9 70.9 71.2
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
The Company accepts deposits at its 18 banking offices, ten of
which have automated teller machines ("ATMs"). In addition, the Company operates
a network of 34 remote ATMs in Norton, Virginia, and the surrounding area; three
remote ATMs in Reidsville, North Carolina; and two remote ATMs in Wilmington,
North Carolina. The Company's memberships in the "STAR", "CIRRUS" and "PLUS"
networks allow customers access to their depository accounts from regional ATM
facilities. The Company charges fees ranging from $1.50 to $1.75 per transaction
for the use of its ATM facilities by those who are not depositors with the
Company. The Company controls deposit flows primarily through the pricing of
such deposits and, to a certain extent, through promotional activities. Such
promotional activities include the Company's "Prestige" and "Priority" accounts
for deposits of $25,000 and $75,000, respectively, and the "FNB Club", which
extends special privileges and sponsors group excursions to sites and
performances of interest to account holders over the age of 55. At December 31,
2000, the Company had $206.8 million in certificates of deposit of $100,000 or
more. In January 1998, the Company joined an electronic network which allows it
to post interest rates and attract certificates of deposit nationally. The
investors are generally credit unions or commercial banks and amounts are
typically just under $100,000 to assure FDIC insurance coverage. Deposit rates
are set weekly by senior management of the Company. Management believes that the
rates it offers are competitive with those offered by other institutions in the
Company's market areas.
See also Note 8 in the Notes to Consolidated Financial Statements
on page 49 of this Annual Report on Form 10-K.
Investment Services
In April 2000, the Company established FNB Southeast Investment
Services, Inc. as a wholly-owned subsidiary of FNB Southeast. FNB Southeast
Investment Services, Inc. employs an investment advisor who splits his time
8
among the Company's branches and is available to current customers and potential
customers of the Company. This advisor offers a complete line of investment
products and services. The Company receives a commission based on the advisor's
sales. The Company no longer has any contractual relationship with American
Express Financial Advisors, who provided similar services for the past five
years. The Company benefits by earning additional fee income and by attracting
additional people to its branches who may become customers of the Bank. In 2000,
the Company earned $48,000 through the third party service provider and the
newly formed subsidiary.
Marketing
The Company currently markets its services through advertising
campaigns and in printed material, such as newspapers, magazines and direct
mailings, as well as through promotional items, such as caps, pens, pencils and
shirts. The Company's officers are also heavily involved in local civic affairs
and philanthropic organizations in order to focus customers on products and
services at a personal level. The Company occasionally sponsors community events
and holds grand opening ceremonies for its new branches to which local
dignitaries are invited to speak and participate in the festivities. Since the
Company does not have a fully-staffed marketing department, the Company's
marketing, advertising and public relations campaigns focus on the following two
components:
o Value. Among other things, the Company offers attractive
rates for its financial products, including its certificates
of deposit and checking accounts. This pricing structure has
been successful in attracting depositors who are motivated by
the Company's rates, as well as by the variety of
individualized services the Company promotes and offers.
o Convenience and Service. All personnel of the Company aim
toward serving the individual needs of the Company's
customers. For example, senior personnel are accessible on
very short notice, even after normal banking hours, by way of
pagers and other means. In addition, all employees are
eligible to earn incentive compensation for sales and cross
sales to customers.
Management intends to continue to market the Company's services
through a combination of advertising campaigns, public relations activities and
local affiliations. In most of its markets, the Company has established advisory
boards, comprised of local community leaders, to promote the Company. While the
key messages of value, convenience, service and reliability will continue to
play a major role in the Company's marketing and public relations efforts,
management may also focus on targeted groups, such as professionals, in addition
to small to medium-sized local businesses.
A vital part of the Company's marketing plan is the execution of
a public relations strategy. Many traditional public relations methods will be
used in promoting its services. Management intends to pursue media coverage,
including general press, industry periodicals and other media covering banking
and finance, consumer issues and special interests. Press releases, quarterly
shareholder reports, media alerts and presentations will announce new banking
services as they are added. In addition, a professional marketing firm has been
engaged by the Company to assist in promoting the overall image of the Company
to the general public and investment community.
Competition
Commercial banking in the southeastern portion of the United
States is extremely competitive, due in large part to interstate branching.
Currently, many of the Company's competitors are significantly larger and have
greater resources than the Company. The Company continues to encounter
9
significant competition from a number of sources, including bank holding
companies, financial holding companies, commercial banks, thrift institutions,
credit unions, and other financial institutions and financial intermediaries.
The Company competes in its market areas with some of the largest banking
organizations in the Southeast, several of which have as many as 200 or 300
branches in North Carolina and Virginia. The Company's competition is not
limited to financial institutions based in North Carolina and Virginia. The
enactment of federal legislation authorizing nationwide interstate banking has
greatly increased the size and financial resources of some of the Company's
competitors. Consequently, many of the Company's competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers, such as trust services, that the Company
does not offer. The Company primarily relies on providing quality products and
services at a competitive price within the market area. As a result of recent
interstate banking legislation, the Company's market is open to future
penetration by banks located in other states provided that the other states
allow their domestic banking institutions to acquire North Carolina banking
institutions, thereby increasing competition.
In the Triad region of North Carolina as of June 2000, the
Company competed with seventeen commercial banks and three savings institutions,
as well as numerous credit unions. For the same period, the Company competed
with nine commercial banks, one savings institution and several credit unions in
the Wilmington region of North Carolina. In the Norton region of Virginia as of
June 2000, the Company competed with seventeen commercial banks. For the same
period, the Company competed with fifteen commercial banks in the Harrisonburg
region of Virginia.
Employees
On December 31, 2000, the Company had approximately 196 full-time
and 12 part-time employees. None of the Company's employees are represented by a
collective bargaining unit. The Company considers its relations with its
employees to be good.
Supervision and Regulation
Bank holding companies and state savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the
Company and FNB Southeast. This summary is qualified in its entirety by
reference to the particular statute and regulatory provisions referred to below
and is not intended to be an exhaustive description of the statutes or
regulations applicable to the business of the Company and FNB Southeast.
Supervision, regulation and examination of the Company and FNB Southeast by the
regulatory agencies are intended primarily for the protection of depositors
rather than shareholders of the Company.
Regulation of the Company.
General. The Company is a financial holding company, registered
with the Board of Governors of the Federal Reserve (the "Federal Reserve") under
the Bank Holding Company Act of 1956, (the "BHCA") as amended by the
Gramm-Leach-Bliley Act (the "GLB Act" or the "Act"), which was enacted on
November 12, 1999 (and further discussed herein). As a result of the Company's
ownership of the Bank, the Company is also registered with the North Carolina
Commissioner of Banks (the "Commissioner") under the North Carolina Bank Holding
Company Act of 1984, as amended. In addition to being subject to the
supervision, examination and regulation of the Federal Reserve and the
10
Commissioner, the Company is also subject to the backup supervisory power of the
Federal Deposit Insurance Corporation (the "FDIC") as a result of the Bank's
deposits being insured by the FDIC to the extent provided by law.
The Company qualified as a financial holding company under the
BHCA, as amended by the GLB Act, in February, 2001. Prior to that time, it was a
bank holding company, subject to the BHCA and Federal Reserve regulations. Under
the BHCA, as amended, a bank holding company which does not qualify as a
financial holding company is prohibited from engaging in activities other than
(i) banking, managing or controlling banks or other permissible subsidiaries,
(ii) furnishing services to or performing services for its subsidiaries or (iii)
engaging in any other activity which the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be proper
incident thereto. In addition, the BHCA prohibits bank holding companies from
engaging in, or acquiring the ownership or control of, more than 5% of the
outstanding voting stock of any company engaged, in a non-banking business
unless such business was determined by the Federal Reserve to be so closely
related to banking as to be properly incident thereto.
However, under the amendments to the BHCA, as codified in the GLB
Act, certain barriers separating banking, securities and insurance firms were
removed. Title I of the Act allows financial organizations to structure new
financial affiliations through a holding company structure, or a financial
subsidiary (with limitations on activities and appropriate safeguards). Bank
holding companies, such as the Company, are now permitted to qualify as
financial holding companies and expand into a wide variety of services that are
financial in nature, provided that their subsidiary depository institutions are
well-managed, well-capitalized and have received a "satisfactory" rating on
their last Community Reinvestment Act ("CRA") examination. A bank holding
company which does not qualify as a financial holding company under the Act is
generally limited in the types of activities in which it may engage to those
that the Federal Reserve Board had recognized as permissible for a bank holding
company prior to the effective date of the Act. The Company is now permitted to
take advantage of these additional types of activities if it so chooses in the
future as a result of its election to become a financial holding company.
The Act designates the Federal Reserve as the overall umbrella
supervisor of the new financial services holding companies. The Act adopts a
system of functional regulation where the primary regulator is determined by the
nature of activity rather than the type of institution. Under this principle,
securities activities are regulated by the SEC and other securities regulators,
insurance activities by the state insurance authorities, and banking activities
by the appropriate banking regulator. As a result, to the extent the Company or
a financial subsidiary of the Company engages in non-banking activities
permitted under the Act, it will be subject to the regulatory authority of the
SEC or state insurance authority, as applicable.
The Company remains subject to a number of restrictions imposed
on all bank holding companies. The BHCA prohibits the Company from acquiring
direct or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or merging or
consolidating with another bank holding company or savings bank holding company
without prior approval of the Federal Reserve.
Similarly, Federal Reserve approval (or, in certain cases,
non-objection) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person owns, controls, or has the power to vote 25% or more of any class of
voting stock of the holding company or controls in any manner the election of a
majority of the directors of the holding company. Control is presumed to exist
if a person owns, controls, or has the power to vote more than 10% of any class
of voting stock and the stock is registered under Section 12 of the Exchange Act
or the acquirer will be the largest shareholder after the acquisition.
11
A number of legal and regulatory obligations and restrictions are
imposed on bank holding companies, as well as their depository institution
subsidiaries, which are designed to minimize potential losses to depositors of
such depository institutions and the FDIC insurance funds. For example, in order
to avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that has become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary to bring the institution
into compliance with all acceptable capital standards as of the time the
institution initially fails to comply with such capital restoration plan. Under
a policy of the Federal Reserve with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, the "cross-guarantee" provisions of the Federal
Deposit Insurance Act, as amended, require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or any
affiliate but is subordinate to claims of depositors, secured creditors and
holders of subordinated debt (other than affiliates) of the commonly controlled
insured depository institutions.
Federal regulations require that the Company must notify the
Federal Reserve Bank of Richmond prior to repurchasing Common Stock in excess of
ten percent of its net worth during a rolling twelve month period unless the
Company (i) both before and after the redemption satisfies capital requirements
for "well capitalized" state member banks, (ii) received a one or two rating in
its last examination, and (iii) is not the subject of any unresolved supervisory
issues.
Additional Provisions Under the GLB Act. In addition to removing
certain barriers which had separated banking, securities and insurance firms (as
previously discussed), the GLB Act made other reforms.
The GLB Act imposes restrictions on the ability of financial
services firms, such as the Company and the Bank, to share customer information
with non-affiliated third parties. The Act: (i) requires financial services
firms to establish privacy policies and disclose them annually to customers,
explaining how nonpublic personal information is shared with affiliates and
third parties; (ii) currently requires that regulatory agencies have standards
for sharing customer information; (iii) permits customers to prohibit
("opt-out") of the disclosure of personal information to non-affiliated third
parties; (iv) prohibits the sharing of customer information with marketers of
credit card and other account numbers; and, (v) prohibits "pretext" calling. The
privacy provisions, however, do allow a community bank to share information with
third parties that sell financial products, such as insurance companies or
12
securities firms. The privacy provision became effective in November 2000, with
full compliance required by July 1, 2001.
In addition to the foregoing, the GLB Act (1) reforms the Federal
Home Loan Bank System to provide small banks with greater access to funds for
making loans to small business and small farmers, (2) obligates operators of
automated teller machines ("ATMs") to provide notices to customers regarding
surcharge practices, and (3) provides that financial institutions with less than
$250 million in assets will normally be examined for compliance with the
Community Reinvestment Act ("CRA") only once every five years if they maintain
an "outstanding" rating and once every four years they if have a "satisfactory"
rating. CRA agreements between financial institutions and community groups must
be disclosed and reported to the public.
Capital Adequacy Guidelines for Holding Companies. The Federal
Reserve has adopted capital adequacy guidelines for bank holding companies and
banks that are members of the Federal Reserve system and have consolidated
assets of $150 million or more. For bank holding companies with less than $150
million in consolidated assets, the guidelines are applied on a bank-only basis
unless the parent bank holding company (i) is engaged in nonbank activity
involving significant leverage or (ii) has a significant amount of outstanding
debt that is held by the general public.
Bank holding companies subject to the Federal Reserve's capital
adequacy guidelines are required to comply with the Federal Reserve's risk-based
capital guidelines. Under these regulations, the minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be "Tier I Capital," principally consisting of common stockholders' equity,
non-cumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
Capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I Capital
(leverage) ratio, under which a bank holding company must maintain a minimum
level of Tier I Capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a Tier I Capital (leverage) ratio of
at least 1% to 2% above the stated minimum.
Dividend and Repurchase Limitations. Federal regulations require
that the Company must obtain Federal Reserve approval in order to use more than
10% of its net worth to make stock repurchases during any 12 month period unless
the Company (i) both before and after the redemption satisfies capital
requirements for "well capitalized" state member banks; (ii) received a one or
two rating in its last examination; and (iii) is not the subject of any
unresolved supervisory issues.
Although the payment of dividends and repurchases of stock by the
Company are subject to certain requirements and limitations of North Carolina
corporate law, except as set forth in this paragraph, neither the Commissioner
nor the FDIC have promulgated any regulations specifically limiting the right of
the Company to pay dividends and repurchase shares. However, the ability of the
Company to pay dividends or repurchase shares may be dependent upon the
Company's receipt of dividends from the Bank. The Bank's ability to pay
dividends is limited. See "-- Regulation of the Bank -- Dividends."
Federal Securities Laws. The Company has registered its Common
Stock with the SEC pursuant to Section 12(g) of the Exchange Act and will not
deregister the Common Stock for a period of three years following the completion
of the Conversion. As a result of such registration, the proxy and tender offer
13
rules, insider trading reporting requirements, annual and periodic reporting and
other requirements of the Exchange Act are applicable to the Company.
Regulation of the Bank
General. Prior to March 15, 1999, FNB Southeast was a national
bank regulated by the Office of Comptroller of the Currency ("OCC"). Effective
March 15, 1999, FNB Southeast converted its charter from a national bank to a
North Carolina state bank and became a member of the Federal Reserve.
Dividends. North Carolina commercial banks, such as FNB
Southeast, are subject to legal limitations on the amounts of dividends they are
permitted to pay. Dividends may be paid by the Bank from undivided profits,
which are determined by deducting and charging certain items against actual
profits, including any contributions to surplus required by North Carolina law.
In addition, without the prior approval of the Federal Reserve Board, FNB
Southeast may not declare or pay a dividend if the total of all dividends
declared during the calendar year, including the proposed dividend, exceeds the
sum of the Bank's net income during that current calendar year and the retained
net income of the prior two calendar years. The Federal Reserve regulations also
prohibit the payment of dividends without the prior approval of the Federal
Reserve Board and two thirds of the shareholders when the dividend (i) would
exceed the Bank's undivided profits or (ii) any portion of the dividend would be
from the Bank's permanent capital. Also, an insured depository institution, such
as FNB Southeast, is prohibited from making capital distributions, including
payment of dividends, if, after making such distribution, the institution would
become "undercapitalized" (as such term is defined in the applicable law and
regulations). Based on its current financial condition, FNB Southeast does not
expect that this provision will have any impact on the Bank's ability to pay
dividends.
