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, 2001
-----------------
[ ] 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
-------
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
(336) 342-3346
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1382275
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
12, 2002, 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 $59.3 million.
As of March 12, 2002, (the most recent practicable date), the
registrant had outstanding 4,589,082 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 16, 2002 to be mailed to shareholders
within 120 days of December 31, 2001.
FNB Financial Services Corporation
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 ................................. 20
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 30
Item 8. Financial Statements and Supplementary Data............... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............... 67
PART III
Item 10. Directors and Executive Officers of the Registrant........ 67
Item 11. Executive Compensation.................................... 67
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................... 67
Item 13. Certain Relationships and Related Transactions............ 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 68
PART I
Item 1. Business
General
FNB Financial Services Corporation (the "Company") is a North
Carolina financial holding company with consolidated assets of $704.8 million,
deposits of $586.8 million and shareholders' equity of $62.7 million, each as of
December 31, 2001. 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. In May 1997, the Bank changed its
name to First National Bank Southeast to reflect its expansion into new markets.
Effective March 15, 1999, the Bank changed its charter from a national bank to a
North Carolina state bank and changed its name to FNB Southeast. 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 2001, 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 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, 2001, the Company reported
net interest income of $21.7 million, loans of $535.3 million and deposits of
$586.8 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 seven 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
1
policy and credit 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 92-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 services the residential construction
market. The Company also opened two additional branches in Greensboro, North
Carolina, during April 2000. These two facilities supplement the existing
office, and the Company now has three full service offices in this dynamic
market. In August 2001, the Company consolidated its two offices in
Harrisonburg, Virginia to more efficiently service this 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 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
2
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 2001, the most recent date for
which data are available, was 28.7%, 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,
- --------------- ----------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Triad Region:
Reidsville (1) ................. $198,885 $219,474 $177,480
Eden (2) ....................... 55,417 59,406
50,873
Madison ........................ 22,302 23,387 22,891
Ruffin ......................... 11,152 10,793 9,244
Greensboro (3) ................. 72,749 57,109 39,614
-------- -------- --------
Subtotal ............. 355,961 366,180 308,635
-------- -------- --------
Wilmington Region:
Wilmington (4) ................. 52,489 47,051 42,332
Burgaw ......................... 26,496 21,125 6,995
-------- -------- --------
Subtotal ............. 78,985 68,176 49,327
-------- -------- --------
Norton Region:
Norton ......................... 67,545 57,936 55,436
Pennington Gap ................. 26,103 26,772 25,913
Richlands ...................... 26,203 26,258 23,018
-------- -------- --------
Subtotal ............. 119,851 110,966 104,367
-------- -------- --------
Harrisonburg Region:
Harrisonburg (5) ............... 31,963 24,129 21,913
-------- -------- --------
Total deposits ....... $586,760 $569,451 $484,242
======== ======== ========
(1) Includes three banking offices for all years.
(2) Includes two banking offices for all years.
(3) Includes three banking offices for 2001 and 2000, and one office for 1999.
(4) Includes two banking offices for 2001 and 2000, and one office for 1999.
(5) Includes one banking office for 2001 and two offices for 2000 and 1999.
The following is a summary description of the Company's market areas.
3
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 December
2001 unemployment rate of 8.1% 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 420,000, 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 5.2% for December
2001, compared to a statewide unemployment rate of 5.9%.
Wilmington Region. Wilmington is the county seat and industrial
center of New Hanover County, located on the southeast coast of North Carolina.
The total population of New Hanover County is approximately 160,000. 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
December 2001 unemployment rate of 6.2% 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. FNB Southeast operates branches in
Norton (Wise County), Pennington Gap (Lee County) and Richlands (Tazewell
County). For December 2001, the Virginia Employment Commission reported the
unemployment rate in Wise County was 4.4%.
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 one branch
in Harrisonburg, serving the counties of Rockingham and Augusta. According to
the Virginia Employment Commission, the December 2001 unemployment rate for
Harrisonburg was 2.0% compared to a statewide unemployment rate of 3.6%.
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, 2001, were
$535.3 million, or 80.0% 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, 2001, 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,
-------------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Real Estate:
Commercial ........... $168,419 31.5% $119,584 23.9% $115,434 27.9%
Residential .......... 130,264 24.4 150,825 30.1 130,676 31.6
Construction ......... 55,861 10.4 66,148 13.2 34,680 8.4
-------- ----- -------- ----- -------- -----
Total real estate 354,544 66.3% 336,557 67.2% 280,790 67.9%
Commercial, financial and
agricultural ........ 90,858 17.0% 74,981 15.0% 58,002 14.0%
-------- ----- -------- ----- -------- -----
Consumer:
Direct ............... 37,112 6.9% 46,463 9.3% 32,778 7.9%
Home Equity .......... 46,169 8.6 39,204 7.8 32,836 7.9
Revolving ............ 6,662 1.2 3,432 0.7 9,605 2.3
-------- ----- -------- ----- -------- -----
Total consumer .. 89,943 16.7% 89,099 17.8% 75,219 18.1%
-------- ----- -------- ----- -------- -----
Total loans ............... $535,345 100.0% $500,637 100.0% $414,011 100.0%
======== ===== ======== ===== ======== =====
Real Estate Loans. Loans secured by real estate for a variety of
purposes constituted $354.5 million or 66.3%, of the Company's total loans at
December 31, 2001. The Company held at December 31, 2001, 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 charge-offs of $7,000 in 2001, $346,000 in 2000, and no net
charge-offs in 1999.
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, 2001, it held $130.3 million of such loans. Loan terms are
typically limited to five years, with payments through the date of maturity
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 charge-offs losses of $36,000 in 2001, $13,000
in 2000, and no net charge-offs in 1999.
5
The Company also originates residential loans for sale into the
secondary market. Through its mortgage banking activities, 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 2001, 2000 and 1999, the Company earned
loan origination fees of $376,000, $264,000, and $249,000, respectively. At
December 31, 2001, the Company held $1.1 million of such loans for sale, and
during 2001 the Company sold an aggregate of $18.4 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, 2001, 2000 and
1999, the Company held $55.9 million, $66.1 million and $34.7 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 charge-offs during
2001, 2000 or 1999.
Commercial Loans. The Company makes loans for commercial purposes to
various types of businesses. At December 31, 2001, the Company held $90.9
million of commercial loans, or 17.0% 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. The Company experienced net charge-offs of $485,000
in 2001, $62,000 in 2000, and net recoveries of $5,000 in 1999.
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, 2001, the Company held $89.9 million of consumer
loans, including home equity lines of credit. During 2001, 2000, and 1999,
respectively, the Company experienced net consumer charge-offs of $336,000,
$258,000, and $249,000.
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
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
experienced recoveries of $6,000 in 2001 and recoveries of $29,000 in 2000, and
net charge-offs of $173,000 in 1999.
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
6
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. 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 50 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.
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 49 of this Annual Report on Form 10-K.
7
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,
------------------------------------------------------------
2001 2000 1999
----- ----- -----
Non-interest bearing demand............... 10.0% 9.6% 9.9%
Savings, NOW, MMI........................ 15.9 14.5 19.2
Certificates of deposit....................... 74.1 75.9 70.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The Company accepts deposits at its 17 banking offices, ten of which
have automated teller machines ("ATMs"). In addition, the Company operates a
network of 38 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,
2001, the Company had $224.5 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. The Company
also utilizes brokered deposits to supplement deposit growth. Management
believes these deposits provide effective funding sources and serve to broaden
the Company's funding base. The table below presents the scheduled maturities of
time deposits of $100,000 or more at December 31, 2001.
Scheduled maturity of time deposits of $100,000 or more Amount
------------------------------------------------------- --------
(In thousands)
Less than three months................................... $ 76,114
Three through six months................................. 98,563
Seven through twelve months.............................. 35,366
Over twelve months....................................... 14,489
---------
Total time deposits................................. $ 224,532
=========
See also Note 8 in the Notes to Consolidated Financial Statements on
page 51 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
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 benefits by
8
earning additional fee income and by attracting additional people to its
branches who may become customers of the Bank. In 2001, the Company generated
$203,000 in revenues through the third party service provider and the
subsidiary.
Mortgage Banking
In June 2001, the Company established FNB Southeast Mortgage
Corporation as a wholly-owned subsidiary of FNB Southeast. The new subsidiary
purchased the assets of Airlie Mortgage Company, Inc., a successful mortgage
brokerage company operating three offices in the coastal area near Wilmington,
North Carolina
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 significant
9
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 2001, the Company
competed with 17 commercial banks and two 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
2001, the Company competed with 18 commercial banks. For the same period, the
Company competed with 17 commercial banks in the Harrisonburg region of
Virginia.
Employees
On December 31, 2001, the Company had approximately 204 full-time and
8 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.
10
Supervision and Regulation
Financial holding companies and commercial 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
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
11
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.
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.
12
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 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.
13
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
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 institution 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, 2001 the Bank was in compliance with
this requirement.
15
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
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, 2001, 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.
16
The Bank does not believe that these regulations have had or will
have a material adverse effect on its current operations.