Capital Requirements. The Bank, as a North Carolina commercial
bank, is required to maintain a surplus account equal to 50% or more of its
paid-in capital stock. As a member bank of the Federal Reserve, the Bank is also
subject to the capital requirements imposed by the Federal Reserve. Under
Federal Reserve regulations, member banks must maintain a minimum ratio of
qualifying capital to weighted risk assets equal to 8%. At least half of the
total capital is required to be Tier I Capital, with the remainder consisting of
Tier II Capital. In addition to the foregoing risk based capital guidelines,
member banks which receive the highest rating in the examination process and are
not anticipating or experiencing any significant growth, must maintain a minimum
level of Tier I Capital to total assets of 3%. Member banks which do not fall
within the foregoing standards are required to maintain higher capital ratios.
Deposit Insurance Assessments. The Bank is also subject to
insurance assessments imposed by the FDIC. Under current law, the insurance
assessment to be paid by the BIF members such as the Bank shall be as specified
in a schedule required to be issued by the FDIC. All FDIC deposits for deposit
insurance have an effective rate ranging from 0 to 31 basis points per $100 of
insured deposits, depending on the institution's capital position and other
supervisory factors. Based on the current financial condition and capital levels
of the Bank, the Bank does not expect that the FDIC insurance assessments will
have a material impact on the Bank's future earnings.
14
Transactions with Affiliates. Under current federal law,
depository institutions are subject to the restrictions contained in Section
22(h) of the Federal Reserve Act with respect to loans to directors, executive
officers and principal shareholders. Under Section 22(h), loans to directors,
executive officers and shareholders who own more than 10% of a depository
institution (18% in the case of institutions located in an area with less than
30,000 in population), and certain affiliated entities of any of the foregoing,
may not exceed, together with all other outstanding loans to such person and
affiliated entities, the institution's loans-to-one-borrower limit (as discussed
below). Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
shareholders who own more than 10% of an institution, and their respective
affiliates, unless such loans are approved in advance by a majority of the board
of directors of the institution. Any "interested" director may not participate
in the voting. The FDIC has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal
Reserve requires that loans to directors, executive officers, and principal
shareholders be made on terms substantially the same as offered in comparable
transactions with non-executive employees of the Bank. The FDIC has imposed
additional limits on the amount a bank can loan to an executive officer.
Loans to One Borrower. The Bank is subject to the Commissioner's
loans to one borrower limits which are substantially the same as those
applicable to national banks. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the unimpaired capital and unimpaired
surplus of the bank. Loans and extensions of credit fully secured by readily
marketable collateral may comprise an additional 10% of unimpaired capital and
unimpaired surplus.
Limits on Rates Paid on Deposits and Brokered Deposits.
Regulations promulgated by the FDIC place limitations on the ability of insured
depository institutions to accept, renew or roll-over deposits by offering rates
of interest which are significantly higher than the prevailing rates of interest
on deposits offered by other insured depository institutions having the same
type of charter in such depository institution's normal market area. Under these
regulations, "well capitalized" depository institutions may accept, renew or
roll-over such deposits without restriction, "adequately capitalized" depository
institutions may accept, renew or roll-over such deposits with a waiver from the
FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew, or roll-over
such deposits. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definitions adopted by the FDIC to implement the corrective action
provisions discussed below.
Only a "well capitalized" (as defined in the statute as
significantly exceeding each relevant minimum capital level) depository
institutions may accept brokered deposits without prior regulatory approval.
"Adequately capitalized" banks may accept brokered deposits with a waiver from
the FDIC (subject to certain restrictions on payment of rates), while
"undercapitalized" banks may not accept brokered deposits. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" are the same as the definitions adopted by the agencies
to implement the prompt corrective action provisions discussed below.
Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 2000, the Bank was in compliance with
this requirement.
Community Reinvestment. Under the Community Reinvestment Act
("CRA") as implemented by regulations of the FDIC, an insured institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
15
institution's discretion to develop, consistent with the CRA, the types of
products and services that it believes are best suited to its particular
community. The CRA requires the federal banking regulators, in connection with
their examinations of insured institutions, to assess the institutions' records
of meeting the credit needs of their communities, using the ratings of
"outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance," and to take that record into account in its evaluation of
certain applications by those institutions. All institutions are required to
make public disclosure of their CRA performance ratings. The Bank received a
"satisfactory" rating in its last CRA examination which was conducted during
June, 2000.
Prompt Corrective Action. The Federal Reserve has broad powers to
take corrective action to resolve the problems of insured depository
institutions. The extent of these powers will depend upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the regulations, an institution is considered "well
capitalized" if it has (i) a total risk-based capital ratio of 10% or greater,
(ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio
of 5% or greater and (iv) is not subject to any order or written directive to
meet and maintain a specific capital level for any capital measure. An
"adequately capitalized" institution is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital
ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of an institution with the highest examination rating). An
institution is considered (A) "undercapitalized" if it has (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio
of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of
an institution with the highest examination rating); (B) "significantly
undercapitalized" if the institution has (i) a total risk-based capital ratio of
less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii)
a leverage ratio of less than 3% and (C) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets equal to or less than
2%. At December 31, 2000, FNB Southeast had the requisite capital levels to
qualify as "well capitalized."
Other. The federal banking agencies, including the Federal
Reserve, have developed joint regulations requiring disclosure of contingent
assets and liabilities and, to the extent feasible and practicable, supplemental
disclosure of the estimated fair market value of assets and liabilities.
Additional joint regulations require annual examinations of all insured
depository institutions by the appropriate federal banking agency, with some
exceptions for small, well-capitalized institutions and state chartered
institutions examined by state regulators, and establish operational and
managerial, asset quality, earnings and stock valuation standards for insured
depository institutions, as well as compensation standards where such
compensation would endanger the insured depository institution or would
constitute an unsafe practice.
The Bank is subject to examination by the Federal Reserve and the
Commissioner. In addition, the Bank is subject to various other state and
federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit and equal credit, fair credit reporting laws and
laws relating to branch banking. The Bank, as an insured North Carolina
commercial bank, is prohibited from engaging as a principal in activities that
are not permitted for national banks, unless (i) the FDIC determines that the
activity would pose no significant risk to the appropriate deposit insurance
fund and (ii) the Bank is, and continues to be, in compliance with all
applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the
capital stock of a North Carolina commercial bank is impaired by losses or
otherwise, the Commissioner is authorized to require payment of the deficiency
by assessment upon the bank's shareholders, pro rata, and to the extent
necessary, if any such assessment is not paid by any shareholder, upon 30 days
notice, to sell as much as is necessary of the stock of such shareholder to make
good the deficiency.
The Bank does not believe that these regulations have had or
will have a material adverse effect on its current operations.
16
Taxation. Federal Income Taxation. Financial institutions such as
the Bank are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code") in the same general manner as other corporations. However,
banks which meet certain definitional tests and other conditions prescribed by
the Code may benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
The Bank may compute its addition to the bad debt reserve under the specific
charge-off method or the reserve method. Under the reserve method, the addition
to bad debts from losses on loans is computed by use of the experience method.
Use of the experience method requires minimum additions to the reserve based on
the amount allowable under a six-year moving average. The Code also provides
annual limits on the amount the Bank can add to its reserves for loan losses.
State Taxation. Under North Carolina law, the Bank is subject to
corporate income taxes at a 6.90% rate and an annual franchise tax at a rate of
0.15%.
Future Requirements.
Statutes and regulations which contain wide-ranging proposals for
altering the structures, regulations and competitive relationships of financial
institutions are introduced regularly. Neither the Company nor the Bank can
predict whether or what form any proposed statute or regulation will be adopted
or the extent to which the business of the Company or the Bank may be affected
by such statute or regulation.
17
Item 2.Properties
The Company leases or owns eighteen banking offices, as shown in
the following table:
Location Owned or Leased Deposits(1) ATM (2) (3) Year Opened/Purchased
-------- --------------- ----------- ----------- ---------------------
202 South Main Street
Reidsville, North Carolina Owned (4) $ 140,815 Yes 1910 (5)
1646 Freeway Drive
Reidsville, North Carolina Owned 40,888 Yes 1972
202 Turner Drive
Reidsville, North Carolina Owned 37,771 Yes 1969
801 South Van Buren Road
Eden, North Carolina Owned 38,603 Yes 1996
151 North Fieldcrest Road
Eden, North Carolina Leased (expires 2008) 16,814 1996
605 North Highway Street
Madison, North Carolina Owned 23,387 Yes 1997
9570 US 29 Business
Ruffin, North Carolina Leased (expires 2004) 10,793 1997
2132 New Garden Road
Greensboro, North Carolina Owned 38,782 Yes 1997
4638 Hicone Road
Greensboro, North Carolina Owned 12,074 Yes 2000
3202 Randleman Road
Greensboro, North Carolina Owned 6,253 Yes 2000
704 South College Road
Wilmington, North Carolina Leased (expires 2002) 46,670 Yes 1997
7210 Wrightsville Avenue
Wilmington, North Carolina Leased (expires 2003) 381 2000
301 East Fremont Street
Burgaw, North Carolina Leased (expires 2004) 21,125 Yes 1999
600 Trent Street
Norton, Virginia Owned 57,936 1973
2302 Second Street
Richlands, Virginia Owned 26,258 1977
700 East Morgan Avenue
Pennington Gap, Virginia Owned 26,772 1979
440 South Main Street
Harrisonburg, Virginia Owned 22,874 1988
624 Chicago Avenue
Harrisonburg, Virginia Leased (expires 2004) 1,255 1999
(1) Deposits as of December 31, 2000, in thousands of dollars.
(2) Each of the ATMs situated at a banking office is a drive-up ATM.
Three additional remote ATMs are located in Reidsville, North
Carolina, pursuant to leases that expire in 2001 and 2003.
(3) FNB Southeast owns and operates a network of 36 remote ATMs located
at non-bank locations such as convenience stores and colleges. This
network generally covers the Norton, Virginia region and
surrounding areas.
(4) Consists of 27,000 square feet in a two story building and includes
the Company's executive offices.
(5) Original office opened in different location in 1910. Current
office opened in 1980.
18
Item 3. Legal Proceedings
In the ordinary course of operations, the Company is a party to
various legal proceedings. In the opinion of management, neither the Company nor
the Bank is involved in any pending legal proceedings other than routine,
non-material proceedings occurring in the ordinary course of business.
Item 4. Submission of Matters To a Vote of Security Holders
There were no matters submitted to a vote of the security holders
of the Company during the fourth quarter of the Company's fiscal year ended
December 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Prices and Dividend Policies
The Company's common stock is traded on The Nasdaq Stock Market
National Market System under the symbol "FNBF." The following table shows the
high and low sale price of the Company's common stock on The Nasdaq Stock Market
National Market System, based on published financial sources, for each of the
last two fiscal years. The table also reflects the per share amount of dividends
paid for each share during the fiscal quarter for each of the last two fiscal
years. Only one dividend was paid during each of the fiscal quarters listed.
Calendar Period High Low Dividends Paid
- --------------- ---- --- --------------
Quarter ended March 31, 1999 $ 18.50 $ 16.00 $ 0.08
Quarter ended June 30, 1999 18.00 15.00 0.08
Quarter ended September 30, 1999 16.25 11.56 0.11
Quarter ended December 31, 1999 12.88 10.38 0.19
Quarter ended March 31, 2000 $ 13.75 $ 10.13 $ 0.11
Quarter ended June 30, 2000 13.88 10.75 0.11
Quarter ended September 30, 2000 13.00 11.00 0.11
Quarter ended December 31, 2000 12.75 9.56 0.12
As of March 9, 2001, there were approximately 2,608 beneficial
owners of the Company's common stock, including 1,234 holders of record of the
Company's common stock. For a discussion as to any restrictions on the Company
or the Bank's ability to pay dividends, reference Item 1 - Supervision and
Regulation of the Company and the Bank.
See also Note 19 in the Notes to Consolidated Financial
Statements on page 57 of this Annual Report on Form 10-K. See also "Supervision
and Regulation - Regulation of the Company, Dividend and Repurchase Limitations"
and "Regulation of the Bank - Dividends."
Recent Sales of Unregistered Securities
The Company did not sell any securities in the fiscal year ended
December 31, 2000, which were not registered under the Securities Act of 1933,
as amended, except that during such fiscal year the Company granted options to
employees and directors to acquire an aggregate of 13,350 shares of its Common
Stock at a weighted average exercise price of $11.24 per share pursuant to the
Company's Omnibus Equity Compensation Plan.
19
Item 6. Selected Financial Data
The annual selected historical financial data presented below are
derived from the audited consolidated financial statements for FNB Financial
Services Corporation, FNB Southeast and FNB Southeast Investment Services, Inc.
The financial statements of the Company have been restated for the years prior
to 1999 to reflect the acquisition of Black Diamond on August 31, 1999, in a
transaction accounted for as a pooling of interests. As this information is only
a summary, you should read it in conjunction with the historical financial
statements (and related notes) of the Company and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
20
Item 6. Selected Financial Data
Table 1. Selected Financial Data
(In thousands, except per share, ratio and other data) At and For the Year Ended December 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Net interest income $ 22,659 $ 20,427 $ 18,378 $ 14,598 12,222
Provision for credit losses 2,525 1,401 1,171 686 707
Other income 2,891 2,977 3,085 2,146 1,722
Other expenses 16,100 15,193 12,872 10,859 9,454
Net income 4,602 4,248 5,022 3,514 2,656
Balance Sheet Data:
Assets $ 685,904 $ 588,419 $ 549,746 $ 445,990 $ 322,789
Loans (1) 500,637 414,011 362,252 319,467 230,456
Allowance for credit losses 6,311 4,436 3,452 3,185 2,422
Deposits 569,451 484,242 459,595 384,121 284,875
Other borrowings 41,000 31,500 17,500 28,720 8,650
Shareholders equity 56,392 50,730 53,631 30,404 27,109
Per Common Share Data (2):
Net income, basic $ 1.03 $ 0.95 $ 1.19 $ 0.98 $ 0.74
Net income, diluted (3) 1.02 0.93 1.13 0.93 0.73
Cash dividends declared 0.45 0.46 0.30 0.27 0.24
Book value 12.56 11.30 11.81 8.43 7.59
Tangible book value 12.47 11.20 11.68 8.24 7.37
Other Data:
Branch offices 18 15 14 14 10
Full-time employees 196 189 184 169 130
Performance Ratios:
Return on average assets 0.72% 0.76% 0.97% 0.94% 0.85%
Return on average equity 8.96 8.49 11.21 12.49 10.22
Net interest margin (tax equivalent) 3.82 3.88 3.78 4.25 4.28
Dividend payout 44.42 47.98 25.37 27.29 31.93
Efficiency (4) 62.20 64.50 59.50 64.00 66.00
Asset Quality Ratios:
Allowance for credit losses to period end loans 1.26% 1.07% 0.95% 1.00% 1.05%
Allowance for credit losses to period end
non-performing loans (5) 195.87 338.00 221.00 123.00 104.00
Net charge-offs to average loans 0.14 0.11 0.26 -0.03 0.18
Non-performing assets to period end loans
and foreclosed property (5) 0.84 0.45 0.85 0.91 1.11
Capital and Liquidity Ratios:
Average equity to average assets 8.07% 9.06% 8.69% 7.50% 8.32%
Leverage 8.22 9.30 10.30 7.00 8.30
Tier 1 risk based 11.28 13.20 15.30 8.90 12.70
Total risk based 12.53 14.30 16.30 9.90 13.80
Average loans to average deposits 87.91 83.49 79.31 81.50 79.22
Average loans to average deposits
and borrowings 79.22 77.34 74.47 78.12 77.58
(1) Loans net of unearned income, before allowance for credit losses.
(2) Gives effect of the 1996 stock split and the 1997 stock splits.
(3) Assumes the exercise of outstanding options to acquire common stock. See
Note 15 to the Company's consolidated financial statements.
(4) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income. (5) Non-performing loans and
non-performing assets include loans past due 90 days or more that are still
accruing interest.
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of the Company and should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto. See also "Forward
Looking Statements" on page 63 of this Annual Report on Form 10-K.
Overview
The Company earned $4.60 million in 2000, an 8.3% increase over
$4.25 million earned in 1999. Diluted net income per share of $1.02 for 2000
represents a 9.7% increase over diluted earnings per share of $0.93 in 1999.
Total assets at December 31, 2000, stood at $685.9 million compared to $588.4
million one year earlier. The $97.5 million increase in total assets is
primarily attributable to an increase in outstanding loans. Loans at December
31, 2000, increased $86.6 million, or 20.9% from 1999, to $500.6 million. During
2000, total deposits increased $85.2 million, or 17.6%, to $569.5 million. Total
shareholders' equity was $56.4 million, an increase of 11.2% over 1999. Book
value per share was $12.56 compared to $11.30 one year earlier.
During the year, FNB Southeast was able to expand its banking
network by opening two additional offices in Greensboro, North Carolina and one
additional office in Wilmington, North Carolina. In October 2000, the Company
merged Black Diamond Savings Bank into FNB Southeast. The Company's subsidiary
bank, FNB Southeast, is a North Carolina chartered commercial bank, and
currently operates thirteen banking offices in North Carolina and five banking
offices in Virginia.
Results of Operations
Net interest income represents the gross profit from the lending
and investment activities of a banking organization and is the most significant
factor affecting the earnings of the Company. Net interest income is influenced
by changes in interest rates, volume and the mix of these various components.
Net interest income on a fully taxable equivalent basis for 2000 was $23.0
million, which represented an 11.5% increase over the previous year. In 1999,
taxable equivalent net interest income increased to approximately $20.6 million
from approximately $18.6 million in 1998, which was an increase of 10.9%. Actual
net interest income was 10.9% higher in 2000, following an improvement of 11.2%
in 1999. Growth in net interest income for 2000 was primarily driven by higher
loan balances, which were supported by deposit growth and increased borrowing
from the Federal Home Loan Bank of Atlanta. Average loans outstanding during the
2000 fiscal year were $459.7 million compared to $387.3 million in 1999, an
increase of 18.7%. In the previous year, average loans outstanding were 11.5%
higher than 1998. This loan growth is attributed to generally favorable economic
conditions in the Company's lending markets and the branch expansion program
mentioned earlier. Average investment securities during 2000 were $135.8
million, down 0.01% from 1999, following a decrease of 1.6% from 1998 to 1999.
Trends in interest rates were upward for the year as the Federal
Reserve increased interest rates throughout the first half of 2000. This had the
effect of increasing both the earning asset yield and the interest bearing
liability rate.
The weighted average yield on earning assets increased 67 basis
points to 8.72% for 2000 compared to 8.05% for the prior year. This increase in
the asset yield is primarily attributable to the increased yield on loans.
22
During the current year, the yield on loans increased 61 basis points to 9.48%
from 8.87% in 1999. This improvement is due to variable rate loans that repriced
higher throughout the year in response to increases in the underlying index.
The weighted average rate paid on interest bearing liabilities
rose from 4.86% in 1999, to 5.58% in 2000, an increase of 72 basis points.
Average savings and time deposits for 2000 were $472.1 million. This is an
increase of $53.9 million, or 12.9% from $418.2 million in average balances from
1999. The overall rate for deposits increased 64 basis points to 5.47% in 2000
compared to 4.83% in the prior year.
Overall rates on purchased funds increased 129 basis points
during 2000. Average purchased funds totaled $57.4 million in 2000, with an
average rate of 6.47%. This is a $20.5 million increase from one year earlier.
This increase is primarily attributable to additional FHLB advances utilized
during 2000. The rate paid for purchased funds was 6.47% and 5.18% for 2000 and
1999, respectively. The sharp increase in rates is due to upward repricing
pressure on existing balances and the inflow of new funds at higher prevailing
market rates.
Table 2 on page 29 summarizes net interest income and average
yields earned and rates paid for the years indicated, on a tax equivalent basis.
Table 3 on page 30 presents the changes in interest income and interest expense
attributable to volume and rate changes between 2000 and 1999, and between 1999
and 1998.
Non-interest Income and Expense
Non-interest income of $2.89 million in 2000 was $86,000, or
2.9%, less than the previous year. Two categories of noninterest income, gain on
sale of securities and gain on sale of loans, experienced significant declines
in 2000 compared to 1999 due to changes in the interest rate environment during
the year. Gains on sale of securities for 2000 totaled $60,000, down $58,000
from the prior year. Gains on sale of loans for 2000 totaled $73,000, down
$101,000 from one year earlier. Service charges on deposit accounts increased to
$2.07 million, up $279,000 from $1.79 million in 1999. The Company was able to
capitalize on increased fees and increased volume of demand deposits and other
accounts with service charges.
Personnel expense of $8.70 million in 2000, exceeded the previous
year by $525,000, or 6.4%. At December 31, 2000, the Company had approximately
196 full-time and 12 part-time employees, compared with 182 full-time and 13
part-time employees at December 31, 1999. Occupancy expenses totaled $871,000
for 2000, which was up 13.0% from $771,000 in 1999. Furniture and equipment
expenses totaled $1.51 million in the current year, up $227,000 or 17.7% from
1999, following a 35.3% increase in 1999 over 1998. The increase in occupancy
expenses and furniture and equipment expenses was driven higher in the current
year by the opening of three new banking offices in 2000 and the full year of
operation for the new banking office opened in December 1999. During the fourth
quarter of 2000 the Company incurred higher than normal expenses for personnel,
travel, forms and supplies due to the conversion of its subsidiary bank. The
efficiency ratio, which measures non-interest expense as a percentage of net
interest income plus non-interest income, was 62.2% in 2000, and compared
favorably to the 64.5% efficiency ratio posted the previous year.
The effective tax rate decreased to 33.6% in 2000 from 37.6% in
1999. The higher effective tax rate for 1999 was primarily attributable to
nondeductible merger-related costs incurred during that year. The effective tax
rate was 32.3% for 1998.
Financial Condition
The Company's consolidated assets of $685.9 million at year end
increased 16.6% over the previous year, following an increase of 7.0% in 1999.
Growth in earning assets in 1999 occurred in both loans and investment
securities, while 2000 saw a marked increase in outstanding loans. Supporting
that growth during fiscal 2000 were increases of 13.6% in non-interest bearing
deposits, 18.0% in interest bearing deposits and 13.7% in purchased funds.
Loan growth during 2000 was $86.6 million, with outstanding loans
up 20.9% at year end, which followed increases of 14.3% in 1999 and 13.2% in
1998. Loans secured by real estate were up 19.9% in 2000 and represented 67.2%
of total loans, compared with 67.9% at year end 1999. Within this category,
commercial real estate loans increased 90.7% during fiscal 2000 to a level of
$66.1 million. Commercial, financial and agricultural loans were up 29.3% during
23
fiscal 2000 representing 15% of total loans, compared with 14.0% last year end.
Consumer loans increased 18.5% during fiscal 2000 led by increased home equity
loans. Management believes the Company is not dependent on any single customer
or group of customers concentrated in a particular industry, the loss of whose
deposits or whose insolvency would have a material adverse effect on operations.
In February 2000, the Company sold its entire credit card
portfolio of $3.4 million to a third party. The Company received approximately a
3% premium on this sale. The loans were sold without recourse. The Company
entered into an agreement with such third party whereby that party's customers
will be issued FNB Southeast branded credit cards, and the Bank will receive
income based on the level of future transactions generated by these customers.
Related to this sale, the Company also sold the merchant servicing business
related to credit card transactions. Current customers will be serviced by a
third party. The Company received a 3% premium on this sale and will receive
future income based on the activity of the current customer base.
Investment securities (at amortized cost) of $149.5 million at
2000 year end were up $12.7 million, or 9.3%, over 1999. U.S. Government agency
securities continue to represent the major share of the total portfolio, and
totaled $119.6 million, or 80.0% of the portfolio at year end 2000, compared to
$111.5 million, or 81.6% of the portfolio one year earlier. Management believes
that the additional risk of owning agency securities over U.S. Treasury
securities is negligible and has capitalized on the favorable spreads available
on the former. The Company continued to purchase tax-exempt municipal securities
during 2000. State and municipal obligations increased $6.1 million and stood at
$16.1 million at year end. The Company's investment strategy is to achieve
acceptable total returns, while investing in securities with relatively short
maturity dates as necessary to fund loan growth. To this end, the Company has
consistently categorized the entire portfolio as "Available for Sale," which it
believes offers the greatest amount of flexibility in managing a total return
concept. Table 4 on page 31 presents the composition of the securities portfolio
for the last three years, as well as information about cost, fair value and
weighted average yield.
Total deposits increased $85.2 million to $569.5 million at
December 31, 2000. This is a 17.6% increase over $484.2 million in deposits one
year earlier. An $88.7 million, or 25.8%, increase in time deposits and a $6.5
million, or 13.6%, increase in demand deposits drove the annual increase during
fiscal 2000. Savings, NOW and MMI accounts decreased by $10.0 million to $82.8
million at 2000 year end.
The market for deposits remains fiercely competitive and the
Company relies on appropriate pricing and quality customer service to retain and
increase its retail deposit base. During the year, the Company had several
featured products to generate new deposits and increase the customer base. These
deposit promotions helped to generate over $39.8 million in deposit balances in
the four banking offices opened since December 1, 1999. For commercial
customers, the Company is focused on building a total relationship, which will
foster growth in both loans and deposits. In addition to traditional checking
accounts, the Company offers a cash management sweep account, with outstanding
balances increasing by $3.0 million during the year to total $10.5 million at
year end.
In order to attract additional deposits, the Company maintains
membership in an electronic network that allows it to post interest rates and
attract deposits nationally. As of December 31, 2000, FNB Southeast had
approximately 297 certificates of deposit totaling $30.4 million, with an
overall rate of 6.91% for the total portfolio. This certificate portfolio
increased by $14.2 million during 2000. Overall, the CDs booked this year are at
higher rates than CDs booked during 1999.
The Company also utilized a portion of its $88.5 million line
with the Federal Home Loan Bank of Atlanta to fund earning assets, with a year
end balance outstanding of $41.0 million. Management continues to believe this
is a cost effective and prudent alternative to deposit balances, since a
particular amount and term may be selected to meet its current needs.
24
Asset Quality
Management places great emphasis in maintaining the Company's
asset quality. The allowance for credit losses, which is utilized to absorb
actual losses in the loan portfolio, is maintained at a level sufficient to
provide for estimated potential charge-offs of non-collectible loans. The loan
portfolio is analyzed on a regular basis to identify potential problems before
they actually occur. The Company's allowance for credit losses is also analyzed
quarterly by management. This analysis includes a methodology that segments the
loan portfolio by selected loan types and considers the current status of the
portfolio, historical charge-off experience, current levels of delinquent,
impaired and non-performing loans, as well as economic factors. The provision
for credit losses represents a charge against income in an amount necessary to
maintain the allowance at an appropriate level. The monthly provision for credit
losses may fluctuate based on the results of this analysis. Table 6 on page 33
depicts a summary of the allowance for credit losses and the allocation of the
allowance for credit losses for the years ended December 31, 1996 through 2000.
The allocation is based on management's grading of the loan portfolio with the
remaining portion allocated to the general category, although the entire
allowance is available to be used for write-offs in any category.
The 2000 provision for credit losses of $2.53 million compares
with $1.40 million in 1999, which equals an 80.7% increase in 2000. In the
fourth quarter of 2000 the Company recorded a provision for credit losses of
$1.28 million. This action was taken as part of the Company's continuing
evaluation of the loan portfolio and other credit risk factors. The 1999 total
provision includes a one-time increase of $464,000 charged against income during
the third quarter to conform the policies of Black Diamond to those of FNB
Southeast. Credit quality remained good, and the level of non-performing loans
and charge-offs has remained at comparatively low levels. Net charge-offs
increased in 2000 to $650,000 or 0.14% of average loans outstanding, compared
with $417,000 or 0.11% of average loans outstanding in the prior year. At
December 31, 2000, the allowance for loan losses as a percentage of year end
loans was 1.26% which represented an increase from 1.07% at December 31, 1999.
Non-performing assets include non-accrual loans, accruing loans
contractually past due ninety days or more, restructured loans, and other real
estate. Loans are placed on non-accrual status when: (i) management has concerns
relating to the ability to collect the loan principal and interest and (ii)
generally when such loans are ninety days or more past due. While non-performing
assets represent potential losses to the Company, management does not anticipate
any aggregate material losses, since most loans are believed to be adequately
secured. Management believes the allowance for credit losses is sufficient to
absorb known risks in the portfolio. No assurance can be given, however, that
economic conditions will not adversely affect borrowers and result in increased
credit losses.
Capital Resources
Banks and financial holding companies, as regulated institutions,
must meet required levels of capital. The Federal Reserve has adopted minimum
capital regulations or guidelines that categorize components and the level of
risk associated with various types of assets. Financial institutions are
required to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with the guidelines. As shown in table 7 on
page 34, the Company and the Subsidiary Bank both maintained capital levels
exceeding the minimum levels to be "well capitalized" for the three years
presented. Effective in March 1999, FNB Southeast converted from a national
bank, regulated by the Office of the Comptroller of the Currency ("OCC"), to a
North Carolina bank, regulated by the North Carolina Commissioner of Banks
("Commissioner"). FNB Southeast will continue to be required to meet certain
levels of capital.
Liquidity Management
Liquidity management refers to the ability to meet day-to-day
cash flow requirements based primarily on activity in loan and deposit accounts
of the Company's customers. Deposit withdrawals, loan funding and general
corporate activity create a need for liquidity for the Company. Liquidity is
25
derived from sources such as deposit growth; maturity, calls, or sales of
investment securities; principal and interest payment on loans; access to
borrowed funds or lines of credit; and profits. The investment portfolio at
December 31, 2000, held securities with call features, whereby the issuer of
such a security has the option to repay the purchaser of said instrument and
cancels the instrument before the contractual maturity date. Due to the interest
rate on the original instrument and current market rates on such instruments,
the Company anticipates that certain debt instruments in the portfolio may be
called in the upcoming year.
The Company's primary source of funds has been from increased
deposit and sweep account balances. Liquidity is further enhanced by an $88.5
million line of credit with the Federal Home Loan Bank of Atlanta collateralized
by FHLB stock and qualifying 1 to 4 family residential mortgage loans. There are
unsecured overnight borrowing lines available through several financial
institutions. Internal liquidity analysis indicates the Company is well
positioned to fund earning assets in the twelve-month period analyzed.
Market Risk
Market risk is the possible chance of loss from unfavorable
changes in market prices and rates. These changes may result in a reduction of
current and future period net interest income, which is the favorable spread
earned from the excess of interest income on interest-earning assets, over
interest expense on interest-bearing liabilities.
For a complete discussion on market risk and how the Company
addresses this risk, see Item 7A on page 27 of this Annual Report on Form 10-K.
Effects of Inflation
Inflation affects financial institutions in ways that are
different from most commercial and industrial companies, which have significant
investments in fixed assets and inventories. The effect of inflation on interest
rates can materially impact bank operations, which rely on net interest margins
as a major source of earnings. Non-interest expenses, such as salaries and
wages, occupancy and equipment cost, are also negatively affected by inflation.
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. This standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.
In October of 2000, the Financial Accounting Standards Board
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", a replacement of SFAS 15. SFAS 140 is
effective for all fiscal quarters of all fiscal years ending after December 15,
2000. This standard establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
In April of 2000, the Financial Accounting Standards Board issued
FIN 44, "Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to Employees".