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 seventeen 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) $ 122,091 Yes 1910 (5)
1646 Freeway Drive
Reidsville, North Carolina Owned 40,465 Yes 1972
202 Turner Drive
Reidsville, North Carolina Owned 36,329 Yes 1969
801 South Van Buren Road
Eden, North Carolina Owned 34,338 Yes 1996
151 North Fieldcrest Road
Eden, North Carolina Leased (expires 2008) 16,535 1996
605 North Highway Street
Madison, North Carolina Owned 22,302 Yes 1997
9570 US 29 Business
Ruffin, North Carolina Leased (expires 2004) 11,152 1997
2132 New Garden Road
Greensboro, North Carolina Owned 37,167 Yes 1997
4638 Hicone Road
Greensboro, North Carolina Owned 17,993 Yes 2000
3202 Randleman Road
Greensboro, North Carolina Owned 17,589 Yes 2000
704 South College Road
Wilmington, North Carolina Leased (expires 2002) 50,758 Yes 1997
7210 Wrightsville Avenue
Wilmington, North Carolina Leased (expires 2003) 1,731 2000
301 East Fremont Street
Burgaw, North Carolina Leased (expires 2004) 26,496 Yes 1999
600 Trent Street
Norton, Virginia Owned 67,545 1973
2302 Second Street
Richlands, Virginia Owned 26,203 1977
700 East Morgan Avenue
Pennington Gap, Virginia Owned 26,103 1979
440 South Main Street
Harrisonburg, Virginia Owned 31,963 1988
(1) Deposits as of December 31, 2001, 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 2003.
(3) FNB Southeast owns and operates a network of 38 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, 2001.
19
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.
Dividends
Calendar Period High Low Paid
--------------- ---- --- ----
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
Quarter ended March 31, 2001 $ 15.52 $ 10.00 $ 0.12
Quarter ended June 30, 2001 14.20 11.50 0.13
Quarter ended September 30, 2001 15.23 12.70 0.13
Quarter ended December 31, 2001 15.06 13.00 0.13
As of March 12, 2002, there were approximately 1,487 beneficial
owners of the Company's common stock, including 1,249 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 60 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, 2001, 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 126,000 shares of its Common
Stock at a weighted average exercise price of $12.80 per share pursuant to the
Company's Omnibus Equity Compensation Plan.
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, FNB Southeast Mortgage Corporation 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,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Income Statement Data:
Net interest income $ 21,705 $ 22,659 $ 20,427 $ 18,378 $ 14,598
Provision for credit losses 1,278 2,525 1,401 1,171 686
Other income 4,740 2,891 2,977 3,085 2,146
Other expenses 15,838 16,100 15,193 12,872 10,859
Net income 6,478 4,602 4,248 5,022 3,514
Balance Sheet Data:
Assets $ 704,825 $ 685,904 $ 588,419 $ 549,746 $ 445,990
Loans (1) 535,345 500,637 414,011 362,252 319,467
Allowance for credit losses 6,731 6,311 4,436 3,452 3,185
Deposits 586,760 569,451 484,242 459,595 384,121
Other borrowings 30,000 41,000 31,500 17,500 28,720
Shareholders equity 62,708 56,392 50,730 53,631 30,404
Per Common Share Data (2):
Net income, basic $ 1.43 $ 1.03 $ 0.95 $ 1.19 $ 0.98
Net income, diluted (3) 1.41 1.02 0.93 1.13 0.93
Cash dividends declared 0.51 0.45 0.46 0.30 0.27
Book value 13.72 12.56 11.30 11.81 8.43
Tangible book value 13.65 12.47 11.20 11.68 8.24
Other Data:
Branch offices 17 18 15 14 14
Full-time employees 204 196 189 184 169
Performance Ratios:
Return on average assets 0.91% 0.72% 0.76% 0.97% 0.94%
Return on average equity 10.75 8.96 8.49 11.21
12.49
Net interest margin (tax equivalent) 3.25 3.83 3.88 3.78 4.25
Dividend payout 35.94 44.42 47.98 25.37 27.29
Efficiency (4) 59.05 62.20 64.50 59.50 64.00
Asset Quality Ratios:
Allowance for credit losses to period end loans 1.26% 1.26% 1.07% 0.95% 1.00%
Allowance for credit losses to period end
non-performing loans (5) 297.04 195.87 338.00 221.00 123.00
Net charge-offs to average loans 0.17 0.14 0.11 0.26 -0.03
Non-performing assets to period end loans
and foreclosed property (5) 0.92 0.84 0.45 0.85 0.91
Capital and Liquidity Ratios:
Average equity to average assets 8.45% 8.07% 9.06% 8.69% 7.50%
Leverage 8.64 8.22 9.30 10.30 7.00
Tier 1 risk based 11.58 11.28 13.20 15.30 8.90
Total risk based 12.83 12.53 14.30 16.30 9.90
Average loans to average deposits 85.96 87.91 83.49 79.31 81.50
Average loans to average deposits
and borrowings 79.63 79.22 77.34 74.47 78.12
(1) Loans net of unearned income, before allowance for credit losses.
(2) Gives effect of the 1997 stock split.
(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 66 of this Annual Report on Form 10-K.
Overview
The Company earned $6.48 million in 2001, a 40.8% increase over the
$4.60 million earned in 2000. Diluted net income per share of $1.41 for 2001
represents a 38.2% increase over diluted net income per share of $1.02 in 2000.
Total assets at December 31, 2001 stood at $704.8 million compared to $685.9
million one year earlier. The increase in assets is primarily attributable to a
$34.7 million increase in loans, offset by a $22.1 million decrease in
investment securities. Loans at December 31, 2001 totaled $535.3 million and
investment securities totaled $123.6 million.
During 2001, deposits increased 3.0% to $586.7 million at December
31, 2001. Total purchased funds at December 31, 2001 totaled $49.7 million
compared to $53.5 million at the prior year-end. Shareholders' equity increased
11.2% to $62.7 million at current year-end. Book value per share was $13.72
compared to $12.56 one year earlier.
The Company's subsidiary bank, FNB Southeast, is a North Carolina
chartered commercial bank and currently operates thirteen banking offices in
North Carolina and four banking offices in Virginia. FNB Southeast operates two
wholly owned subsidiaries. FNB Southeast Investment Services, Inc. was formed in
2000 to provide retail investment products and services. FNB Southeast Mortgage
Corporation was formed in 2001 and acquired certain assets of Airlee Mortgage
Corporation, which provide mortgage banking services.
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 2001 was $22.1
million, which represented a 4.0% decrease from the previous year. In 2000,
taxable equivalent net interest income increased to approximately $23.0 million
from approximately $20.6 million in 1999. Actual net interest income for 2001
was $21.7 million, a 4.2% decrease from $22.7 million recorded in 2000. The
decrease in net interest income is primarily attributable to the decline in the
earning asset rate resulting from the dramatic reduction in the prime lending
rate throughout 2001. The prime lending rate declined from 9.50% at December 31,
2000 to 4.75% at December 31, 2001. The rate decline was partially offset by
increased balances of interest earning assets. Average loans outstanding during
the 2001 fiscal year were $515.3 million compared to $459.7 million in 2000, an
increase of 12.1%. In the previous year, average loans outstanding were 18.7%
higher than 1999. Average investment securities during 2001 were $157.4 million
compared to $135.8 million in 2000 and $136.5 million in 1999.
Trends in interest rates were sharply downward for the year as the
Federal Reserve decreased interest rates throughout 2001. This had the effect of
decreasing both the earning asset yield and the interest bearing liability rate.
During the year the decline in the earning asset yield outpaced the decline in
the interest bearing liability rate. However, the decline in interest rates did
result in an increase in the fair value of the Company's investment portfolio.
The increased fair value resulted in increased liquidity, due to securities
being called and the sale of securities at a gain.
22
The weighted average yield on earning assets decreased 98 basis
points to 7.75% for 2001 compared to 8.73% for 2000 and 8.05% for 1999. This
decrease in the asset yield in 2001 was primarily attributable to the decreased
yield on loans. During the current year, the yield on loans decreased 112 basis
points to 8.36% from 9.48% in 2000. This decline is due to variable rate loans
that repriced lower throughout the year in response to decreases in the
underlying index.
The weighted average rate paid on interest bearing liabilities of
4.86% in 1999 had increased to 5.58% in 2000, but fell to 5.18% in 2001, a
decrease of 40 basis points. Average interest bearing deposits for 2001 totaled
$544.1 million and totaled $472.1 million in 2000. This represents an increase
of $72.0 million, or 15.3% from $472.1 million in average balances from 2000.
The overall rate for interest bearing deposits decreased 28 basis points to
5.19% in 2001 compared to 5.47% in the prior year.
The overall rate on purchased funds decreased 150 basis points during
2001. Average purchased funds totaled $47.6 million in 2001, with an average
rate of 4.97%. This is a $9.7 million decrease from one year earlier. This
decrease was primarily attributable to reduced levels of FHLB advances utilized
during 2000. In 1999, average purchased funds was $36.9 million. Average FHLB
borrowings for 2001 was $34.4 million compared to $45.6 million in 2000. The
average rate paid on purchased funds was 4.97%, 6.47% and 5.18% for 2001, 2000
and 1999 respectively.
Table 2 on page 32 summarizes net interest income and average yields
earned and rates paid for the years indicated, on a tax equivalent basis. Table
3 on page 33 presents the changes in interest income and interest expense
attributable to volume and rate changes between 2001 and 2000, and between 2000
and 1999.
Non-interest Income and Expense
Non-interest income of $4.7 million in 2001 was $1.8 million, or
64.0%, more than the previous year amount of $2.9 million. In 1999, non-interest
income was $3.0 million. One category of noninterest income, gain on sale of
securities, experienced significant increases in 2001 compared to 2000 due to
changes in the interest rate environment during the year. Gains on sale of
securities for 2001 totaled $1.8 million, up from $60,000 in 2000 and $118,000
in 1999. Service charges on deposit accounts increased to $2.2 million from $2.1
million in 2000 and $1.8 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 $9.3 million in 2001, exceeded the previous year
by $582,000, or 6.7%. Personnel expense in 1999 was $8.2 million. At December
31, 2001, the Company had approximately 204 full-time and 8 part-time employees,
compared with 196 full-time and 12 part-time employees at December 31, 2000.