FIN 44 was effective July 1, 2000. This interpretation clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
26
In December of 1999, the Securities and Exchange Commission
issued SAB 101, "Revenue Recognition in Financial Statements". SAB 101, as
amended, is effective no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. This staff accounting bulletin provides the
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues.
Based on the Company's operations as of December 31, 2000, none
of these standards had a material effect on the Company's financial statements.
Recent Events
On February 12, 2001, the Federal Reserve approved the Company's request to
convert from a bank holding company to a financial holding company, pursuant to
the Gramm-Leach-Bliley Act of 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possible chance of loss from unfavorable
changes in market prices and rates. These changes may result in a reduction of
current and future period net interest income, which is the favorable spread
earned from the excess of interest income on interest-earning assets, over
interest expense on interest-bearing liabilities.
Interest rate risk management is a part of the Company's overall
asset/liability management process. The primary oversight of asset/liability
management rests with the Company's Asset and Liability Committee, which is
comprised of senior management and members of the Company's Board of Directors.
The committee meets on a regular basis to review the asset/liability management
activities of the Company and monitor compliance with established policies. A
member of the Board of Directors chairs the committee and reports on its
activities to the full Board.
A primary objective of interest rate sensitivity management is to
ensure the stability and quality of the Company's primary earning component, net
interest income. This process involves monitoring the Company's balance sheet in
order to determine the potential impact that changes in the interest rate
environment may have on net interest income. Rate sensitive assets and
liabilities have interest rates which are subject to change within a specific
time period, due to either maturity or to contractual agreements which allow the
instruments to reprice prior to maturity. Interest rate sensitivity management
seeks to ensure that both assets and liabilities react to changes in interest
rates within a similar time period, thereby minimizing the risk to net interest
income.
The measurement of the Company's interest rate sensitivity, or
"gap", is a technique traditionally used in asset/liability management. The
interest sensitivity gap is the difference between repricing assets and
repricing liabilities for a particular time period. Table 8 on page 35 indicates
a ratio of rate sensitive assets to rate sensitive liabilities within one year
at December 31, 2000, to be 0.67%. This ratio indicates that net interest income
would decline in a rising interest rate environment, since a greater amount of
liabilities than assets would reprice more quickly over the one-year period.
Included in rate sensitive liabilities are certain deposit accounts (NOW, MMI,
and savings) that are subject to immediate withdrawal and repricing, yet have no
stated maturity. These balances are presented in the category that management
believes best identifies their actual repricing patterns. This analysis assumes
60.0% of NOW and savings accounts, and 50.0% of MMI accounts, reprice within one
year, and the remaining balances reprice after one year. Furthermore, the
overall risk to net interest rate is further mitigated by the Company's level of
variable rate loans. These are loans with a contractual interest rate tied to an
index, such as the prime rate. A portion of these loans may reprice on multiple
occasions during a one-year period due to changes in the underlying rate index.
Approximately 58.1% of the total loan portfolio has a variable rate and reprices
in accordance with the underlying rate index subject to terms of individual note
agreements.
In addition to the traditional gap analysis, the Company also
utilizes a computer based interest rate risk simulation model. This
comprehensive model includes rate sensitivity gap analysis, rate shock net
interest margin analysis, and asset/liability term and rate analysis. The
Company uses this model to monitor interest rate risk on a quarterly basis and
to detect trends that may affect the overall net interest income for the
27
Company. This simulation incorporates the dynamics of balance sheet and interest
rate changes and calculates the related effect on net interest income. As a
result, this analysis more accurately projects the risk to net interest income
over the upcoming twelve-month period. The Company's asset/liability policy
provides guidance for levels of interest rate risk and potential remediations,
if necessary, to mitigate excessive levels of risk. The modeling results
indicate the Company is subject to an acceptable level of interest rate risk.
The Company considers interest rate risk to be its most
significant market risk, which could potentially have the greatest impact on
operating earnings. The Company is asset sensitive, which means that falling
interest rates could result in a reduced amount of net interest income. The
Company is not subject to other types of market risk, such as foreign currency
exchange rate risk, commodity or equity price risk.
Table 9 on page 36 presents the Company's financial instruments
which are considered to be sensitive to changes in interest rates, categorized
by contractual maturities, average interest rates and estimated fair values as
of December 31, 2000.
28
Table 2
Average Balance and Net Interest Income Analyst
Fully Taxable Equivalent Basis
(In thousands, except percentages)
Year Ended December 31,
-------------------------------------------------------
2000
-------------------------------------------------------
Interest Income/ Average
Average Balance (3) Expense Yield/ Rate
------------------- ---------------- ------------
Interest earning assets:
Loans, net (2) $ 459,731 $ 43,588 9.48%
Taxable investment securities 117,263 7,084 6.04
Tax-exempt investment securities 13,788 1,082 7.85(1)
Other securities 4,769 334 7.00
Deposits with FHLB 3,885 270 6.95
Federal funds sold and overnight investments 2,828 153 5.41
----------- -----------
Total earning assets 602,264 52,511 8.72%
Non-earning assets:
Cash and due from banks 17,504
Premises and equipment 11,231
Other assets 10,313
Less: Allowance for credit loss (5,102)
-----------
Total assets $ 636,210
===========
Interest bearing liabilities:
Savings and time deposits $ 472,079 25,808 5.47
Federal funds purchased, borrowed funds and
securities sold under agreements to
repurchase
57,362 3,709 6.47
----------- -----------
Total interest bearing liabilities 529,441 29,517 5.58
Other liabilities and shareholder's equity
Demand deposits 50,877
Other liabilities 4,519
Shareholders' equity 51,373
-----------
Total liabilities and shareholders' equity $ 636,210
===========
Net interest income and net yield on
earning assets (3) (4) $ 22,994 3.82%
=========== ======
Interest rate spread (5) 3.14%
======
Year Ended December 31,
--------------------------------------------------------
1999
--------------------------------------------------------
Interest Average
Average Balance (3) Income/ Expense Yield/ Rate
------------------- --------------- ------------
Interest earning assets:
Loans, net (2) $ 387,335 $ 34,339 8.87%
Taxable investment securities 126,666 7,396 5.84
Tax-exempt investment securities 7,041 556 7.90 (1)
Other securities 2,787 205 7.36
Deposits with FHLB 1,717 90 5.24
Federal funds sold and overnight investments 5,341 136 2.54
------------ ----------
Total earning assets 530,887 42,722 8.05%
Non-earning assets:
Cash and due from banks 10,506
Premises and equipment 9,496
Other assets 8,273
Less: Allowance for credit loss (3,856)
------------
Total assets $ 555,306
============
Interest bearing liabilities:
Savings and time deposits $ 418,171 20,191 4.83
Federal funds purchased, borrowed funds and
securities sold under agreements to
repurchase
36,939 1,915 5.18
------------ ----------
Total interest bearing liabilities 455,110 22,106 4.86
Other liabilities and shareholder's equity
Demand deposits 45,739
Other liabilities 4,168
Shareholders' equity 50,289
------------
Total liabilities and shareholders' equity $ 555,306
============
Net interest income and net yield on
earning assets (3) (4) 20,616 3.88%
======== ========
Interest rate spread (5) 3.19%
Year Ended December 31,
--------------------------------------------------------------
1998
--------------------------------------------------------------
Interest Income/ Average Yield/
Average Balance (3) Expense Rate
------------------- -------------------- ---------------
Interest earning assets:
Loans, net (2) $ 347,347 $ 31,826 9.16%
Taxable investment securities 129,125 7,675 5.94
Tax-exempt investment securities 7,712 624 8.09 (1)
Other securities 1,847 135 7.31
Deposits with FHLB 2,360 125 5.30
Federal funds sold and overnight investments 3,069 223 7.27
------------ -----------
Total earning assets 491,460 40,608 8.26%
Non-earning assets:
Cash and due from banks 10,053
Premises and equipment 8,753
Other assets 8,666
Less: Allowance for credit loss (3,441)
------------
Total assets $ 515,491
============
Interest bearing liabilities:
Savings and time deposits $ 397,533 20,479 5.15
Federal funds purchased, borrowed funds and
securities sold under agreements to
repurchase
28,474 1,539 5.40
------------ -----------
Total interest bearing liabilities 426,007 22,018 5.17
Other liabilities and shareholder's equity
Demand deposits 40,433
Other liabilities 4,238
Shareholders' equity 44,813
------------
Total liabilities and shareholders' equity $ 515,491
============
Net interest income and net yield on
earning assets (3) (4) $ 18,590 3.78%
=========== =======
Interest rate spread (5) 3.09%
=======
(1) The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2) The average loan balances include non-accruing loans.
(3) The average balances for all years include market adjustments to fair value
for securities and loans available/held for sale.
(4) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5) Earning asset yield minus interest bearing liabilities rate.
29
Table 3
Volume and Rate Variance Analysis
Fully Taxable Equivalent Basis
(In thousands)
Year Ended December 31,
----------------------------------------------------------------
2000 vs. 1999
----------------------------------------------------------------
Volume (2) Variance Rate (2) Variance Total Variance
---------------------- ------------------- ----------------
Interest Income:
Loans, net $ 6,434 $ 2,815 $ 9,249
Taxable investment securities (547) 235 (312)
Tax-exempt investment securities (1) 533 (7) 526
Other earning assets 146 (17) 129
Federal funds sold and retail repurchase agreements 50 147 197
----------- ------------ -----------
Total interest income 6,616 3,173 9,789
----------- ------------ -----------
Interest expense:
Savings and time deposits 2,603 3,014 5,617
Federal funds purchased, borrowed funds and securities sold
under agreements to repurchase 1,059 735 1,794
----------- ------------ -----------
Total interest expense 3,662 3,749 7,411
----------- ------------ -----------
Increase (decrease) in net interest income $ 2,954 $ (576) $ 2,378
=========== ============ ===========
Year Ended December 31,
-----------------------------------------------------------------
1999 vs. 1998
-----------------------------------------------------------------
Volume (2) Variance Rate (2) Variance Total Variance
--------------------- ----------------- ----------------
Interest Income:
Loans, net $ 3,649 $ (1,136) $ 2,513
Taxable investment securities (149) (130) (279)
Tax-exempt investment securities (1) (54) (14) (68)
Other earning assets 69 1 70
Federal funds sold and retail repurchase agreements 131 (253) (122)
--------- ------------ -----------
Total interest income 3,646 (1,532) 2,114
--------- ------------ -----------
Interest expense:
Savings and time deposits 1,063 (1,351) (288)
Federal funds purchased, borrowed funds and securities sold
under agreements to repurchase 458 (82) 376
--------- ------------ -----------
Total interest expense 1,521 (1,433) 88
--------- ------------ -----------
Increase (decrease) in net interest income $ 2,125 $ (99) $ 2,026
========= ============ ===========
(1) The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2) Changes attributable to both volume and rate have been allocated
proportionately.
30
Table 4
Investment Securities
(In thousands, except percentages)
As of December 31, 2000 As of December 31, 1999
-------------------------------------- --------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
--------- ---------- ---------- --------- ---------- ----------
U.S. Treasury $ 200 $ 200 6.39% $ 200 $ 200 6.70 %
U.S. government agency 127,859 127,301 5.81 122,604 118,002 5.78
State and municipal obligations (1) 16,097 16,928 8.31 9,989 9,959 7.85
Other debt securities 1,331 1,309 6.35 1,340 1,284 6.34
Other equity 3,967 3,967 7.33 2,573 2,573 7.31
-------- -------- -------- --------
Total investment securities (1) $149,454 $149,705 6.24 $136,706 $132,018 5.97
======== ======== ======== ========
As of December 31, 1998
--------------------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
--------- ------- ---------
U.S. Treasury $ 199 $ 207 6.25%
U.S. government agency 143,432 144,213 5.86
State and municipal obligations (1) 6,101 6,434 8.00
Other debt securities 1,093 1,108 6.36
Other equity 4,330 4,340 6.89
-------- --------
Total investment securities (1) $155,155 $156,302 5.97
======== ========
As of December 31, 2000
------------------------------------------------------------------------------------------
After One After Five
Within Year to Years to After
One Year Five Years Ten Years Ten Years
---------------------- ------------------- ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- ------- --------- ------- --------- ------- --------- -------
U.S. Treasury $ 200 6.40% $ -- 0.00% $ -- 0.00% $ -- 0.00%
U.S. government agency 8,237 5.49 95,052 6.26 17,919 5.78 6,651 6.03
State and municipal obligations (1) 127 6.05 1,076 4.94 5,676 8.54 9,218 8.54
Other debt securities 101 7.00 449 6.11 670 6.43 111 7.00
-------- -------- -------- -------
Total debt securities (1) $ 8,665 5.54 $ 96,577 6.24 $ 24,265 6.55 $15,980 7.55
======== ======== ======== =======
As of December 31, 2000
----------------------------
Weighted
Average
-------------------------
Total Yield (1)
--------- ---------
U.S. Treasury $ 200 6.40%
U.S. government agency 127,859 6.13
State and municipal obligations (1) 16,097 8.31
Other debt securities 1,331 6.40
--------
Total debt securities (1) $145,487 6.40
========
(1) Yields stated on a tax equivalent basis.
31
Table 5
Loan Portfolio Composition
(In thousands, except percentages)
As of December 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------ ------------------------
Real Estate:
Commercial $ 119,584 23.9% 115,434 27.9% $ 94,798 26.2%
Residential 150,825 30.1 130,676 31.6 120,143 33.2
Construction 66,148 13.2 34,680 8.4 29,794 8.2
------------- ------- ----------- ------ ---------- -------
Total real estate $ 336,557 67.2 $ 280,790 67.9 $244,735 67.6
Commercial, financial and
agricultural 74,981 15.0 58,002 14.0 49,822 13.8
------------- ------- ----------- ------ ---------- -------
Consumer:
Direct 46,463 9.3 32,778 7.9 32,368 8.9
Home equity 39,204 7.8 32,836 7.9 26,723 7.4
Revolving 3,432 0.7 9,605 2.3 8,604 2.3
------------- ------- ----------- ------ ---------- -------
Total consumer 89,099 17.8 75,219 18.1 67,695 18.6
------------- ------- ----------- ------ ---------- -------
Total $ 500,637 100.0% $ 414,011 100.0% $362,252 100.0%
============= ======= =========== ====== ========== =======
As of December 31,
----------------------------------------------------------
1997 1996
------------------------- --------------------------
Real Estate:
Commercial $ 60,659 19.0% $ 39,746 17.3%
Residential 120,257 37.7 99,835 43.3
Construction 22,143 6.9 18,773 8.1
---------- ------- ---------- -----------
Total real estate 203,059 63.6 $158,354 68.7
Commercial, financial and
agricultural 57,453 18.0 28,784 12.5
---------- ------- ---------- -----------
Consumer:
Direct 31,556 9.9 25,428 11.0
Home equity 21,425 6.7 15,109 6.6
Revolving 5,974 1.8 2,781 1.2
---------- ------- ---------- -----------
Total consumer 58,955 18.4 43,318 18.8
---------- ------- ---------- -----------
Total $319,467 100.0% $230,456 100.0%
========== ======= ========== ===========
As of December 31, 2000
---------------------------
Rate Structure for Loans
Maturity Maturing Over One Year
----------------------------------------------------- ----------------------------
Over One Over Predetermined Floating or
One Year Year to Five Interest Adjustable
or Less Five Years Years Total Rate Rate
-------- ---------- --------- --------- --------- ---------
Commercial, financial and agricultural $ 37,977 $ 28,829 $ 8,175 $ 74,981 $ 13,274 $ 23,730
Real estate - construction 30,583 25,153 10,412 66,148 14,671 20,894
Real estate - residential 11,567 35,630 103,628 150,825 67,559 71,699
Real estate - commercial 30,059 71,408 18,117 119,584 53,709 35,816
Consumer 15,762 32,329 41,008 89,099 29,884 43,453
-------- -------- -------- -------- -------- --------
Total $125,948 $193,349 $181,340 $500,637 $179,097 $195,592
======== ======== ======== ======== ======== ========
As of December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- --------- --------
Non-performing assets:
Non-accrual loans $ 3,222 $ 1,195 $ 1,474 $ 2,499 $ 2,251
Loans past due 90 days or more and still accruing interest - 117 87 92 68
Other real estate 1,007 534 1,518 308 251
Renegotiated troubled debt - - - - -
32
Table 6
Summary of Allowance for Credit Losses
(In thousands except ratios and percentages)
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
Balance, beginning of period $ 4,436 $ 3,452 $ 3,185 $ 2,422 $ 2,105
Charge-offs:
Commercial 62 -- 597 16 --
Real estate-construction -- -- -- -- --
Real estate-mortgage 362 -- 4 53 292
Consumer 380 512 407 186 162
------- ------- ------- ------- -------
Total charge-offs 804 512 1,008 255 454
Recoveries:
Commercial -- 5 12 10 --
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- -- 233 --
Consumer 154 90 92 89 64
------- ------- ------- ------- -------
Total recoveries 154 95 104 332 64
------- ------- ------- ------- -------
Net charge-offs 650 417 904 (77) 390
Provision charged to operations 2,525 1,401 1,171 686 707
------- ------- ------- ------- -------
Balance, end of period $ 6,311 $ 4,436 $ 3,452 $ 3,185 $ 2,422
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans 0.14% 0.11% 0.26% -0.03% 0.18%
======= ======= ======= ======= =======
Ratio of allowance to year end loans 1.26% 1.07% 0.26% 1.00% 1.05%
======= ======= ======= ======= =======
Allocation of the Allowance for Credit Losses
2000 1999 1998 1997 1996
--------------- -------------- --------------- -------------- -------------
$ % (1) $ % (1) $ % (1) $ % (1) $ % (1)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance at end of period applicable to:
Commercial 4,445 15 2,087 14 1,549 14 1,291 18 1,011 13
Real estate-construction 28 13 50 8 4 8 8 7 49 8
Real estate-mortgage 125 54 868 60 330 59 514 57 442 60
Consumer 1,635 18 1,276 18 1,320 19 515 18 657 19
General 78 0 155 0 249 0 857 0 263 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allocation 6,311 100 4,436 100 3,452 100 3,185 100 2,422 100
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
(1) Percent of loans in each category to total loans.
33
Table 7
Regulatory Capital
(In thousands, except percentages)
As of or for year ended December 31,
--------------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------- ---------------------
Total capital to risk weighted assets
Consolidated $ 62,028 12.5% $ 57,327 14.3 % $ 55,769 16.3%
Subsidiary Bank 61,319 12.4 56,281 13.9 54,607 15.0
Tier 1 capital to risk weighted assets
Consolidated 55,841 11.3 52,891 13.2 52,350 15.3
Subsidiary Bank 55,132 11.1 51,845 12.8 51,155 14.1
Tier 1 capital to average assets
Consolidated 55,841 8.2 52,891 9.3 52,350 10.3
Subsidiary Bank 55,132 8.1 51,845 9.0 51,155 9.4
34
Table 8
Interest Sensitivity Analysis
(In thousands, except ratios)
As of December 31, 2000
------------------------------------------------------------------------------
Total Total
Sensitive Sensitive
1 - 90 91 - 180 181 - 365 Within Over
Day Day Day One One
Sensitive Sensitive Sensitive Year Year Total
--------- --------- --------- --------- --------- ---------
Interest earning assets:
Loans, net of non-accruals $ 239,558 $ 12,329 $ 19,269 $ 271,156 $ 226,259 $ 497,415
Taxable investment securities 4,243 200 4,095 8,538 120,852 129,390
Tax exempt investment securities -- -- 127 127 15,970 16,097
Other investment securities 3,967 -- -- 3,967 -- 3,967
Due from FHLB 976 -- -- 976 -- 976
--------- --------- --------- --------- --------- ---------
Total interest earning assets 248,744 12,529 23,491 284,764 363,081 647,845
--------- --------- --------- --------- --------- ---------
Interest bearing liabilities:
Savings, NOW and MMI $ 45,947 $ -- $ -- $ 45,947 $ 36,810 $ 82,757
Other time deposits 104,762 92,692 129,589 327,043 105,217 432,260
Overnight borrowings 12,537 -- -- 12,537 -- 12,537
Other borrowings 20,000 11,000 10,000 41,000 -- 41,000
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 183,246 103,692 139,589 426,527 142,027 568,554
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap
$ 65,498 $ (91,163) $(116,098) $(141,763)
========= ========= ========= =========
Ratio of interest sensitive assets to liabilities 1.36 0.12 0.17 0.67 2.56 1.14
35
Table 9
Market Risk of Financial Instruments
(In thousands, except percentages)
Contractual Maturities as of December 31, 2000
------------------------------------------------------------------------- Average Estimated
Over Interest Fair
2001 2002 2003 2004 2005 Five Years Total Rate Value
---- ---- ---- ---- ---- ---------- ----- ---- -----
Financial assets:
Debt securities $ 8,665 $ 3,155 $ 40,318 $ 33,689 $ 19,415 $ 40,245 $145,487 5.76% $145,738
Loans:
Fixed rate 30,889 26,791 15,682 32,903 39,429 64,292 209,986 8.64 204,901
Variable rate 95,059 5,329 32,847 18,362 22,006 117,048 290,651 9.87 288,477
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total financial assets $134,613 $ 35,275 $ 88,847 $ 84,954 $ 80,850 $221,585 $646,124 8.47% $639,116
======== ======== ======== ======== ======== ======== ======== ======== ========
Financial liabilities:
NOW $ 26,788 $ -- $ -- $ -- $ -- $ -- $ 26,788 0.76% $ 26,788
MMI 37,070 -- -- -- -- -- 37,070 4.53 37,070
Savings 18,899 -- -- -- -- -- 18,899 1.64 18,899
Time deposits 327,043 55,241 26,693 10,614 12,076 593 432,260 5.88 435,232
Borrowings 26,000 5,000 5,000 5,000 -- -- 41,000 6.73 40,997
Federal funds purchased
and retail repurchase 12,537 -- -- -- -- -- 12,537 6.31 12,537
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total financial liabilities $448,337 $ 60,241 $ 31,693 $ 15,614 $ 12,076 $ 593 $568,554 5.48% $571,523
======== ======== ======== ======== ======== ======== ======== ======== ========
Contractual Maturities as of December 31, 1999
------------------------------------------------------------------------------------------------------------ Average Estimated
Over Interest Fair
2000 2001 2002 2003 2004 Five Years Total Rate Value
---- ---- ---- ---- ---- ---------- ----- ---- -----
Financial assets:
Debt securities $ 859 $ 4,418 $ 4,159 $ 38,437 $ 34,405 $ 51,855 $134,133 6.24% $129,445
Loans:
Fixed rate 37,049 17,359 12,270 29,908 19,165 84,608 200,359 8.53 193,751
Variable rate 94,263 21,798 14,273 16,401 10,711 56,206 213,652 8.92 214,104
-------- -------- -------- -------- -------- -------- -------- ---- --------
Total financial assets $132,171 $ 43,575 $ 30,702 $ 84,746 $ 64,281 $192,669 $548,144 8.12% $537,300
======== ======== ======== ======== ======== ======== ======== ==== ========
Financial liabilities:
NOW $ 26,134 $ -- $ -- $ -- $ -- $ -- $ 26,134 0.82% $ 26,134
MMI 47,077 -- -- -- -- -- 47,077 4.27 47,077
Savings 19,514 -- -- -- -- -- 19,514 1.78 19,514
Time deposits 218,372 74,433 23,351 10,058 16,476 912 343,602 5.54 343,353
Borrowings 11,500 -- 10,000 5,000 5,000 -- 31,500 5.93 31,423
Federal funds purchased
and retail repurchase 15,599 -- -- -- -- -- 15,599 4.68 15,599
-------- -------- -------- -------- -------- -------- -------- ---- --------
Total financial liabilities $338,196 $ 74,433 $ 33,351 $ 15,058 $ 21,476 $ 912 $483,426 5.01% $483,100
======== ======== ======== ======== ======== ======== ======== ==== ========
36
Table 10
Quarterly Financial Data
(In thousands, except per share data)
2000 1999
-------------------------------------------- --------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr(1) 1st Qtr(1)
-------- ------- ------- -------- ------- ------- ---------- ----------
Interest income $14,339 $13,520 $12,571 $11,746 $11,211 $10,905 $10,353 $10,064
Interest expense 8,414 7,832 6,935 6,336 5,795 5,633 5,378 5,300
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 5,925 5,688 5,636 5,410 5,416 5,272 4,975 4,764
Provision for credit losses 1,279 370 340 536 283 705 184 229
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for credit losses 4,646 5,318 5,296 4,874 5,133 4,567 4,791 4,535
------- ------- ------- ------- ------- ------- ------- -------
Other income 593 732 760 806 915 687 661 714
Other expenses 5,007 3,772 3,860 3,461 3,673 4,276 3,704 3,540
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 232 2,278 2,196 2,219 2,375 978 1,748 1,709
Income taxes 102 794 710 717 808 638 566 550
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 130 $ 1,484 $ 1,486 $ 1,502 $ 1,567 $ 340 $ 1,182 $ 1,159
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.03 $ 0.33 $ 0.33 $ 0.34 $ 0.35 $ 0.08 $ 0.26 $ 0.26
Diluted $ 0.03 $ 0.33 $ 0.33 $ 0.33 $ 0.35 $ 0.07 $ 0.26 $ 0.25
(1) Amounts differ from original 10-Q filed with the Securities and Exchange
Commission due to the acquisition of Black Diamond Savings Bank, FSB in
August 1999. This acquisition was accounted for using the pooling of
interests method of accounting for business combinations.
37
Report of Independent Accountants
To The Board of Directors and Shareholders
of FNB Financial Services Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of changes in
shareholders' equity and of cash flows, present fairly, in all material
respects, the financial position of FNB Financial Services Corporation and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 6, 2001
38
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
- ---------------------------
December 31, 2000 and 1999
(Dollars in thousands, except share data)
2000 1999
--------- ---------
ASSETS
Cash and due from banks ...................................................... $ 15,952 $ 24,391
Investment securities:
Available for sale ...................................................... 145,738 129,445
Federal Home Loan Bank and Federal Reserve Bank Stock ................... 3,967 2,573
Loans, net of allowance for credit losses of $6,311 in 2000 and $4,436 in 1999 494,326 409,575
Premises and equipment, net .................................................. 12,046 9,807
Accrued income and other assets .............................................. 13,875 12,628
--------- ---------
Total assets ....................................................... $ 685,904 $ 588,419
========= =========
LIABLILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ..................................................... $ 54,434 $ 47,915
Interest-bearing ........................................................ 515,017 436,327
--------- ---------
Total deposits ..................................................... 569,451 484,242
Federal funds purchased and retail repurchase agreements ..................... 12,537 15,599
Other borrowings ............................................................. 41,000 31,500
Accrued expenses and other liabilities ....................................... 6,524 6,348
--------- ---------
Total liabilities .................................................. 629,512 537,689
--------- ---------
Shareholders' equity:
Preferred stock, no par value; Authorized - 10,000,000 shares; none issued ... -- --
Common stock, $1.00 par value;
Authorized - 40,000,000 shares; Outstanding -
4,488,259 in 2000 and 4,478,545 in 1999 ................................. 4,488 4,479
Paid-in capital .............................................................. 25,723 25,653
Retained earnings ............................................................ 26,028 23,458
Accumulated other comprehensive income ....................................... 153 (2,860)
--------- ---------
Total shareholders' equity ......................................... 56,392 50,730
--------- ---------
Total liabilities and shareholders' equity ......................... $ 685,904 $ 588,419
========= =========
See notes to consolidated financial statements
39
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
- ----------------------------------------------------------
Years ended December 31, 2000, 1999 and 1998 (Dollars in thousands, except per
share data)
2000 1999 1998
--------- --------- --------
Interest income
Loans .......................................... $ 43,588 $ 34,339 $ 31,826
Federal funds sold ............................. 423 226 348
Investment securities
Taxable ................................... 7,084 7,396 7,675
Tax exempt ................................ 747 367 412
Other .......................................... 334 205 135
-------- -------- --------
Total interest income ................ 52,176 42,533 40,396
-------- -------- --------
Interest expense
Deposits ....................................... 25,808 20,191 20,479
Federal funds purchased and other borrowings ... 3,709 1,915 1,539
-------- -------- --------
Total interest expense ............... 29,517 22,106 22,018
-------- -------- --------
Net interest income ................................. 22,659 20,427 18,378
Provision for credit losses ......................... 2,525 1,401 1,171
-------- -------- --------
Net interest income after provision for credit losses 20,134 19,026 17,207
-------- -------- --------
Other income
Service charges on deposit accounts ............ 2,072 1,793 1,433
Other service charges and fees ................. 455 371 469
Bankcard fees .................................. 231 521 427
Net gain on sales of loans ..................... 73 174 334
Net gain on securities available for sale ...... 60 118 422
-------- -------- --------
Total other operating income ......... 2,891 2,977 3,085
-------- -------- --------
Other expenses
Salaries and employee benefits ................. 8,699 8,174 7,374
Occupancy expense .............................. 871 771 696
Furniture and equipment expense ................ 1,507 1,280 946
Insurance expense, including FDIC assessment ... 250 108 139
Marketing expense .............................. 447 352 338
Printing and supply expense .................... 308 346 317
Bankcard processing ............................ 155 412 402
Merger related costs ........................... -- 675 --
Other expenses ................................. 3,863 3,075 2,660
-------- -------- --------
Total other expenses ................. 16,100 15,193 12,872
-------- -------- --------
Income before income taxes .......................... 6,925 6,810 7,420
Income tax expense .................................. 2,323 2,562 2,398
-------- -------- --------
Net income .......................................... 4,602 4,248 5,022
Other comprehensive income (loss) ................... 3,013 (3,560) 472
-------- -------- --------
Comprehensive income ................................ $ 7,615 $ 688 $ 5,494
======== ======== ========
Net income per share, basic ......................... $ 1.03 $ 0.95 $ 1.19
======== ======== ========
Net income per share, diluted ....................... $ 1.02 $ 0.93 $ 1.13
======== ======== ========
See notes to consolidated financial statements
40
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
- ----------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998
(Dollars in thousands)
2000 1999 1998
-------- -------- --------
Common stock
Balance at beginning of year ......................... $ 4,479 $ 4,544 $ 3,506
Stock split effected in the form of a stock dividend . -- -- 101
Stock repurchase ..................................... -- (119) --
Stock issuance ....................................... 3 -- 897
Dividend reinvestment plan ........................... 2 23 13
Exercise of stock options ............................ 3 17 20
Employee 401(k) plan ................................. 1 14 6
Employee stock awards ................................ -- -- 1
-------- -------- --------
Balance at end of year ............................... 4,488 4,479 4,544
-------- -------- --------
Paid-in capital
Balance at beginning of year ......................... 25,653 27,140 7,840
Stock split effected in the form of a stock dividend . -- -- 1,228
Stock issuance ....................................... (3) (1,965) 17,546
Dividend reinvestment plan ........................... 28 224 266
Exercise of stock options ............................ 40 79 52
Employee 401(k) plan ................................. 5 175 202
Employee stock awards ................................ -- -- 6
-------- -------- --------
Balance at end of year ............................... 25,723 25,653 27,140
-------- -------- --------
Retained earnings
Balance at beginning of year ......................... 23,458 21,247 18,830
Net income ........................................... 4,602 4,248 5,022
Cash dividends paid ($0.45 per share in 2000, $0.46 in
1999, and $0.30 in 1998) ........................ (2,032) (2,037) (1,275)
Stock split effected in the form of a stock dividend . -- -- (1,330)
-------- -------- --------
Balance at end of year ............................... 26,028 23,458 21,247
-------- -------- --------
Accumulated other comprehensive income
Balance at beginning of year ......................... (2,860) 700 228
Other comprehensive income ........................... 3,013 (3,560) 472
-------- -------- --------
Balance at end of year ............................... 153 (2,860) 700
-------- -------- --------
Total shareholders' equity ................. $ 56,392 $ 50,730 $ 53,631
======== ======== ========
See notes to consolidated financial statements
41
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
- -------------------------------------
Years ended December 31, 2000, 1999, and 1998
(Dollars in thousands)
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received ................................................................. $ 49,796 $ 42,215 $ 37,903
Fees and commission received ...................................................... 3,827 3,807 3,230
Interest paid ..................................................................... (28,030) (22,208) (21,846)
Noninterest expense paid .......................................................... (14,474) (14,614) (11,744)
Income taxes paid ................................................................. (3,580) (2,862) (2,472)
Proceeds from sales of loans ...................................................... 4,408 3,831 15,062
--------- --------- ---------
Net cash provided by operating activities ............................... 11,947 10,169 20,133
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale .............................. 6,337 61,611 94,915
Proceeds from maturities of securities available for sale ......................... 588 19,245 20,110
Purchase of securities ............................................................ (19,673) (62,691) (173,876)
Capital expenditures .............................................................. (3,661) (1,481) (1,736)
(Increase) decrease in other real estate owned .................................... (473) 1,110 (1,333)
Net (increase) decrease in loans .................................................. (93,196) (56,025) (55,669)
--------- --------- ---------
Net cash used in investing activities ................................... (110,078) (38,231) (117,589)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and interest checking accounts ......... (3,449) 8,214 32,179
Net increase in time deposits ..................................................... 88,658 16,433 44,173
Net increase in other borrowings .................................................. 9,500 14,000 2,500
Net increase (decrease) in federal funds purchased and retail repurchase agreements (3,062) 1,667 (1,512)
Repurchase of common stock ........................................................ -- (2,084) --
Proceeds from issuance of common stock ............................................ 77 532 19,008
Dividends paid .................................................................... (2,032) (2,037) (1,275)
--------- --------- ---------
Net cash provided by financing activities ............................... 89,692 36,725 95,073
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .............................. (8,439) 8,663 (2,383)