Occupancy expenses totaled $1.0 million for 2001, which was up 18.6% from
$871,000 in 2000. Furniture and equipment expenses totaled $1.8 million in the
current year, a 22.4% increase from $1.5 million recorded in 2000. The
efficiency ratio, which measures non-interest expense as a percentage of net
interest income plus non-interest income, was 59.1% in 2001, and compared
favorably to the 62.2% efficiency ratio posted in 2000 and 64.5% in 1999. Other
expenses were $2.8 million compared to $3.9 million in 2000. The decrease is
primarily due to the reversal of $260,000 of other expenses in 2001 of a
$350,000 expense recorded in 2000. The expense was recorded in 2000 based on the
best estimate of cost to cancel a contract with a third party data processing
service provider. The contract was cancelled during 2001 and the actual cost was
approximately $90,000.
Income tax expense in 2001 was $2.9 million, an increase from $2.3
million in 2000. The effective tax rate in 2001 decreased to 30.6% from 33.6% in
2000. The decline in the effective tax rate for 2001 is primarily due to the
reduced current expense required to provide adequate income tax provision at the
year-end 2001. Income tax expense in 1999 was $2.6 million, with an effective
rate of 37.6%. The higher effective tax rate in 1999 was primarily attributable
to nondeductible merger-related cost incurred during that year.
23
Financial Condition
The Company's consolidated assets of $704.8 million at year end
increased 2.8% over the previous year, following an increase of 16.6% in 2000.
Total average assets increased 12.1% to $713.5 million in 2001, compared to
$636.2 million in 2000. During 2001 the Company experienced a 13.5% increase in
average earning assets. Average earning assets totaled $680.5 million in 2001
compared to $602.3 million in 2000. The increase in 2001 was driven by an
increase in average outstanding loans, but mitigated by a decrease in average
investment securities balance. Growth in earning assets was supported by an
increase of 8.8% in average non-interest bearing deposits, and a 15.3% in
interest bearing deposits.
Loan growth during 2001 was $34.7 million, with outstanding loans up
6.9% at year-end, which followed increases of 20.9% in 2000 and 14.3% in 1999.
Loans secured by real estate increased to $354.5 million in 2001 and represented
66.3% of total loans, compared with 67.2% at year end 2000. Within this
category, commercial real estate loans increased 40.8% during fiscal 2001 to a
level of $168.4 million. Commercial, financial and agricultural loans totaled
$90.9 million and represent 17.0% of total loans, compared with 15.0% last
year-end. Consumer loans increased 1.0% during fiscal 2001 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.
Investment securities (at amortized cost) of $125.1 million at
year-end 2001 were down $24.3 million, or 16.3%, from year-end 2000. U.S.
Government agency securities continue to represent the major share of the total
portfolio, and totaled $112.5 million, or 89.9% of the portfolio at year-end
2001, compared to $127.9 million, or 85.6% 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. State and municipal obligations decreased $7.8
million and stood at $8.3 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 34 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 $17.3 million to $586.8 million at December
31, 2001. This is a 3.0% increase over $569.5 million in deposits one year
earlier. A $2.6 million, or 0.6%, increase in time deposits and a $4.4 million,
or 8.1%, increase in demand deposits drove the annual increase during fiscal
2001. Savings, NOW and MMI accounts decreased by $10.3 million to $93.0 million
at 2001 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. 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 of $9.9 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, 2001, FNB Southeast had
approximately 188 of such certificates of deposit totaling $20.7 million, with
an overall rate of 5.17% for this portfolio. This certificate portfolio
decreased by $10.0 million during 2001. The Company also held $17.0 million in
brokered certificates of deposit at December 31, 2001 compared to $22.0 million
one year earlier. The brokered certificates have an original term of twelve
months with maturities scheduled for January and April 2002.
24
The Company also has a credit facility with the Federal Home Loan
Bank of Atlanta. Borrowing capacity is established at 17% of the subsidiary
banks' total assets as submitted on regulatory financial reports. The Company
also utilized a portion of its approximately $115 million line with the Federal
Home Loan Bank of Atlanta to fund earning assets. FHLB borrowings totaled $30.0
million at year-end. Management continues to believe this is a cost effective
and prudent alternative to deposit balances, since a particular amount, term and
structure may be selected to meet its current needs.
Asset Quality
Management places great emphasis on 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 consistent with
management's best estimate of probable loan losses incurred as of the balance
sheet date.
The loan portfolio is analyzed on an ongoing basis to evaluate
current risk levels, and risk grades are adjusted accordingly. The Company's
allowance for credit losses is also analyzed quarterly by management. This
analysis includes a methodology that separates the total loan portfolio into
homogeneous loan classifications for purposes of evaluating risk. The required
allowance is calculated by applying a risk adjusted reserve requirement to the
dollar volume of loans within a homogenous group. Major loan portfolio subgroups
include: risk graded commercial loans, mortgage loans, home equity loans, retail
loans and retail credit lines. The provisions of Statement of Financial
Accounting Standard No. 114 ("SFAS No. 114") and related pronouncements are
applied to individually significant loans. Finally, individual reserves may be
recorded based on a review of loans on the "watch list."
Commercial loans. All commercial loans within the portfolio are risk
graded among nine risk grades based on management's evaluation of the overall
credit quality of the loan, including the payment history, the financial
position of the borrower, the underlying collateral value, an internal credit
risk assessment and examination results. There is an increased reserve
percentage for each successively higher risk grade. As a result, the allowance
is adjusted upon any migration of a loan to a higher risk grade within the
commercial loan portfolio. The following table details the risk-graded portfolio
at December 31, 2001 and 2000.
Risk Percent of Commercial Risk General
Grade Description Loans by Grade Reserve Percentage
- ----- ----------- ---------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Risk 1 Low Risk 0.62 % 0.54 % 0.00% 0.00%
Risk 2 Lower Than Average Risk 1.09 1.46 0.25 0.25
Risk 3 Average Risk 15.33 24.38 0.45 0.45
Moderately Higher Than
Risk 4 Average Risk 76.50 68.39 0.80 0.80
Risk 5 Higher Than Average Risk 2.23 0.16 1.25 1.25
Risk 6 Special Mention 1.31 0.66 2.50 2.50
Risk 7 Substandard 2.90 4.15 15.00 15.00
Risk 8 Doubtful 0.03 0.26 50.00 50.00
Risk 9 Loss 0.00 0.00 100.00 100.00
25
The reserve percentages utilized have been determined by management
to be appropriate based on historical loan loss levels and the risk for each
corresponding risk grade. During 2000, the Company reviewed the reserve
percentages for commercial risk graded loans. The change in the reserve
percentages in risk grade 2 through risk grade 5 was made to better reflect the
historical charge-off experience of the Company. The reserve percentages for
risk grades 6, risk grade 7, risk grade 8 and risk grade 9 were changed to
reserve percentages preferred by banking regulators. The net effect in 2000,
compared to earlier years, was to reserve a higher overall percentage for risk
grade 6 through risk grade 9, and a lower overall percentage for risk grade 1
through risk grade 5. The reserve percentages established in 2000 remained in
effect throughout 2001.
Mortgage, home equity, and credit lines. Reserves are calculated on
mortgage, home equity, and credit lines based on historical loss experience and
current economic conditions. The average rolling eight-quarter net loss
percentage is calculated for each of these loan categories. The reserve
requirement also includes a reserve percentage for current economic conditions.
The sum of these two components is applied to the dollar balance of loans in
each of these categories to determine the required reserve.
Retail loans. The retail loans are pooled together to determine the
reserve requirement. The average rolling eight-quarter net loss percentage is
calculated for this loan category. The reserve requirement also includes a
reserve percentage for current economic conditions. The sum of these two
components is applied to the dollar balance of retail loans to determine the
required reserve for current loans and loans past due less than 90 days. A
separate reserve is calculated for loans past due 90 days or more. A reserve
amount equal to 25.0% of all retail loans past due 90 days or more is added to
the above mentioned requirement to determine the total reserve requirement for
retail loans.
Specific impairment under SFAS No. 114. Management evaluates
individually significant loans in risk grade 7 and risk grade 8 on an individual
basis for impairment. The specific allowance is calculated based upon a review
of these loans and the estimated losses at the balance sheet date. At December
31, 2001 and 2000, the recorded investment in loans considered impaired was
approximately $6,857,000 and $3,222,000, respectively. Impaired loans at
December 31, 2001 consisted of $924,000 of retail loans past due 90 days or
more, and $5,933,000 of risk grade 7 and risk grade 8 commercial loans.
Calculated reserves for impaired loans at December 31, 2001 totaled $1,748,000
and $901,000 one year earlier.
Risk grade 9 loans are evaluated on an individual basis. Since these
loans are considered a loss, a reserve percentage of 100% of the outstanding
balance is required. The Company had no loans risk graded 9 at December 31,
2001.
Watch list review. Specific allowances may be determined based on a
review of specific watch list loans. Specific losses are estimated at each
measurement date. The Company has established a monthly procedure to review all
loans placed on the watch list. The watch list primarily consist of loans
classified as special mention, substandard and doubtful. An estimated loss
amount and action plan is established for each watch list loan. By reviewing
these watch list loans, the Company is able to update original probable loss
amounts in light of developing conditions. This serves to reduce the differences
between estimated and actual observed losses.