--------- --------- ---------
Cash and cash equivalents, beginning of year ...................................... 24,391 15,728 18,111
--------- --------- ---------
Cash and cash equivalents, end of year ............................................ $ 15,952 $ 24,391 $ 15,728
========= ========= =========
Supplemental disclosure of non-cash transactions
Non-interest transfers from loans to other real estate ............................ $ 986 $ 192 $ 1,975
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income ........................................................................ $ 4,602 $ 4,248 $ 5,022
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses .................................................. 2,525 1,401 1,171
Depreciation ................................................................. 1,139 978 790
Accretion and amortization ................................................... 477 494 394
(Gain) loss on sale of securities available for sale ......................... (60) (118) (422)
(Gain) loss on sale of mortgage loans ........................................ (73) (174) (334)
Proceeds from sales of loans ................................................. 4,408 3,831 15,062
Increase in accrued income and other assets .................................. (1,247) (1,751) (2,250)
Increase in accrued expenses and other liabilities ........................... 176 1,260 700
--------- --------- ---------
Net cash provided by operating activities ............................... $ 11,947 $ 10,169 $ 20,133
========= ========= =========
See notes to consolidated financial statements
42
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
- ------------------------------------------
December 31, 2000, 1999 and 1998
Note 1 - Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of FNB Financial Services Corporation (the "Company") and its
wholly-owned subsidiary FNB Southeast (the "Subsidiary Bank") and FNB Southeast
Investment Services, Inc., a wholly-owned subsidiary of FNB Southeast. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Nature of operations
FNB Southeast provides a variety of financial services to
individual and corporate customers through its thirteen full-service branches in
Reidsville, Madison, Eden, Ruffin, Greensboro, Burgaw, and Wilmington, North
Carolina. A majority of the Subsidiary Bank's North Carolina customers are
located in Rockingham, Guilford, and New Hanover Counties. The Subsidiary Bank
also provides a variety of financial services to customers through its five
full-service branches in Norton, Harrisonburg, Richlands, and Pennington Gap,
Virginia. A majority of the Subsidiary Bank's Virginia customers are located in
Wise, Tazewell, Russell, Lee, Rockingham, and Augusta Counties. FNB Southeast's
primary deposit products are interest-bearing checking accounts, certificates of
deposit and individual retirement accounts. Its primary lending products are
commercial, real estate, and consumer loans.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and their reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for credit
losses on loans. A majority of the Subsidiary Bank's loan portfolio consists of
loans in the geographic areas cited above. The local economies of these areas
depend heavily on the industrial, agricultural, and service sectors.
Accordingly, the ultimate collectibility of a large portion of the Subsidiary
Bank's loan portfolio would be affected by changes in local economic conditions.
Cash and cash equivalents
For the purpose of presentation in the statement of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks".
Investment securities
The Company classifies its investment securities at the time of
purchase into three categories as follows:
- Held to Maturity reported at amortized cost,
- Trading - reported at fair value with unrealized gains and
losses included in earnings, or
- Available for Sale - reported at fair value with unrealized
gains and losses reported in other comprehensive income.
Other securities, which are carried at cost, include stock in the
Federal Reserve Bank and the Federal Home Loan Bank of Atlanta ("FHLB").
Gains and losses on sales of securities are recognized when
realized on a specific identification basis. Premiums and discounts are
amortized into interest income using the level yield method.
Loans
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
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.
43
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Loan origination fees and costs
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
Allowance for credit losses
The allowance for credit losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based upon
reviews of individual credits, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant risk factors. Losses are charged and recoveries are credited to the
allowance for credit losses at the time the loss or recovery is incurred.
While management uses the best available information to evaluate
the adequacy of the allowance for credit losses, future additions to the
allowance may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Subsidiary Bank's allowance for credit losses on loans
and foreclosed real estate. Such agencies may require the Subsidiary 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, acquired through partial or total satisfaction
of loans, is carried at the lower of cost or fair market value, less estimated
costs to sell, which becomes the property's new basis. At the date of
acquisition, losses are charged to the allowance for credit losses. Subsequent
write downs are charged to expense in the period they are incurred.
Premises and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. The provision for depreciation and amortization
is computed principally by the straight-line method over the estimated useful
lives of the assets.
Expenditures for maintenance and repairs are charged to
operations, and the expenditures for major replacements and betterments are
added to the premises and equipment accounts. The cost and accumulated
depreciation of the premises and equipment retired or sold are eliminated from
the appropriate asset accounts at the time of retirement or sale and the
resulting gain or loss is reflected in current operations.
Income taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of non-taxable income such as
interest on state and municipal securities and non-deductible expenses) and
deferred taxes on temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Net income per share
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". SFAS No. 128 requires disclosure of two
earnings per share amounts: basic net income per share of common stock and
diluted net income per share of common stock. Basic net income per share of
common stock is computed by dividing net income available to common shareholders
by the weighted average number of shares of common stock outstanding during each
year. Diluted net income per share of common stock is computed by dividing net
income plus any adjustments to net income related to the issuance of dilutive
potential common shares by the weighted average number of shares of common stock
outstanding during each year plus the number of dilutive potential common
shares.
44
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Sales of loans
Gains and losses on the sale of loans are accounted for by
imputing gain or loss on those sales where a yield rate guaranteed to the buyer
is more or less than the contract interest rate being collected. Such gains or
losses are recognized in the financial statements during the year of sale. The
Subsidiary Bank continues to service certain loans that have been sold. Such
loan balances are not included in the accompanying consolidated balance sheets.
Off balance sheet financial instruments
In the ordinary course of business, the Subsidiary Bank enters
into off balance sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
Segment information
The Company follows the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This Statement
requires that public business enterprises report certain information about
operating segments in their annual financial statements and in condensed
financial statements for interim periods issued to stockholders. It also
requires that public business enterprises report related disclosures and
descriptive information about products and services provided by significant
segments, geographic areas, and major customers, differences between the
measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
Operating segments are components of an enterprise with separate
financial information available for use by the chief operating decision maker to
allocate resources and to assess performance. The Company has determined that it
has one significant operating segment, the providing of general commercial
financial services to customers located in Reidsville, Madison, Eden, Ruffin,
Greensboro, Burgaw, and Wilmington, North Carolina; Norton, Harrisonburg,
Richlands, and Pennington Gap, Virginia; and surrounding communities. The
various products are those generally offered by community banks, and the
allocation of resources is based on the overall performance of the Company,
rather than the individual branches or products.
There are no differences between the measurements used in
reporting segment information and those used in the Company's general-purpose
financial statements.
New accounting pronouncements
In June of 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. This standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This standard did not
have a material effect on the Company's financial statements.
In October of 2000, the Financial Accounting Standards Board
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" a replacement of SFAS 125. SFAS 140 is
effective for all fiscal quarters of all fiscal years ending after December 15,
2000. This standard establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. This
standard did not have a material effect on the Company's financial statements.
In April of 2000, the Financial Accounting Standards Board issued
FIN 44, "Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to Employees".
FIN 44 was effective July 1, 2000. This interpretation clarifies (a) the
definition of employees for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a
45
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. This
interpretation did not have a material effect on the Company's financial
statements.
In December of 1999, the Securities and Exchange Commission
issued SAB 101, "Revenue Recognition in Financial Statements". SAB 101, as
amended, is effective no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. This staff accounting bulletin provides the
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. This interpretation did not have a material effect
on the Company's financial statements.
Reclassification
Certain items for 1998 and 1999 have been reclassified to conform
with the 2000 presentation. Such reclassifications had no effect on net income
or shareholders' equity as previously reported.
Subsequent Events
On February 12, 2001, the Federal Reserve approved the Company's
request to convert from a bank holding company to a financial holding company,
pursuant to the Gramm-Leach-Bliley Act of 1999.
Note 2 - Mergers and acquisitions
On August 31, 1999, the Company completed the acquisition of
Black Diamond Savings Bank, FSB ("Black Diamond") through the issuance of 1.3333
shares of the Company's common stock for each share of Black Diamond's
outstanding common stock, or 1,113,397 shares. The merger was accounted for as a
pooling of interests.
Company (1) Black Diamond Combined
----------- -------------- -----------
(In thousands)
1999:
Total income ...... $34,478 $11,032 $45,510
Net interest income 16,258 4,169 20,427
Net income ........ 3,744 504 4,248
1998:
Total income ...... 32,929 10,552 43,481
Net interest income 14,558 3,820 18,378
Net income ........ 3,847 1,175 5,022
(1) Prior to Black Diamond merger
Black Diamond, prior to the merger with the Company, reported
total income of $7,134,000, net interest income of $2,584,000, and net income of
$753,000 for the eight months ended August 31, 1999.
Note 3 - Restriction on cash and due from banks
The Subsidiary Bank maintains average reserve balances with the
Federal Reserve Bank. The average amounts of these reserve balances for the
years ended December 31, 2000 and 1999 were $339,000 and $688,000, respectively.
46
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Note 4 - Investment securities
Investment securities consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
December 31, 2000
Available for sale:
U.S. Treasury ................... $ 200 $ -- $ -- $ 200
U.S. government agency securities 119,579 -- 505 119,074
Mortgage backed securities ...... 8,280 -- 53 8,227
State and municipal obligations . 16,097 831 -- 16,928
Other ........................... 1,331 -- 22 1,309
-------- -------- -------- --------
Total available for sale ........ 145,487 831 580 145,738
Federal Home Loan Bank and Federal
Reserve Bank stock .............. 3,967 -- -- 3,967
-------- -------- -------- --------
Total investment securities $149,454 $ 831 $ 580 $149,705
======== ======== ======== ========
December 31, 1999 Available for sale:
U.S. Treasury ................... $ 200 $ -- $ -- $ 200
U.S. government agency securities 111,543 -- 4,238 107,305
Mortgage backed securities ...... 11,061 1 365 10,697
State and municipal obligations . 9,989 62 92 9,959
Other ........................... 1,340 -- 56 1,284
-------- -------- -------- --------
Total available for sale ........ 134,133 63 4,751 129,445
Federal Home Loan Bank and Federal
Reserve Bank stock .............. 2,573 -- -- 2,573
-------- -------- -------- --------
Total investment securities $136,706 $ 63 $ 4,751 $132,018
======== ======== ======== ========
The amortized cost and estimated market value of debt securities
at December 31, 2000, by contractual maturities, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Securities Available for Sale
-----------------------------
Amortized Estimated
Cost Fair Value
-------- ---------
(In thousands)
Due in one year or less ...................... $ 8,665 $ 8,647
Due after one through five years.............. 96,577 96,272
Due after five through ten years.............. 24,265 24,395
Due after ten years .......................... 15,980 16,424
-------- --------
Total debt securities ................... $145,487 $145,738
======== ========
47
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Proceeds from the sale of investment securities available for
sale, gross realized gains, gross realized losses, and the related income taxes
on net realized gains were as follows:
Year ended December 31
---------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Proceeds from sales ....................... $ 6,277 $60,805 $79,075
Gross realized gains ...................... 98 178 424
Gross realized losses ..................... 38 60 2
Applicable income tax on net realized gains 23 46 184
At December 31, 2000, and 1999, investment securities with a
carrying value of approximately $80,427,000 and $44,211,000 respectively, were
pledged as collateral to secure public deposits and for other purposes.
Note 5 - Loans
Major classifications of loans at December 31, are as follows:
2000 1999
-------- ---------
(In thousands)
Commercial, financial and agricultural $ 74,981 $ 58,002
Consumer ............................. 89,099 75,219
Real estate:
Residential mortgage ............ 150,113 129,922
Commercial mortgage ............. 119,584 115,434
Construction .................... 66,148 34,680
-------- --------
Subtotal loans ....................... 499,925 413,257
Loans held for sale .................. 712 754
-------- --------
Gross loans ........... $500,637 $414,011
======== ========
A loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows discounted
at the historical effective interest rate, while collateral dependent loans are
measured for impairment based on the fair value of the collateral.
The Company uses several factors in determining if a loan is
impaired. The internal asset classification procedures include a thorough review
of significant loans and lending relationships and include the accumulation of
related data. This data includes loan payment status, borrowers' financial data
and borrowers' operating factors such as cash flow, operating income or loss,
etc.
At December 31, 2000 and 1999, the recorded investment in loans
that were considered impaired was approximately $3,222,000 and $1,747,000,
respectively. The related allowance for credit losses on these impaired loans
was approximately $901,000 and $488,000, respectively. The average recorded
investment in impaired loans for the years ended December 31, 2000, 1999 and
1998 was approximately $2,892,000, $1,611,000 and $1,987,000 respectively. There
were no loans on nonaccrual status that were not considered impaired at December
31, 2000.
Mortgage loans serviced for the Federal Home Loan Mortgage
Corporation are not included in the accompanying consolidated balance sheets.
The unpaid principal balances of those loans at December 31, 2000 and 1999 were
$24,459,000 and $24,385,000, respectively. Mortgage loans serviced for other
investors at December 31, 2000 and 1999, were $1,580,000 and $2,551,000,
respectively.
Certain 1 to 4 family residential mortgage loans are held as
collateral under a blanket floating lien to secure a portion of the Subsidiary
Bank's borrowings (see Note 9).
48
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------
Note 6 - Allowance for credit losses
Changes in the allowance for credit losses for the three years ended December 31
were as follows:
2000 1999 1998
------- ------- -------
(In thousands)
Balance at beginning of year $ 4,436 $ 3,452 $ 3,185
Provision for credit losses 2,525 1,401 1,171
Recoveries ................. 154 95 104
Losses charged off ......... (804) (512) (1,008)
------- ------- -------
Balance at end of year ..... $ 6,311 $ 4,436 $ 3,452
======= ======= =======
Note 7 - Premises and equipment
Premises and equipment is summarized as follows:
2000 1999
-------- --------
(In thousands)
Land ............................................. $ 2,788 $ 2,784
Building and leasehold improvements .............. 7,144 6,188
Equipment ........................................ 9,802 7,067
Construction in progress ......................... -- 335
------- -------
Subtotal ......................................... 19,734 16,374
Less accumulated depreciation and amortization.... 7,688 6,567
------- -------
Total premises and equipment, net ........... $12,046 $ 9,807
======= =======
Note 8 - Deposits
The aggregate amount of jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $206,766,000 and
$131,413,000 in 2000 and 1999, respectively.
At December 31, 2000 the scheduled maturities of time deposits
are as follows:
Year ending December 31, Amount
------------------------ --------
(In thousands)
2001 ..................................... $327,043
2002 ..................................... 55,241
2003 ..................................... 26,693
2004 ..................................... 10,614
2005 ..................................... 12,076
Thereafter ............................... 593
--------
Total time deposits ................. $432,260
========
Note 9 - Federal funds purchased, retail repurchase agreements and other
borrowings
The following is a schedule of federal funds purchased,
securities sold under repurchase agreements and FHLB borrowings:
49
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Balance Interest Rate Average Maximum
as of as of Average Interest Outstanding at
December 31 December 31 Balance Rate Any Month-end
-------------- ------------- -------- ---------- -------------
(In thousands, except percentages)
2000
Federal funds purchased and securities
sold under agreements to repurchase $12,537 6.31% $11,728 5.90% $19,312
FHLB borrowings ........................ 41,000 6.73% 45,634 6.61% 52,500
------- ------- -------
Total ........................ $53,537 $57,362 $71,812
======= ======= =======
1999
Federal funds purchased and securities
sold under agreements to repurchase $15,599 5.08% $12,706 4.68% $21,406
FHLB borrowings ........................ 31,500 5.86% 22,278 5.93% 31,500
------- ------- -------
Total ........................ $47,099 $34,984 $52,906
======= ======= =======
At December 31, 2000, the Subsidiary Bank had an $88.5 million
line of credit with the FHLB under which $41.0 million was outstanding. This
line of credit is secured with FHLB stock and a blanket floating lien on
qualifying 1 to 4 family residential mortgage loans. The outstanding amounts
consist of $26.0 million maturing in 2001, $5.0 million maturing in 2002, $5.0
million maturing in 2003, and $5.0 million maturing in 2004. The borrowing
maturing in 2002 had a one-time call feature in 1999 and converted to a floating
rate based on the three month LIBOR. The borrowing maturing in 2003 had an
identical call feature in 2000 and also converted to a floating rate based on
the three month LIBOR.
Federal funds purchased represent unsecured overnight borrowings
from other financial institutions by the Subsidiary Bank. Securities sold under
agreement to repurchase represent short-term borrowings by the Subsidiary Bank,
with overnight maturities collateralized by securities of the United States
government or its agencies.
Note 10 - Income taxes
The components of income tax expense are as follows:
2000 1999 1998
------- ------- -------
(In thousands)
Current tax expense
Federal .................................. $ 2,996 $ 2,928 $ 2,452
State .................................... 53 92 40
------- ------- -------
Total current .................. 3,049 3,020 2,492
------- ------- -------
Deferred tax expense (benefit)
Federal .................................. (633) (399) (94)
State .................................... (93) (59) --
------- ------- -------
Total deferred ................. (726) (458) (94)
------- ------- -------
Total income tax expense ....... $ 2,323 $ 2,562 $ 2,398
======= ======= =======
The sources of deferred tax assets and liabilities and the tax
effect of each are as follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Allowance for credit losses ........................ $2,193 $1,115
Net unrealized loss on securities available for sale -- 1,828
Non-qualified deferred compensation plans .......... 657 1,016
Other .............................................. 52 81
------ ------
Total ................................. 2,902 4,040
Deferred tax liabilities:
Depreciable basis of property and equipment ........ 324 396
Net unrealized gain on securities available for sale 98 --
Deferred loan fees ................................. 281 245
Other .............................................. 83 83
------ ------
Total ................................. 786 724
------ ------
Net deferred tax assets (liabilities) ................ $2,116 $3,316
====== ======
50
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
There is no valuation allowance for deferred tax assets as
management believes that realization of the deferred tax assets is more likely
than not based upon the Company's history of taxable income and estimates of
future taxable income.
The provision for federal income taxes differs from that computed
by applying the federal statutory rate of 34% as indicated in the following
analysis:
2000 1999 1998
---- ---- ----
(In thousands)
Tax based on statutory rates .................. $ 2,354 $ 2,315 $ 2,523
Increase (decrease) resulting from:
Effect of tax-exempt income .............. (209) (136) (98)
State income taxes, net of federal benefit (35) 22 (37)
Disallowed merger cost ................... -- 230 --
Other, net ............................... 213 131 10
------- ------- -------
Total provision for income taxes ......... $ 2,323 $ 2,562 $ 2,398
======= ======= =======
Note 11 - Lease commitments
The minimum annual lease commitments under noncancelable
operating leases in effect at December 31, 2000, are as follows:
Year Ending December 31
----------------------- Amount
------------------
(In thousands)
2001 ..................................... $ 278
2002 ..................................... 268
2003 ..................................... 254
2004 ..................................... 240
2005 ..................................... 240
Thereafter ............................... 783
------
Total lease commitments $2,063
======
Rental expense was $350,000 in 2000, $271,000 in 1999, and
$206,000 in 1998.
Note 12 - Related party transactions
The Subsidiary Bank had loans outstanding to principal officers
and directors and their affiliated companies of approximately $3,716,000 and
$4,451,000 at December 31, 2000 and 1999, respectively. During 2000, additions
to such loans were $1,442,000 and repayments were $2,177,000. Such loans were
made substantially on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other borrowers
and do not involve more than the normal risks of collectibility.
Note 13 - Shareholders' equity
51
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Stock grants
The Company did not issue stock grants during 2000 or 1999.
During 1998, stock grants to employees totaled 95 common shares.
Stock option plans
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 123, the Company has elected to continue using the
measurement prescribed in Accounting Principles Board ("APB") Opinion No. 25,
and accordingly, SFAS No. 123 had no effect on the Company's financial position
or results of operations.
The Company has issued stock under both incentive and
non-qualified stock options. The following is a summary of stock option activity
and related information for the years ended December 31:
2000 1999 1998
-------------------------- --------------------------- ------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- -------- --------------- ------------------------------
Outstanding -
Beginning of year.... 798,661 $ 14.33 633,215 $ 14.55 574,766 $ 12.55
Granted ............. 13,350 11.24 206,850 13.38 95,100 24.87
Exercised ........... (7,427) 7.11 (27,220 9.44 (26,378) 8.39
Forfeited ........... (6,500) 14.96 (14,184 15.40 (10,273) 12.04
-------- -------- -------
of year ............. 798,084 $ 14.34 798,661 $ 14.33 633,215 $ 14.55
======== ======== =======
Exercisable - End
of year ............. 570,292 $ 13.51 422,006 $ 12.56 340,339 $ 10.97
Weighted average
fair value of
options granted
during the year ..... $ 2.92 $ 4.05 $ 7.09
The following is a summary of information on outstanding and
exercisable options at December 31, 2000:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------ -------------------------------------
Weighted Average Remaining Weighted
Range of Contractual Weighted Average Average
Exercise Prices Number Life (Years) Exercise Price Number Exercise Price
- ------------------ ----------- ----------------------------- ---------------------- ---------- ----------------------
$ 6.75 - 12.52 441,574 7.23 $ 10.54 314,711 $ 9.98
12.94 - 25.50 356,510 7.13 19.06 255,581 17.87
----------- ----------
798,084 570,292
=========== ==========
Because the Company has adopted the disclosure-only provisions of
SFAS No. 123, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date of the awards consistent
with the provisions of SFAS No. 123, the Company's net income and basic net
income per share would have been reduced to the pro forma amounts indicated
below:
52
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
2000 1999 1998
------------- ------------- -------------
Net income - as reported .................. $ 4,602,000 $ 4,248,000 $ 5,022,000
Net income - pro forma .................... 4,064,000 3,462,000 4,445,000
Basic net income per share - as reported... 1.03 0.95 1.19
Basic net income per share - pro forma .... 0.91 0.78 1.05
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used in 2000, 1999, and 1998: dividend yield of 4.75% for
2000, and 3.20% for 1999 and 1998; expected volatility of 33.0% for 2000, and
29.0% for 1999 and 1998; risk free interest rates of 5.85% for 2000, 6.25% for
1999 and 5.55% for 1998, and expected lives of 7 years for all years.
These plans provide that shares granted come from the Company's
authorized but unissued or reacquired common stock. The price of the options
granted pursuant to these plans will not be less than 100 percent of the fair
market value of the shares on the date of grant. The options granted in 1989,
1992, and 1995 vest ratably over a five year period, and the options granted in
1996, 1997, 1998, and 1999 vest ratably over a four year period. No option will
be exercisable after ten years from the date granted.
Note 14 - Other comprehensive income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes requirements for the disclosure
of comprehensive income in the Company's consolidated financial statements.
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of non-owner changes in equity. As required by
SFAS No. 130, prior period consolidated financial statements have been
reclassified to reflect application of the provisions of this statement.
Other comprehensive income is defined as comprehensive income
exclusive of net income. Unrealized gains (losses) on available for sale
investment securities represent the sole component of the Company's other
comprehensive income. Other comprehensive income (loss) consists of the
following:
2000 1999 1998
------- -------- --------
(In thousands)
Unrealized holding gains (losses) arising during the year ........ $ 4,999 $(5,717) $ 1,195
Reclassification adjustment for gains included in net income ..... 60 118 422
------- ------- -------
Other comprehensive income (loss) before tax ..................... 4,939 (5,835) 773
Income tax expense (benefit) related to other comprehensive income 1,926 (2,275) 301
------- ------- -------
Other comprehensive income (loss) ................................ $ 3,013 $(3,560) $ 472
======= ======= =======
Note 15 - Net income per share
The following is a reconciliation of the numerator and
denominator of basic common stock and diluted net income per share of common
stock as required by SFAS No. 128:
53
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
For the year ended December 31, 2000
----------------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ -----------
Net income per share of common stock:
Income available to common shareholders ... $4,602,000 4,483,950 $ 1.03
========
Effect of Dilutive Securities:
Stock options ............................. -- 36,488
---------- ----------
Net income per share of common stock - assuming
dilution:
Income available to common shareholders and
assumed conversion ................... $4,602,000 4,520,438 $ 1.02
========== ========== ========
For the year ended December 31, 1999
-----------------------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------- -----------
Net income per share of common stock:
Income available to common shareholders ............. $4,248,000 4,464,138 $ 0.95
=========
Effect of Dilutive Securities:
Stock options ....................................... -- 87,379
---------- ----------
Net income per share of common stock - assuming dilution:
Income available to common shareholders and
assumed conversion ........................ $4,248,000 4,551,517 $ 0.93
========== ========== =========
For the year ended December 31, 1998
-----------------------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Net income per share of common stock:
Income available to common shareholders ............. $5,022,000 4,238,923 $ 1.19
=========
Effect of Dilutive Securities:
Stock options ....................................... -- 208,047
---------- ----------
Net income per share of common stock - assuming dilution:
Income available to common shareholders and
assumed conversion ........................ $5,022,000 4,446,970 $ 1.13
========== ========== =========
Note 16 - FNB Financial Services Corporation (Parent Company)
The parent company's principal asset is its investment in its
subsidiary, FNB Southeast. The significant source of income of the parent
company is dividends received from its subsidiary.
54
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
2000 1999 1998
---------- --------- --------
(In thousands)
Condensed balance sheets
Assets
Cash and due from banks ................................. $ 410 $ 982 $ 1,058
Securities .............................................. 11 12 12
Investment in wholly-owned subsidiary ................... 55,685 49,630 52,472
Other assets ............................................ 286 106 89
-------- -------- --------
Total assets ............................................ $ 56,392 $ 50,730 $ 53,631
======== ======== ========
Shareholders' equity and other liabilities ................... $ 56,392 $ 50,730 $ 53,631
======== ======== ========
Condensed statements of income
Dividends from subsidiary .................................... $ 1,633 $ 1,808 $ 1,271
Management fees .............................................. 180 85 --
Gain on sale of securities ................................... 62 -- --
Amortization and other expenses .............................. (244) (540) (92)
-------- -------- --------
Income before tax benefit .................................... 1,631 1,353 1,179
Income tax benefit ........................................... 1 14 30
-------- -------- --------
Income before equity in undistributed net income of subsidiary 1,632 1,367 1,209
Equity in undistributed net income of subsidiary ............. 2,970 2,881 3,813
-------- -------- --------
Net income ................................................... $ 4,602 $ 4,248 $ 5,022
======== ======== ========
2000 1999 1998
--------- --------- ---------
(In thousands)
Condensed statements of cash flows
Cash flows from operating activities
Dividends received from subsidiary ............................. $ 1,633 $ 1,808 $ 1,271
Management fees received ....................................... 180 10 --
Cash paid for franchise tax, registration cost, acquisition cost
and other ...................................................... (181) (451) (92)
(Increase) in other assets ..................................... (180) (17) (59)
-------- -------- --------
Net cash provided by operating activities ................. 1,452 1,350 1,120
-------- -------- --------
Cash used in investing activities
Investment in subsidiary ....................................... (134) 2,163 (18,449)
Proceeds from sale of securities ............................... 63 -- --
-------- -------- --------
Net cash provided by investing activities ................. (71) 2,163 (18,449)
-------- -------- --------
Cash flows from financing activities
Proceeds from stock issuance ................................... -- -- 18,443
Repurchase of common stock ..................................... -- (2,084) --
Dividends paid, net of DRIP .................................... (2,002) (1,790) (996)
Proceeds from employee 401(k) .................................. 6 189 208
Proceeds from employee stock awards ............................ -- -- 7
Exercise of stock options ...................................... 43 96 72
-------- -------- --------
Net cash provided by (used in) financing activities ....... (1,953) (3,589) 17,734
-------- -------- --------
Increase (decrease) in cash ......................................... (572) (76) 405
Cash at beginning of year ........................................... 982 1,058 653
-------- -------- --------
Cash at end of year ................................................. $ 410 $ 982 $ 1,058
======== ======== ========
Reconciliation of net income to cash provided by operating activities
Net income .......................................................... $ 4,602 $ 4,248 $ 5,022
Adjustments to reconcile net income to net cash provided
by operating activities
(Increase) decrease in other assets ....................... (180) (17) (89)
Equity in undistributed net income of subsidiary .......... (2,970) (2,881) (3,813)
------- -------- --------
Net cash provided by operating activities ........................... $ 1,452 $ 1,350 $ 1,120
======== ======== ========
55
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Note 17 - Commitments and contingent liabilities
The Company's consolidated financial statements do not reflect
various commitments and contingent liabilities which arise in the normal course
of business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit.
A summary of the Subsidiary Bank's commitments and contingent
liabilities at December 31, are as follows:
Contract or
Notional Amount
------------------------------
2000 1999
----------- -----------
(In thousands)
Commitments to extend credit......................... $ 77,589 $ 79,425
Standby letters of credit............................ 179 93
----------- -----------
Total commitments and contingent liabilities.... $ 77,768 $ 79,518
=========== ===========
The Subsidiary Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend is represented by the contractual notional amount of those instruments.