The 2001 provision for credit losses of $1.3 million compares with
$2.5 million in 2000, which equals an 49.4% decrease in 2001. In the fourth
quarter of 2000 the Company recorded a provision for credit losses of $1.3
million. This action was taken as part of the Company's continuing evaluation of
the loan portfolio and other credit risk factors. During 2001 credit quality
remained good, and the levels of non-performing loans and charge-offs have
remained at comparatively low levels. Net charge-offs increased in 2001 to
$858,000 or 0.17% of average loans outstanding, compared with $650,000 or 0.14%
of average loans outstanding in the prior year. At December 31, 2001 the
allowance for credit losses as a percentage of year end loans was 1.26%, the
same as at December 31, 2000.
26
During 2001 and at December 31, 2001, the Company observed a
migration in the risk graded commercial loan portfolio to risk grades indicative
of higher credit risk. Specifically, as indicated in the table above, there was
a migration from risk grade 3 to risk grade 4 and risk grade 5. This migration
was partially offset by a decrease in retail loans past due 90 days or more from
those existing at December 31, 2000.
Risk grade loans classified special mention, substandard and doubtful
decreased from $13.8 million at year-end 2000 to $13.1 million at year-end 2001.
The reserve requirement for this category of loans totaled $2.1 million for both
years. Retail loans past due 90 days or more at December 31, 2001 were $924,000,
with a $391,000 reserve requirement. This compares to $1,564,000 in retail loans
past due 90 days or more and a reserve requirement of $391,000 at December 31,
2000.
The table below summarizes the Company's allowance as a percentage of
total loans outstanding and net charge-off percentage for the past five years.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Allowance percentage 1.26 % 1.26 % 1.07 % 0.95 % 1.00 %
Net charge-off percentage 0.17 % 0.14 % 0.11 % 0.26 % (0.03)%
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. 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 37, 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, to a North
Carolina bank, regulated by the 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 derived from
sources such as deposit growth; maturity, calls, or sales of investment
securities; principal and interest payments on loans; access to borrowed funds
or lines of credit; and profits. The investment portfolio at December 31, 2001,
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.
During 2001, the Company deployed cash flow from operating and
financing activities to fund increases in the loan portfolio. Overall, cash and
cash equivalents increased by $8.1 million to $23.4 million at December 31,
2001.
27
As presented in the consolidated statement of cash flows, the Company
generated $6.9 million in operating cash flow during 2001, down 8.4% from $7.6
million in 2000. This decrease was primarily attributable to a decrease in the
amount that interest received exceeded interest paid in each year. In 2001, the
excess was only $20.7 million, while in 2000, the excess was $21.8 million. This
change resulted from the falling interest rate environment in 2001, and the
Company's inability to decrease rates paid on deposits as quickly as the yield
on loans dropped.
In 2001, the Company had a net increase of $37.2 million in loans
compared to $88.8 million in 2000. In 2001, the Company received $154.4 million
from sales and calls of securities, while purchasing $149.4 million. The
turnover in the security portfolio was attributable to the reduction in interest
rates throughout the year. In 2000, the Company purchased $19.7 million of
securities, while receiving $6.3 million from sales and calls and $588,000 from
maturities.
The Company's major financing sources during 2001 were a $14.7
million increase in savings, NOW and MMI deposits and a $2.6 million increase in
time deposits, for a combined total of $17.3 million. This is lower than the
combined $85.2 million increase in deposits during 2000. The deposit growth
during the year allowed the Company to reduce FHLB borrowings by $11.0 million.
Time deposits increased $16.4 million and borrowings increased $14.0 million in
1999.
Liquidity is further enhanced by an approximately $115 million line
of credit with the Federal Home Loan Bank of Atlanta (FHLB) collateralized by
FHLB stock, investment securities and qualifying 1 to 4 family residential
mortgage loans. The Company provides various reports to the FHLB on a regular
basis throughout the year to maintain the availability of the credit line. Each
borrowing request to the FHLB is initiated through an advance application that
is subject to approval by the FHLB before funds are advanced under the credit
agreement.
The Company also has unsecured overnight borrowing lines totaling $19
million available through four financial institutions. These lines are used to
manage the day to day, short-term liquidity needs of the Company. Each Federal
funds line has a requirement to repay the line in full on a frequent basis,
typically within five to ten business days.
The Company also projects future cash flow requirements based on
scheduled loan and deposit maturities, borrowing maturities, capital
expenditures and other factors. At December 31, 2001 and for the upcoming twelve
month period, the Company had scheduled loan maturities of $135.8 million,
securities maturities of $145,000 and $340.5 million in maturing time deposits.
The Company also has $93.0 million in deposits with no contractual maturity that
are subject to withdrawal during 2002. The Company also has $34.7 of borrowings
that are scheduled for repayment in 2002. Anticipated capital expenditures
during 2002 are approximately $1.5 million. Internal analysis indicated the
Company is positioned to meet expected liquidity requirements during the
upcoming twelve-month period.
The Company also has off-balance sheet arrangements with customers
that may impact the overall liquidity needs. These commitments and contingent
liabilities are commitments to extend credit and standby letters of credit. The
following table presents commitments and contingent liabilities at December 31,
2001.
One Year Over One
and Less Year Total
-------- ---- -----
Commitments to extend credit $ 78,139 - $ 78,139
Standby letters of credit 376 - 376
-------- ------- --------
Total commitments and contingent liabilities $ 78,515 - $ 78,515
======== ======= ========
28
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 30 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
The FASB has issued SFAS No. 141, "Business Combinations", and No.
142, "Goodwill and Other Intangible Assets." SFAS 141 supersedes APB Opinion No.
16, "Business Combinations", and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises" and requires that all
business combinations be accounted for using the purchase method. This Statement
carries forward without reconsideration those portions of APB Opinion No. 16,
"Business Combinations", that provide guidance related to the application of the
purchase method. This Statement requires that intangible assets that meet
certain criteria be recognized as assets apart from goodwill. The provisions of
this Statement apply to all business combinations initiated after June 30, 2001.
This Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later.
SFAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
It addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This Statement
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. This
Statement carries forward without reconsideration those provisions of Opinion 17
related to the accounting for internally developed intangible assets.
The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001 and early application is
permitted for entities with fiscal years beginning after March 15, 2001, under
certain conditions. Impairment losses for goodwill and indefinite-lived
intangible assets that arise due to the initial application of this Statement
(resulting from a transitional impairment test) are to be reported as resulting
from a change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires that obligations associated with the
retirement of a tangible long-lived asset to be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. SFAS 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002 (early application is
encouraged).
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 requires
that
29
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, its provisions are to be applied prospectively.
Based on the Company's operations as of December 31, 2001, none of
these standards had a material effect on the Company's financial statements.
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 earnings 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 38 indicates a ratio
of rate sensitive assets to rate sensitive liabilities within one year at
December 31, 2001, to be 0.85%. 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. The overall risk to net
interest income is also influenced 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 58.5% 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
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
30
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 39 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, 2001.
31
Table 2
Average Balance and Net Interest Income Analysis
Fully Taxable Equivalent Basis
(In thousands, except percentages)
Year Ended December 31,
---------------------------------------------------------------------------------
2001 2000
------------------------------------- --------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance (3) Expense Rate Balance (3) Expense Rate
----------- ------- ---- ----------- ------- ----
Interest earning assets:
Loans, net (2) $ 515,287 $ 43,069 8.36% $ 459,731 $ 43,588 9.48%
Taxable investment securities 136,782 7,916 5.79 117,263 7,084 6.04
Tax-exempt investment securities 15,083 1,114 7.39 (1) 13,788 1,132 8.21 (1)
Other securities 5,530 297 5.37 4,769 334 7.00
Overnight deposits 7,851 317 4.04 3,885 270 6.95
Federal funds sold - - - 2,828 153 5.41
---------- --------- ---------- ----------
Total earning assets 680,533 52,713 7.75 602,264 52,561 8.73
Non-earning assets:
Cash and due from banks 15,048 17,504
Premises and equipment 11,738 11,231
Other assets 12,673 10,313
Less: Allowance for credit loss (6,503) (5,102)
---------- ----------
Total assets $ 713,489 $ 636,210
========== ==========
Interest bearing liabilities:
Savings and NOW $ 44,407 314 0.71 $ 46,686 $ 634 1.36
MMI 46,379 1,583 3.41 41,905 1,819 4.34
Time deposits 453,305 26,364 5.82 383,488 23,355 6.09
Federal funds purchased, borrowed funds and
securities sold under agreements to repurchase
47,617 2,368 4.97 57,362 3,709 6.47
---------- --------- ---------- ----------
Total interest bearing liabilities 591,708 30,629 5.18 529,441 29,517 5.58
Other liabilities and shareholder's equity
Demand deposits 55,358 50,877
Other liabilities 6,168 4,519
Shareholders' equity 60,255 51,373
---------- ----------
Total liabilities and shareholders' equity $ 713,489 636,210
========== ==========
Net interest income and net yield on
earning assets (3) (4) $ 22,084 3.25% $ 23,044 3.83%
========= ==== ========== ====
Interest rate spread (5) 2.57% 3.15%
==== ====
December 31,
----------------------------------------
1999
----------------------------------------
Interest Average
Average Income/ Yield/
Balance (3) Expense 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
Other securities 2,787 205 7.36
Overnight deposits 1,717 90 5.24
Federal funds sold 5,341 136 2.55
---------- ---------
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 NOW $ 47,352 $ 677 1.43
MMI 40,879 1,666 4.08
Time deposits 329,940 17,848 5.41
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
====
(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.