The Subsidiary Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Note 18 - Employee benefit plans
The Company's non-contributory defined benefit pension plan
covers substantially all of its employees. The plan calls for benefits to be
paid to eligible employees at retirement based primarily upon years of service
with the Company and a percentage of qualifying compensation during final years
of employment. Contributions to the plan are based upon the projected unit
credited actuarial funding method and comply with the funding requirements of
the Employee Retirement Income Security Act. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. Plan assets consist primarily of cash and
cash equivalents, U.S. government securities, and common stocks.
The following table outlines the changes in the Company's pension
obligations, assets and funded status for the years ended December 31, 2000 and
1999, and the assumptions and components of net periodic pension cost for the
two years in the period ended December 31, 2000.
2000 1999
------- -------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year .............. $ 3,580 $ 3,067
Service cost ......................................... 295 192
Interest cost ........................................ 247 224
Actuarial loss ....................................... (238) 131
Benefits paid ........................................ (147) (34)
------- -------
Benefit obligation at end of year .................... 3,737 3,580
------- -------
Change in plan assets
Fair value of plan assets at beginning of year ....... 3,139 2,669
Actual return on plan assets ......................... (54) 356
Employer contribution ................................ 0 147
Benefits paid ........................................ (147) (33)
------- -------
Fair value of plan assets at end of year ............. 2,938 3,139
------- -------
Plan assets less than projected benefit obligation ... (799) (441)
Funded status
Unrecognized net actuarial (gain) loss ............... 160 107
Unrecognized prior service charge .................... 100 98
------- -------
Pension liability .................................... $ (539) $ (236)
======= =======
56
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Weighted-average assumptions
Discount rate ......................... 7.50% 7.00%
Expected return on plan assets ........ 8.00% 7.00%
Rate of compensation increase ......... 5.00% 5.00%
Components of net periodic pension cost
Service cost .......................... $ 295 $ 193
Interest cost ......................... 246 223
Expected return on plan assets ........ (251) (200)
Amortization of prior service cost .... 13 11
----- -----
Net periodic pension cost ............. $ 303 $ 227
===== =====
The Company has a Supplemental Executive Retirement Plan ("SERP")
which allows the Company to supplement the level of certain executives'
retirement income over that which is obtainable through the tax-qualified
retirement plan. Contributions to the SERP totaled $205,000 for 2000, $229,000
for 1999 and $170,000 for 1998.
The Subsidiary Bank also has a separate contributory 401(k)
savings plan covering substantially all employees. The plan allows eligible
employees to contribute up to a fixed percentage of their compensation, with the
Subsidiary Bank matching a portion of each employee's contribution. The
Subsidiary Bank's contributions were $117,000, $171,000 and $162,000 for 2000,
1999 and 1998, respectively.
A deferred compensation plan allows the directors and certain
senior officers of the Company and the Subsidiary Bank to defer the compensation
they earn for performance of their appointed duties for the Company and the
Subsidiary Bank. Each director elects annually to either receive that year's
compensation currently or to defer receipt until their death, disability or
retirement as a director. Each officer elects annually to either receive that
year's compensation currently or to defer receipt of a portion of their
compensation until their death, disability or retirement as an officer.
Effective November 1, 1999, the deferred compensation balances were transferred
to a Rabbi trust. No liability exists as of December 31, 2000 and 1999.
Note 19 - Regulatory matters
The primary source of funds for the dividends paid by the Company
to its shareholders is dividends received from its banking subsidiary. The
Subsidiary Bank is restricted as to dividend payout by state laws applicable to
banks and may pay dividends only out of undivided profits. Additionally,
dividends paid by the Company may be limited due to maintaining minimum capital
requirements imposed by banking regulators. Management does not expect any of
these restrictions to materially limit its ability to pay dividends comparable
to those paid in the past. At December 31, 2000, the Subsidiary Bank had
undivided profits of approximately $26.9 million.
57
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------
The Subsidiary Bank is subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Subsidiary Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Subsidiary Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Subsidiary Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Subsidiary Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2000, that
the Subsidiary Bank meets all capital adequacy requirements to which they are
subject.
The most recent notification from the North Carolina Commissioner
of Banks categorized the Subsidiary Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Subsidiary Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. Since that
notification, the Subsidiary Bank has continued to experience asset growth.
The actual capital amounts and ratios for the Company and the
Subsidiary Bank are presented in the following table.
To Be Well
(In thousands, except percentages) For Capital
Adequacy
Actual Purposes
----------------------- ---------------------------------------------
Amount Ratio Amount Ratio
-------- ------- --------- -----------------------------
(In thousands, except for percentages)
December 31, 2000:
Total Capital (To Risk Weighted Assets)
Consolidated ........................ $62,028 12.5% $39,609 greater than or equal to 8.0%
Subsidiary Bank ..................... 61,319 12.4 39,586 greater than or equal to 8.0
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................ 55,841 11.3 19,805 greater than or equal to 4.0
Subsidiary Bank ..................... 55,132 11.1 19,793 greater than or equal to 4.0
Tier 1 Capital (To Average Assets)
Consolidated ........................ 55,841 8.2 27,215 greater than or equal to 4.0
Subsidiary Bank ..................... 55,132 8.1 27,203 greater than or equal to 4.0
December 31, 1999:
Total Capital (To Risk Weighted Assets)
Consolidated ........................ $57,327 14.3% $32,055 greater than or equal to 8.0%
Subsidiary Bank ..................... 56,281 13.9 31,468 greater than or equal to 8.0
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................ 52,891 13.2 16,027 greater than or equal to 4.0
Subsidiary Bank ..................... 51,845 12.8 15,710 greater than or equal to 4.0
Tier 1 Capital (To Average Assets)
Consolidated ........................ 52,891 9.3 22,813 greater than or equal to 4.0
Subsidiary Bank ..................... 51,845 9.0 22,361 greater than or equal to 4.0
(In thousands, except percentages) Capitalized Under
Prompt Corrective
Action Provisions
---------------------------------------------
Amount Ratio
--------- --------
(In thousands, except for percentages)
December 31, 2000:
Total Capital (To Risk Weighted Assets)
Consolidated ........................ $N/A
Subsidiary Bank ..................... 49,483 greater than or equal to 10.0%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................ N/A
Subsidiary Bank ..................... 29,690 greater than or equal to 6.0
Tier 1 Capital (To Average Assets)
Consolidated ........................ N/A
Subsidiary Bank ..................... 34,004 greater than or equal to 5.0
December 31, 1999:
Total Capital (To Risk Weighted Assets)
Consolidated ........................ $ N/A
Subsidiary Bank ..................... 39,335 greater than or equal to 10.0%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................ N/A
Subsidiary Bank ..................... 23,565 greater than or equal to 6.0
Tier 1 Capital (To Average Assets)
Consolidated ........................ N/A
Subsidiary Bank ..................... 27,951 greater than or equal to 5.0
58
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Note 20 - Fair value of financial instruments
The following methods and assumptions were used to estimate the
fair value for each class of the Company's financial instruments.
Cash and cash equivalents. For cash on hand and amounts due from
banks 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 prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities. The fair value of equity investments in the restricted stock of the
Federal Reserve Bank and Federal Home Loan Bank equals the carrying value.
Loans. The fair value of fixed rate 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. The fair value of residential mortgage loans held for sale
is based on quoted market prices. The fair value of variable rate loans with
frequent repricing and negligible credit risk approximates book value.
Deposits. The fair value of noninterest-bearing demand deposits
and NOW, savings, and money market deposits is the amount payable on demand at
the reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Retail Repurchase Agreements. The
carrying value of federal funds purchased and retail repurchase agreements is
considered to be a reasonable estimate of fair value.
Other borrowings. Other borrowings consists of FHLB borrowings
with varying maturities. The fair values of these liabilities are estimated
using the discounted values of the contractual cash flows. The discount rate is
estimated using the rates currently in effect for similar borrowings.
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 were disclosed in Note 17.
The estimated fair values of financial instruments are as follows:
December 31, 2000 December 31, 1999
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- -------------- ----------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 15,952 $ 15,952 $ 24,391 $ 24,391
Investment securities
Available for sale 145,738 145,738 129,445 129,445
Other equity securities 3,967 3,967 2,573 2,573
Loans held for sale 712 712 754 754
Loans 499,925 495,003 413,257 407,855
Financial liabilities:
Deposits 569,451 572,423 484,242 483,993
Federal funds purchased and retail repurchase
agreements 12,537 12,537 15,599 15,599
Other borrowings 41,000 40,997 31,500 31,423
59
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
The fair value estimates are made at a specific point in time
based on relevant market and other information about the financial instruments.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on 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.
60
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's definitive proxy
statement, to be filed with the Securities and Exchange Commission with respect
to the Annual Meeting of Shareholders to be held on May 17, 2001.
Item 11. Executive Compensation
Incorporated by reference from the Company's definitive proxy
statement, to be filed with the Securities and Exchange Commission with respect
to the Annual Meeting of Shareholders to be held on May 17, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's definitive proxy
statement, to be filed with the Securities and Exchange Commission with respect
to the Annual Meeting of Shareholders to be held on May 17, 2001.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Company's definitive proxy
statement, to be filed with the Securities and Exchange Commission with respect
to the Annual Meeting of Shareholders to be held on May 17, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements. The following financial statements and
supplementary data are included in Item 8 of this report.
Financial Statements Form 10-K Page
-------------------- ---------------
Report of Independent Accountants............................................... 38
Consolidated Balance Sheets as of December 31, 2000 and 1999.................... 39
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998................................................ 40
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998................................................ 41
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998................................................................... 42
Notes to Consolidated Financial Statements...................................... 43-60
61
(a)(2) Financial Statement Schedules. All applicable financial
statement schedules required under Regulation S-X have been
included in the Notes to the Consolidated Financial Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K
are listed below.
Exhibit No. Description
----------- -----------
3.01 (1) Amended and Restated Articles of Incorporation.
3.02 (1) Bylaws of Company, as amended.
4.01 (1) Specimen Common Stock Certificate.
10.01 (3) Stock Compensation Plan of the Registrant
approved April 11, 1989, by the shareholders of the
Registrant, with forms of stock option and stock
bonus agreements attached.
10.02 (4) Omnibus Equity Compensation Plan of the Registrant.
10.03 (5) Severance Policy for Senior Officers of the
Registrant (employed for five years or more).
10.04 (6) Revised Severance Plan for Senior Officers of the
Registrant (employed for five years or more).
10.05 (4) Severance Policy for Senior Officers of the
Registrant (employed for less than five years).
10.07 (8) Benefit Equivalency Plan of Registrant effective
January 1, 1994.
10.08 (8) Annual Management Incentive Plan of Registrant.
10.09 (8) Long Term Incentive Plan of Registrant.
10.10 (8) Employment Agreement dated May 18, 1995, between the
Registrant, as employer, and Ernest J. Sewell,
President and Chief Executive Officer of the
Registrant.
10.11 (9) Split-Dollar Agreement dated January 27, 1995,
between the Registrant and Ernest J. Sewell.
1.012 (9) Split-Dollar Agreement dated September 26, 1994,
between the Registrant and Robert F. Albright.
10.13 (9) Split-Dollar Agreement dated January 27, 1995,
between Registrant and C. Melvin Gantt.
10.14 (9) Split-Dollar Agreement dated December 8, 1995,
between the Registrant and Richard L. Powell.
10.15 (10) Lease, dated January 31, 1997, between Registrant
and Landmark Commercial, Inc., relating to the
Wilmington branch office.
10.16 (2) Amendment to Benefit Equivalency Plan effective
January 1, 1998.
10.17 (11) Amended and Restated Employment Agreement dated
August 10, 1999, between Black Diamond Savings Bank,
FSB and Don M. Green. Merger agreement between
Registrant and Black Diamond Savings Bank, FSB.
11.00 Statement Regarding Computation of Per Share
Earnings
12.00 Statement Regarding Computation of Ratios
21.01 Schedule of Subsidiaries.
23.01 Consent of PricewaterhouseCoopers LLP.
(1) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998, filed with the Securities and
Exchange Commission.
(2) Incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, filed with the Securities and
Exchange Commission.
(3) Incorporated herein by reference to the Registrant's
Statement on Form S-8 (No. 33-33186), filed with the
Securities and Exchange Commission.
(4) Incorporated herein by reference to the Registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, filed with the Securities
and Exchange Commission.
(5) Incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, filed with the Securities and
Exchange Commission.
(6) Incorporated herein by reference to the Registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994, filed with the Securities
and Exchange Commission.
(7) Incorporated herein by reference to the Registrant's
Quarterly Report, on Form 10-QSB for the fiscal
quarter ended June 30, 1995, filed with the
Securities and Exchange Commission.
(8) Incorporated herein by reference to the Registrant's
Statement on Form S-2 (File No. 333-47203) filed
with the Securities and Exchange Commission on March
3, 1998.
(9) Incorporated herein by reference to the Registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997, filed with the Securities
and Exchange Commission.
(10) Incorporated herein by reference to the Registrant's
Current Report on Form 8-K dated August 31, 1998,
filed with the Securities and Exchange Commission.
(11) Incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, filed with the Securities and
Exchange Commission.
(b) Reports on 8-K.
The Company filed a Current Report on Form 8-K on December 22,
2000, to report plans to record an additional provision for credit loss expense
of approximately $1.2 million dollars in the fourth quarter of 2000.
62
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K under
the caption "Business" and incorporated by reference herein from the Company's
Annual Report to Shareholders contains various "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results and financial position to
differ materially. Such forward-looking statements can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," or "continue," or the negative thereof or other various thereof or
comparable terminology.
The Company cautions that any such forward-looking statements are
further qualified by important factors that could cause the Company's actual
operating results to differ materially from those in the forward-looking
statements, including without limitation, the effects of future economic
conditions, governmental fiscal and monetary policies, legislative and
regulatory changes, the risks of changes in interest rates on the level and
composition of deposits, the effects of competition from other financial
institutions, the failure of assumptions underlying the establishment of the
allowance for possible credit losses, the low trading volume of the Company's
Common Stock, and other considerations described in connection with specific
forward-looking statements.
63
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FNB FINANCIAL SERVICES CORPORATION
Date: March 15, 2001 By: /s/ Ernest J. Sewell
--------------------------------
Ernest J. Sewell,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Capacity Date
/s/ Ernest J. Sewell President, Chief Executive Officer and Director March 15, 2001
- -----------------------------------
Ernest J. Sewell (Principal Executive Officer)
/s/ Michael W. Shelton Vice President and Chief Financial Officer March 15, 2001
- -----------------------------------
Michael W. Shelton (Principal Financial and Accounting Officer)
/s/ Barry Z. Dodson Chairman of the Board March 15, 2001
- -----------------------------------
Barry Z. Dodson
/s/ Gary G. Blosser Director March 15, 2001
- -----------------------------------
Gary G. Blosser
/s/ Charles A. Britt Director March 15, 2001
- -----------------------------------
Charles A. Britt
/s/ O. Eddie Green Director March 15, 2001
- -----------------------------------
O. Eddie Green
/s/ Joseph H. Kinnarney Director March 15, 2001
- -----------------------------------
Joseph H. Kinnarney
/s/ Clifton G. Payne Director March 15, 2001
- -----------------------------------
Clifton G. Payne
/s/ Elton H. Trent, Jr. Director March 15, 2001
- -----------------------------------
Elton H. Trent, Jr.
/s/ Kenan C. Wright Director March 15, 2001
- -----------------------------------
Kenan C. Wright
64
EXHIBIT INDEX
Exhibit Description
- ------- ------------
11.00 Statement Regarding Computation of Per Share Earnings
12.00 Statement Regarding Computation of Ratios
21.01 Schedule of Subsidiaries
23.01 Consent of PricewaterhouseCoopers LLP
68