32
Table 3
Volume and Rate Variance Analysis
Fully Taxable Equivalent Basis
(In thousands)
Year Ended December 31,
--------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
---------------------------------- -------------------------------
Volume (2) Rate (2) Total Volume (2) Rate (2) Total
Variance Variance Variance Variance Variance Variance
-------- -------- -------- -------- -------- --------
Interest Income:
Loans, net $ 5,267 $ (5,786) $ (519) $ 6,434 $ 2,815 $ 9,249
Taxable investment securities 1,179 (347) 832 (547) 235 (312)
Tax-exempt investment securities (1) 77 (95) (18) 533 43 576
Other securities 53 (90) (37) 146 (17) 129
Overnight deposits 276 (229) 47 114 66 180
Federal funds sold and retail repurchase agreements (153) - (153) (64) 81 17
-------- --------- ------- -------- ------- --------
Total interest income 6,699 (6,547) 152 6,616 3,223 9,839
-------- --------- ------- -------- ------- --------
Interest expense:
Savings and NOW (31) (289) (320) (10) (33) (43)
MMI 194 (430) (236) 42 111 153
Time deposits 4,252 (1,243) 3,009 2,571 2,936 5,507
Federal funds purchased, borrowed funds and securities sold
under agreements to repurchase (630) (711) (1,341) 1,059 735 1,794
-------- --------- ------- -------- ------- --------
Total interest expense 3,785 (2,673) 1,112 3,662 3,749 7,411
-------- --------- ------- -------- ------- --------
Increase (decrease) in net interest income $ 2,914 $ (3,874) $ (960) $ 2,954 $ (526) $ 2,428
======== ========= ======= ======== ======= ========
(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.
33
Table 4
Investment Securities
(In thousands, except percentages)
As of December 31, 2001 As of December 31, 2000 As of December 31, 1999
----------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Amortized Fair Average Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield Cost Value Yield
--------- --------- ---- -------- -------- ---- --------- -------- ----
U.S. government agency $ 112,516 $ 114,660 6.13% $127,859 $127,301 5.81% $ 122,604 $118,002 5.78%
U.S. Treasury - - - 200 200 6.39 200 200 6.70
State and municipal obligations (1) 8,325 8,628 8.46 16,097 16,928 8.31 9,989 9,959 7.85
Other debt securities 304 309 6.83 1,331 1,309 6.35 1,340 1,284 6.34
Other equity 3,967 3,967 6.19 3,967 3,967 7.33 2,573 2,573 7.31
--------- --------- -------- -------- --------- --------
Total investment securities (1) $ 125,112 $ 127,564 6.32 $149,454 $149,705 6.24 $ 136,706 $132,018 5.97
========= ========= ======== ======== ========= ========
As of December 31, 2001
----------------------------------------------------------------------------------------
After One After Five
Within Year to Years to After Weighted
One Year Five Years Ten Years Ten Years Average
---------------- -------------- -------------- -------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield (1)
------ ----- ------ ----- ------ ----- ------ ----- ----- ---------
U.S. government agency $ - 0.00% $ 37,497 5.98% $ 72,191 6.21% $ 2,828 6.05% $112,516 6.13%
State and municipal obligations (1) 145 7.08 930 7.12 4,349 8.51 2,901 8.77 8,325 8.46
Other debt securities - - - - 304 6.83 - - 304 6.83
------- -------- -------- ------- --------
Total debt securities (1) $ 145 7.08 $ 38,427 $ 76,844 6.38 $ 5,729 7.61 $121,145 6.35
======= ======== ======== ======= ========
(1) Yields stated on a tax equivalent basis.
34
Table 5
Loan Portfolio Composition
(In thousands, except percentages)
As of December 31,
-----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ---------------- ----------------- ----------------- ------------------
Real Estate:
Commercial $168,419 31.5% $119,584 23.9% $115,434 27.9% $ 94,798 26.2% $ 60,659 19.0%
Residential 130,264 24.4 150,825 30.1 130,676 31.6 120,143 33.2 120,257 37.7
Construction 55,861 10.4 66,148 13.2 34,680 8.4 29,794 8.2 22,143 6.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate 354,544 66.3 336,557 67.2 280,790 67.9 244,735 67.6 203,059 63.6
Commercial, financial and
Agricultural 90,858 17.0 74,981 15.0 58,002 14.0 49,822 13.8 57,453 18.0
Consumer:
Direct 37,112 6.9 46,463 9.3 32,778 7.9 32,368 8.9 31,556 9.9
Home equity 46,169 8.6 39,204 7.8 32,836 7.9 26,723 7.4 21,425 6.7
Revolving 6,662 1.2 3,432 0.7 9,605 2.3 8,604 2.3 5,974 1.8
Total consumer 89,943 16.7 89,099 17.8 75,219 18.1 67,695 18.6 58,955 18.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $535,345 100.0% $500,637 100.0% $414,011 100.0% $362,252 100.0% $319,467 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
As of December 31, 2001
--------------------------------------------------------------------------------------------
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 $ 46,268 $ 34,701 $ 9,889 $ 90,858 $ 11,925 $ 32,665
Real estate - construction 45,292 8,315 2,254 55,861 4,475 6,093
Real estate - residential 8,075 37,180 85,009 130,264 97,959 24,230
Real estate - commercial 24,014 120,588 23,817 168,419 53,697 90,709
Consumer 12,117 31,223 46,603 89,943 25,970 51,856
---------- ----------- ---------- ----------- ------------ ------------
Total $ 135,766 $ 232,007 $ 167,572 $ 535,345 $ 194,026 $ 205,553
========== =========== ========== =========== ============ ============
As of December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- -------------- --------------- -------------
Non-performing assets:
Non-accrual loans $ 2,266 $ 3,222 $ 1,195 $ 1,474 $ 2,499
Loans past due 90 days or more and still accruing interest 6 - 117 87 92
Other real estate 2,707 1,007 534 1,518 308
35
Table 6
Summary of Allowance for Credit Losses
(In thousands except ratios and percentages)
2001 2000 1999 1998 1997
------- ------ ------ ------ ------
Balance, beginning of period $ 6,311 $4,436 $3,452 $3,185 $2,422
Charge-offs:
Commercial 510 65 - 597 16
Real estate-construction - - - - -
Real estate-mortgage 43 359 - 4 53
Consumer 448 380 512 407 186
------- ------ ------ ------ ------
Total charge-offs 1,001 804 512 1,008 255
------- ------ ------ ------ ------
Recoveries:
Commercial 25 - 5 12 10
Real estate-construction - - - - -
Real estate-mortgage - - - - 233
Consumer 118 154 90 92 89
------- ------ ------ ------ ------
Total recoveries 143 154 95 104 332
------- ------ ------ ------ ------
Net charge-offs 858 650 417 904 (77)
Provision charged to operations 1,278 2,525 1,401 1,171 686
------- ------ ------ ------ ------
Balance, end of period $ 6,731 $6,311 $4,436 $3,452 $3,185
======= ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.17% 0.14% 0.11% 0.26% -0.03%
======= ====== ====== ====== ======
Ratio of allowance to year end loans 1.26% 1.26% 1.07% 0.95% 1.00%
======= ====== ====== ====== ======
Allocation of the Allowance for Credit Losses
2001 2000 1999 1998 1997
--------------- --------------- --------------- -------------- ---------------
$ % (1) $ % (1) $ % (1) $ % (1) $ % (1)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance at end of period applicable to:
Commercial 4,773 17 4,445 15 2,087 14 1,549 14 1,291 18
Real estate-construction 18 10 28 13 50 8 4 8 8 7
Real estate-mortgage 104 56 125 54 868 60 330 59 514 57
Consumer 1,836 17 1,635 18 1,276 18 1,320 19 515 18
General -- -- 78 -- 155 -- 249 -- 857 --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allocation 6,731 100 6,311 100 4,436 100 3,452 100 3,185 100
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
(1) Percent of loans in each category to total loans.
36
P
Table 7
Regulatory Capital
(In thousands, except percentages)
As of or for year ended December 31,
----------------------------------------------------------------
2001 2000 1999
-------------------- ------------------ -------------------
Total capital to risk weighted assets
Consolidated $67,468 12.8% $62,028 12.5% $57,327 14.3%
Subsidiary Bank 65,221 12.4 61,319 12.4 56,281 13.9
Tier 1 capital to risk weighted assets
Consolidated 60,888 11.6 55,841 11.3 52,891 13.2
Subsidiary Bank 58,658 11.2 55,132 11.1 51,845 12.8
Tier 1 capital to average assets
Consolidated 60,888 8.6 55,841 8.2 52,891 9.3
Subsidiary Bank 58,658 8.3 55,132 8.1 51,845 9.0
37
Table 8
Interest Sensitivity Analysis
(In thousands, except ratios)
As of December 31, 2001
------------------------------------------------------------------------------
Total
1 - 90 91 - 180 181 - 365 Sensitive Sensitive
Day Day Day Within Over
Sensitive Sensitive Sensitive One Year One Year Total
--------- --------- --------- --------- --------- ---------
Interest earning assets:
Loans, net of non-accruals $ 315,317 $ 15,099 $ 26,497 $ 356,913 $ 176,166 $ 533,079
Taxable investment securities -- -- -- -- 112,820 112,820
Tax exempt investment securities -- 145 -- 145 8,180 8,325
Other investment securities 3,967 -- -- 3,967 -- 3,967
Due from FHLB 6,199 -- -- 6,199 -- 6,199
--------- --------- --------- --------- --------- ---------
Total interest earning assets 325,483 15,244 26,497 367,224 297,166 $ 664,390
--------- --------- --------- --------- --------- ---------
Interest bearing liabilities:
NOW 16,180 -- -- 16,180 10,787 $ 26,967
MMI 24,375 -- 24,375 24,374 48,749
Savings 10,394 -- 10,394 6,929 17,323
Time deposits 131,866 127,684 80,979 340,529 94,361 434,890
Overnight borrowings 19,677 -- -- 19,677 -- 19,677
Other borrowings 20,000 -- -- 20,000 10,000 30,000
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 222,492 127,684 80,979 431,155 146,451 $ 577,606
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap $ 102,991 $(112,440) $ (54,482) $ (63,931) $ 150,715 $ 86,784
========= ========= ========= ========= ========= =========
Ratio of interest sensitive assets to liabilities 1.46 0.12 0.33 0.85
38
Table 9
Market Risk of Financial Instruments
(In thousands, except percentages)
Contractual Maturities as of December 31, 2001 Average Estimated
--------------------------------------------------------------------------- Interest Fair
2002 2003 2004 2005 2006 Five Years Total Rate Value
-------- -------- -------- -------- -------- ---------- -------- ------ --------
Financial assets:
Debt securities $ 145 $ 440 $ 5,223 $ 5,945 $ 26,819 $ 82,573 $121,145 6.35% $123,597
Loans:
Fixed rate 26,560 22,495 38,425 24,632 19,860 88,615 220,587 8.56 220,902
Variable rate 109,206 21,118 36,071 38,426 30,980 78,957 314,758 5.40 316,441
-------- -------- -------- -------- -------- -------- -------- --------
Total financial assets $135,911 $ 44,053 $ 79,719 $ 69,003 $ 77,659 $250,145 $656,490 $660,940
======== ======== ======== ======== ======== ======== ======== ========
Financial liabilities:
NOW $ 26,967 $ -- $ -- $ -- $ -- $ -- $ 26,967 0.21% $ 26,967
MMI 48,749 -- -- -- -- -- 48,749 1.94 48,749
Savings 17,323 -- -- -- -- -- 17,323 0.57 17,323
Time deposits 340,534 53,923 20,234 17,013 2,463 723 434,890 4.83 446,317
Other borrowings 15,000 5,000 -- -- -- 10,000 30,000 3.02 29,587
Federal funds purchased
and retail repurchase 19,677 -- -- -- -- -- 19,677 1.88 19,677
-------- -------- -------- -------- -------- -------- -------- --------
Total financial liabilities $468,250 $ 58,923 $ 20,234 $ 17,013 $ 2,463 $ 10,723 $577,606 $588,620
======== ======== ======== ======== ======== ======== ======== ========
Contractual Maturities as of December 31, 2001 Average Estimated
--------------------------------------------------------------------------- Interest Fair
2002 2003 2004 2005 2006 Five Years Total Rate Value
-------- -------- -------- -------- -------- ---------- -------- ------ --------
Financial assets:
Debt securities $ 8,665 $ 3,155 $ $ 33,689 $ 19,415 $ 40,245 $145,487 5.76% $145,738
40,318
Loans:
Fixed rate 30,889 26,791 15,682 32,903 39,429 64,292 209,986 8.64 207,238
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% $641,453
======== ======== ======== ======== ======== ======== ======== ========
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
======== ======== ======== ======== ======== ======== ======== ========
39
Table 10
Quarterly Financial Data
(In thousands, except per share data)
2001 2000
---------------------------------------------------------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr (1) 1st Qtr (1)
------- ------- ------- ------- ------- ------- ----------- -----------
Interest income $11,579 $13,133 $13,662 $13,960 $14,339 $13,520 $12,571 $11,746
Interest expense 6,334 7,728 8,164 8,403 8,414 7,832 6,935 6,336
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 5,245 5,405 5,498 5,557 5,925 5,688 5,636 5,410
Provision for credit losses 480 315 260 223 1,279 370 340 536
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for credit losses 4,765 5,090 5,238 5,334 4,646 5,318 5,296 4,874
------- ------- ------- ------- ------- ------- ------- -------
Other income 2,135 1,076 834 695 593 732 760 806
Other expenses 4,008 3,971 3,945 3,914 5,007 3,772 3,860 3,461
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 2,892 2,195 2,127 2,115 232 2,278 2,196 2,219
Income taxes 968 664 608 611 102 794 710 717
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,924 $ 1,531 $ 1,519 $ 1,504 $ 130 $ 1,484 $ 1,486 $ 1,502
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.42 $ 0.34 $ 0.34 $ 0.33 $ 0.03 $ 0.33 $ 0.33 $ 0.34
Diluted $ 0.42 $ 0.33 $ 0.33 $ 0.33 $ 0.03 $ 0.33 $ 0.33 $ 0.33
40
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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/PricewaterhouseCooper
- -------------------------
PricewaterhouseCoopers LLP
Raleigh, North Carolina
January 31, 2002
41
Management's Report on the Financial Statements and the Internal Control
of FNB Financial Services Corporation
Management of FNB Financial Services Corporation ("the Company") is
responsible for the preparation, integrity and fair presentation of the
Company's annual consolidated financial statements. The annual consolidated
financial statements included in the 2001 Annual Report have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on judgments and estimates made by management. Management has also
prepared the financial and other information included in the year-end Call
Report prepared by the Company's wholly-owned subsidiary, FNB Southeast, and is
responsible for its accuracy and consistency with the financial statements.
The annual consolidated financial statements referred to above have been
audited by PricewaterhouseCoopers LLP, independent public accountants, who have
been given unrestricted access to all financial records and related data,
including minutes of meetings of shareholders, the Board of Directors and
committees of the Board. Management believes that all representations made to
PricewaterhouseCoopers LLP during the audit were valid and appropriate.
Management is responsible for establishing and maintaining effective
internal control over financial reporting, including safeguarding and management
of assets. The objective of internal control is to provide reasonable assurance
to management and the Board of Directors: (1) as to the preparation of the
financial statements in accordance with accounting principles generally accepted
in the United States, (2) that adequate procedures are in effect to safeguard
assets against unauthorized loss or disposition, and (3) that adequate
procedures are in effect over the management of assets.
There are limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even an effective internal control can provide only
reasonable assurance with respect to the reliability of financial statements and
safeguarding and management of assets. Furthermore, the effectiveness of any
internal control can change with changes in circumstances.
In accordance with the Federal Deposit Insurance Corporation Improvement
Act ("FDICIA"), management has made its own assessment of the effectiveness of
the Company's internal control over financial reporting as of December 31, 2001,
based on the criteria described in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes that, as of December 31, 2001, the
Company's internal control was effective in achieving the objectives stated
above.
/s/Ernest J. Sewell /s/Pressley A. Ridgill /s/Michael W. Shelton
- ------------------- ---------------------- ---------------------
Ernest J. Sewell Pressley A. Ridgill Michael W. Shelton
President and Executive Vice President and Senior Vice President and
Chief Executive Officer Chief Operating Oficer Chief Financial Officer
March 6, 2002
42
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
- ---------------------------
December 31, 2001 and 2000
(Dollars in thousands, except share data)
2001 2000
-------- --------
ASSETS
Cash and due from banks $ 23,673 $ 15,952
Investment securities:
Available for sale 123,597 145,738
Federal Home Loan Bank and Federal Reserve Bank Stock 3,967 3,967
Loans, net of allowance for credit losses of $6,731 in 2001 and $6,311 in 2000 528,614 494,326
Premises and equipment, net 11,381 12,046
Accrued income and other assets 13,593 13,875
-------- --------
Total assets $704,825 $685,904
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 58,831 $ 54,434
Interest-bearing 527,929 515,017
-------- --------
Total deposits 586,760 569,451
Federal funds purchased and retail repurchase agreements 19,677 12,537
Other borrowings 30,000 41,000
Accrued expenses and other liabilities 5,680 6,524
-------- --------
Total liabilities 642,117 629,512
-------- --------
Commitments and Contingent Liabilities: See Note 17.
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 -
4,568,907 in 2001 and 4,488,259 in 2000 4,569 4,488
Paid-in capital 26,465 25,723
Retained earnings 30,178 26,028
Accumulated other comprehensive income 1,496 153
-------- --------
Total shareholders' equity 62,708 56,392
-------- --------
Total liabilities and shareholders' equity $704,825 $685,904
======== ========
See notes to consolidated financial statements
43
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
- ----------------------------------------------------------
Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands, except per
share data)
2001 2000 1999
-------- -------- --------
Interest income
Loans $ 43,069 $ 43,588 $ 34,339
Federal funds sold and overnight deposits 317 423 226
Investment securities
Taxable 7,916 7,084 7,396
Tax exempt 735 747 367
Other 297 334 205
-------- -------- --------
Total interest income 52,334 52,176 42,533
-------- -------- --------
Interest expense
Deposits 28,261 25,808 20,191
Federal funds purchased and other borrowings 2,368 3,709 1,915
-------- -------- --------
Total interest expense 30,629 29,517 22,106
-------- -------- --------
Net interest income 21,705 22,659 20,427
Provision for credit losses 1,278 2,525 1,401
-------- -------- --------
Net interest income after provision for credit losses 20,427 20,134 19,026
-------- -------- --------
Other income
Service charges on deposit accounts 2,180 2,072 1,793
Other service charges and fees 650 455 371
Bankcard fees 157 231 521
Net gain on sales of loans -- 73 174
Net gain on securities available for sale 1,753 60 118
-------- -------- --------
Total other operating income 4,740 2,891 2,977
-------- -------- --------
Other expenses
Salaries and employee benefits 9,281 8,699 8,174
Occupancy expense 1,033 871 771
Furniture and equipment expense 1,844 1,507 1,280
Insurance expense, including FDIC assessment 186 250 108
Marketing expense 241 447 352
Printing and supply expense 376 308 346
Bankcard processing 65 155 412
Merger related costs -- -- 675
Other expenses 2,812 3,863 3,075
-------- -------- --------
Total other expenses 15,838 16,100 15,193
-------- -------- --------
Income before income taxes 9,329 6,925 6,810
Income tax expense 2,851 2,323 2,562
-------- -------- --------
Net income 6,478 4,602 4,248
Other comprehensive income (loss) 1,343 3,013 (3,560)
-------- -------- --------
Comprehensive income $ 7,821 $ 7,615 $ 688
======== ======== ========
Net income per share, basic $ 1.43 $ 1.03 $ 0.95
======== ======== ========
Net income per share, diluted $ 1.41 $ 1.02 $ 0.93
======== ======== ========
See notes to consolidated financial statements
44
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
- ----------------------------------------------------------
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
Common stock
Balance at beginning of year $ 4,488 $ 4,479 $ 4,544
Stock repurchase -- -- (119)
Stock issuance -- 3 --
Dividend reinvestment plan 4 2 23
Exercise of stock options 77 3 17
Employee 401(k) plan -- 1 14
-------- -------- --------
Balance at end of year 4,569 4,488 4,479
-------- -------- --------
Paid-in capital
Balance at beginning of year 25,723 25,653 27,140
Stock repurchase -- -- (1,965)
Stock issuance -- (3) --
Dividend reinvestment plan 34 28 224
Exercise of stock options 708 40 79
Employee 401(k) plan -- 5 175
-------- -------- --------
Balance at end of year 26,465 25,723 25,653
-------- -------- --------
Retained earnings
Balance at beginning of year 26,028 23,458 21,247
Net income 6,478 4,602 4,248
Cash dividends paid ($0.51 per share in 2001, $0.45 in
2000, and $0.46 in 1999) (2,328) (2,032) (2,037)
-------- -------- --------
Balance at end of year 30,178 26,028 23,458
-------- -------- --------
Accumulated other comprehensive income
Balance at beginning of year 153 (2,860) 700
Other comprehensive income 1,343 3,013 (3,560)
-------- -------- --------
Balance at end of year 1,496 153 (2,860)
-------- -------- --------
Total shareholders' equity $ 62,708 $ 56,392 $ 50,730
======== ======== ========
See notes to consolidated financial statements
45
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
- -------------------------------------
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 52,467 $ 49,796 $ 42,215
Fees and commission received 4,245 3,827 3,807
Interest paid (31,742) (28,030) (22,208)
Noninterest expense paid (15,029) (14,474) (14,614)
Income taxes paid (2,657) (3,580) (2,862)
Funding of loans held for sale (18,766) (4,366) (4,010)
Proceeds from sales of loans held for sale 18,426 4,408 3,831
--------- --------- ---------
Net cash provided by operating activities 6,944 7,581 6,159
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and calls of securities available for sale 154,383 6,337 61,611
Proceeds from maturities of securities available for sale 20,625 588 19,245
Purchase of securities (149,402) (19,673) (62,691)
Capital expenditures (708) (3,661) (1,481)
(Increase) decrease in other real estate owned 1,154 (473) 1,110
Net (increase) decrease in loans (37,219) (88,830) (52,015)
--------- --------- ---------
Net cash used in investing activities (11,167) (105,712) (34,221)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and interest checking accounts 14,679 (3,449) 8,214
Net increase in time deposits 2,630 88,658 16,433
Net increase (decrease) in other borrowings (11,000) 9,500 14,000
Net increase (decrease) in federal funds purchased and retail repurchase agreements 7,140 (3,062) 1,667
Repurchase of common stock -- -- (2,084)
Proceeds from issuance of common stock 823 77 532
Dividends paid (2,328) (2,032) (2,037)
--------- --------- ---------
Net cash provided by financing activities 11,944 89,692 36,725
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 7,721 (8,439) 8,663
Cash and cash equivalents, beginning of year 15,952 24,391 15,728
--------- --------- ---------
Cash and cash equivalents, end of year $ 23,673 $ 15,952 $ 24,391
========= ========= =========
Supplemental disclosure of non-cash transactions
Non-interest transfers from loans to other real estate $ 2,854 $ 986 $ 192
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 6,478 $ 4,602 $ 4,248
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 1,278 2,525 1,401
Depreciation 1,388 1,139 978
Accretion and amortization 455 477 494
(Gain) loss on sale of securities available for sale (1,753) (60) (118)
(Gain) loss on other assets -- (73) (174)
Funding of loans held for sale (18,766) (4,366) (4,010)
Proceeds from sales of loans held for sale 18,426 4,408 3,831
(Decrease) increase in accrued income and other assets 282 (1,247) (1,751)
Increase (decrease) in accrued expenses and other liabilities (844) 176 1,260
--------- --------- ---------
Net cash provided by operating activities $ 6,944 $ 7,581 $ 6,159
========= ========= =========
See notes to consolidated financial statements
46
NB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
- ------------------------------------------
December 31, 2001, 2000 and 1999
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
Mortgage Corporation, and FNB Southeast Investment Services, Inc., both are
wholly-owned subsidiaries 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 four
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
Cash and cash equivalents include cash and due from banks and
interest-bearing bank deposits. Cash and cash equivalents are defined as cash
and short-term investments with maturities of three months or less.
47
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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.
As of December 31, 2001 and 2000, the Company had available for sale
securities of approximately $123,597,000 and $145,738,000, respectively. Other
securities, which are carried at cost, include stock in the Federal Reserve Bank
("FRB") and the Federal Home Loan Bank of Atlanta ("FHLB"). The Company is
required to maintain certain levels of FRB and FHLB stock based on various
criteria established by the individual issuer. 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. Loans are generally placed on non-accrual status
when contractual payment becomes 90 days past due. 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.
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 Company's allowance for credit losses is based on management's
best estimate of probable loan losses incurred as of the balance sheet date.
Factors impacting estimated probable loan losses include credit quality trends,
past loan loss experience, current economic conditions, and loan volume among
loan categories.
While management uses the best available information to establish the
allowance for credit losses, future additions to the allowance may be necessary
based on the factors cited above. In addition, the allowance is reviewed by
regulatory agencies as an integral part of their examination processes. Such
agencies may require the Company to recognize changes to the allowance based on
their judgements about information available to them at the time of their
examination.
48
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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. Useful lives of buildings are estimated at 20 to 40 years
and equipment are 3 to 10 years.
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.
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.
49
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Mortgage servicing assets
Mortgage servicing assets are included in other assets of the balance
sheet. The allocated cost of originated mortgage servicing rights are
capitalized and amortized over the estimated lives of the related loans.
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 October of 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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.
The FASB has issued SFAS No. 141, "Business Combinations", and No.
142, "Goodwill and Other Intangible Assets." SFAS 141 supersedes APB Opinion No.
16, "Business Combinations", and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises" and requires that all
business combinations be accounted for using the purchase method. This Statement
carries forward without reconsideration those portions of APB Opinion No. 16,
"Business Combinations",
50
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
that provide guidance related to the application of the purchase method. This
Statement requires that intangible assets that meet certain criteria be
recognized as assets apart from goodwill. The provisions of this Statement apply
to all business combinations initiated after June 30, 2001. This Statement also
applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later. SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This Statement also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. This Statement carries
forward without reconsideration those provisions of Opinion 17 related to the
accounting for internally developed intangible assets.
The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001 and early application is
permitted for entities with fiscal years beginning after March 15, 2001, under
certain conditions. Impairment losses for goodwill and indefinite-lived
intangible assets that arise due to the initial application of this Statement
(resulting from a transitional impairment test) are to be reported as resulting
from a change in accounting principles.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires that obligations associated with the
retirement of a tangible long-lived asset to be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. SFAS 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002 (early application is
encouraged).
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, its provisions are to be applied prospectively.
Based on the Company's operations as of December 31, 2001, none of
these standards had a material effect on the Company's financial statements.
Reclassification
Certain items for 1999 and 2000 have been reclassified to conform
with the 2001 presentation. Such reclassifications had no effect on net income
or shareholders' equity as previously reported.
51
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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.
Note 3 - Restriction on cash and due from banks
The Subsidiary Bank maintains average required reserve balances with
the Federal Reserve Bank. The average amounts of these reserve balances for the
years ended December 31, 2001 and 2000 were $512,000 and $339,000, respectively.
52
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Note 4 - Investment securities
Investment securities at December 31 consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
2001:
Available for sale:
U.S. government agency securities $104,039 $ 1,993 $ -- $106,032
Mortgage backed securities 8,477 151 -- 8,628
State and municipal obligations 8,325 303 -- 8,628
Other 304 5 -- 309
-------- -------- -------- --------
Total available for sale 121,145 2,452 -- 123,597
Federal Home Loan Bank and Federal
Reserve Bank stock 3,967 -- -- 3,967
-------- -------- -------- --------
Total investment securities $125,112 $ 2,452 $ -- $127,564
======== ======== ======== ========
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
======== ======== ======== ========
The amortized cost and estimated market value of debt securities at
December 31, 2001, 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.
Amortized Estimated
Cost Fair Value
-------- ---------
(In thousands)
Due in one year or less $ 145 $ 146
Due after one through five years 38,427 39,002
Due after five through ten years 76,844 78,562
Due after ten years 5,729 5,887
-------- --------
Total debt securities $121,145 $123,597
======== ========
53
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, and gross realized losses for the years ended December 31
were as follows:
2001 2000 1999
------- ------- -------
(In thousands)
Proceeds from sales $70,469 $ 6,277 $60,805
Gross realized gains 1,771 98 178
Gross realized losses 18 38 60
At December 31, 2001, and 2000, investment securities with a carrying
value of approximately $73,300,000 and $80,427,000, respectively, were pledged
as collateral to secure public deposits and for other purposes.
Note 5 - Loans (net of unearned income)
Major classifications of loans at December 31, are as follows:
2001 2000
-------- --------
(In thousands)
Commercial, financial and agricultural $ 90,858 $ 74,981
Consumer 89,943 89,099
Real estate:
Residential mortgage 129,212 150,113
Commercial mortgage 168,419 119,584
Construction 55,861 66,148
-------- --------
Subtotal loans 534,293 499,925
Loans held for sale 1,052 712
-------- --------
Gross loans $535,345 $500,637
======== ========
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. Generally, a loan will be considered
impaired if it exhibits the same level of underlying weakness and probability of
loss as loans classified doubtful or loss.
The impairment evaluation compares the recorded book value of the
loan, or loan relationship, to the present value of the expected future
principal, interest and collateral value (if applicable) cash flows. The
expected cash flows are discounted at the contractual interest rate for the
individual note. A specific reserve is established if the present value of
expected future cash flows is less than the recorded book value of the loan.
At December 31, 2001 and 2000, the recorded investment in loans
considered impaired was approximately $6,857,000 and $3,222,000, respectively.
The related allowance for credit losses on these impaired loans was
approximately $1,748,000 and $901,000, respectively. The average recorded
investment in impaired loans for the years ended December 31, 2001, 2000 and
1999 was approximately $6,451,000, $2,892,000,and $1,611,000 respectively.
The amount of gross interest that would have been recorded if
nonperforming loans had been performing in accordance with their terms was
approximately $203,000, $371,000 and $59,000 for 2001, 2000, and 1999,
respectively. The amount of foregone interest income was approximately $114,000,
$331,000 and $15,000 for 2001, 2000 and 1999, respectively.
54
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
The amount of potential problem loans totaled $6,857,000 at December
31, 2001. These loans are considered impaired by the Company. There are no other
identified potential problem loans at December 31, 2001.
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, 2001 and 2000 were
$19,961,000 and $24,459,000, respectively. Mortgage loans serviced for other
investors at December 31, 2001 and 2000, were $428,000 and $1,580,000,
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).
Note 6 - Allowance for credit losses
Changes in the allowance for credit losses for the years ended
December 31 were as follows:
2001 2000 1999
------- ------- -------
(In thousands)
Balance at beginning of year $ 6,311 $ 4,436 $ 3,452
Provision for credit losses 1,278 2,525 1,401
Recoveries 143 154 95
Losses charged off (1,001) (804) (512)
------- ------- -------
Balance at end of year $ 6,731 $ 6,311 $ 4,436
======= ======= =======
Note 7 - Premises and equipment
Premises and equipment at December 31 is summarized as follows:
2001 2000
------- -------
(In thousands)
Land $ 2,859 $ 2,788
Building and leasehold improvements 7,107 7,144
Equipment 10,476 9,802
------- -------
Subtotal 20,442 19,734
Less accumulated depreciation and amortization 9,061 7,688
------- -------
Total premises and equipment, net $11,381 $12,046
======= =======
Note 8 - Deposits
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $224,532,000 and
$206,766,000 in 2001 and 2000, respectively. The table below presents the
scheduled maturities of time deposits at December 31, 2001.
Year ending December 31, (In thousands)
------------------------ -------------
2002....................................... $ 340,534
2003....................................... 53,923
2004....................................... 20,234
2005....................................... 17,013
2006....................................... 2,463
Thereafter................................. 723
---------
Total time deposits................... $ 434,890
=========
55
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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:
Maximum
Balance Interest Rate Average Outstanding at
as of as of Average Interest Any
December 31 December 31 Balance Rate Month-end
----------- ----------- ------- ---- ---------
(In thousands, except percentages)
2001
Federal funds purchased and securities
sold under agreements to repurchase $ 19,677 1.88% $ 13,235 4.07% $ 23,740
FHLB borrowings.......................... 30,000 3.02% 34,382 5.32% 41,000
--------- -------- ----------
Total.................................. $ 49,677 $ 47,617 $ 64,740
========= ======== ==========
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
========= ======== ==========
At December 31, 2001, the Subsidiary Bank had an approximately $115
million line of credit with the FHLB under which $30.0 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 $15.0 million maturing in 2002, $5.0 million maturing in 2003, and
$10.0 million maturing in 2011. The borrowing maturing in 2011 has a one-time
call feature in 2006 and may be converted to a floating rate based on the three
month LIBOR rate.
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 for the years ended December 31
are as follows:
2001 2000 1999
------- ------- -------
(In thousands)
Current tax expense
Federal $ 3,373 $ 2,996 $ 2,928
State 96 53 92
------- ------- -------
Total current 3,469 3,049 3,020
------- ------- -------
Deferred tax expense (benefit)
Federal (539) (633) (399)
State (79) (93) (59)
------- ------- -------
Total deferred (618) (726) (458)
------- ------- -------
Total income tax expense $ 2,851 $ 2,323 $ 2,562
======= ======= =======
56
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
The sources of deferred tax assets and liabilities and the tax effect
of each at December 31 are as follows:
2001 2000
------ ------
(In thousands)
Deferred tax assets:
Allowance for credit losses $2,489 $2,193
Non-qualified deferred compensation plans 888 657
Other 52 52
------ ------
Total 3,429 2,902
Deferred tax liabilities:
Depreciable basis of property and equipment 234 324
Net unrealized gain on securities available for sale 956 98
Deferred loan fees 281 281
Other 82 83
------ ------
Total 1,553 786
------ ------
Net deferred tax assets (liabilities) $1,876 $2,116
====== ======
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 income taxes differs from that computed by applying
the federal statutory rate of 34% as indicated in the following analysis:
2001 2000 1999
------- ------- -------
(In thousands)
Tax based on statutory rates $ 3,172 $ 2,354 $ 2,315
Increase (decrease) resulting from:
Effect of tax-exempt income (228) (209) (136)
State income taxes, net of federal benefit 11 (35) 22
Disallowed merger cost -- -- 230
Other, net (104) 213 131
------- ------- -------
Total provision for income taxes $ 2,851 $ 2,323 $ 2,562
======= ======= =======
Note 11 - Lease commitments
The minimum annual lease commitments under noncancelable operating
leases in effect at December 31, 2001, are as follows:
Year Ending December 31 (In thousands)
----------------------- -------------
2002....................................... $ 289
2003....................................... 274
2004....................................... 246
2005....................................... 240
2006....................................... 240
Thereafter................................. 543
----------
Total lease commitments................ $ 1,832
==========
Rental expense was $401,000 in 2001, $350,000 in 2000,and $271,000 in
1999.
57
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Note 12 - Related party transactions
The Subsidiary Bank had loans outstanding to principal officers and
directors and their affiliated companies during each of the past three years.
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.
The following table summarizes the transactions for the past three years.
2001 2000 1999
----------- ----------- -----------
Balance, beginning of year $ 3,716,000 $ 4,451,000 $ 3,723,000
Advances during year 4,184,000 1,442,000 1,995,000
Repayments during year (3,274,000) (2,177,000) (1,267,000)
----------- ----------- -----------
Balance, end of year $ 4,626,000 $ 3,716,000 $ 4,451,000
=========== =========== ===========
Note 13 - Stock -based compensation
The Company can provide compensation to directors, employees and
third parties through stock grants or options. The Company did not issue stock
grants during 2001, 2000 or 1999.
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:
2001 2000 1999
--------------------------- ------------------------ ---------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding -
Beginning of year 798,084 $ 14.34 798,661 $ 14.33 633,215 $ 14.55
Granted 126,000 12.80 13,350 11.24 206,850 13.38
Exercised (84,532) 10.11 (7,427) 7.11 (27,220) 9.44
Forfeited (26,199) 17.01 (6,500) 14.96 (14,184) 15.40
------- ------- -------
Outstanding - End
of year 813,353 $ 14.46 798,084 $ 14.34 798,661 $ 14.33
======= ======= =======
Exercisable - End
of year 563,753 $ 14.65 570,292 $ 13.51 422,006 $ 12.56
Weighted average
fair value of
Options granted
During the year $ 4.08 $ 2.92 $ 4.05
58
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
The following is a summary of information on outstanding and exercisable options
at December 31, 2001:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------- ----------------------------------
Weighted Average Weighted
Range of Remaining Contractual Weighted Average Average
Exercise Prices Number Life (Years) Exercise Price Number Exercise Price
--------------- ------ ------------ -------------- ------ --------------
$ 6.75 - 12.52 386,322 6.52 $ 10.76 281,285 $ 10.34
$12.94 - 25.50 427,031 7.14 17.80 282,468 18.95
------ -------
813,353 563,753
======= =======
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:
2001 2000 1999
------------- ------------ -------------
Net income - as reported $ 6,478,000 $ 4,602,000 $ 4,248,000
Net income - pro forma 5,956,000 4,064,000 3,462,000
Basic net income per share - as reported 1.43 1.03 0.95
Basic net income per share - pro forma 1.32 0.91 0.78
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 2001, 2000, and 1999: dividend yield of 3.90% for 2001,
4.75% for 2000, and 3.20% for 1999; expected volatility of 42.0% for 2001, 33.0%
for 2000, and 29.0% for 1999; risk free interest rates of 4.92% for 2001, 5.85%
for 2000, and 6.25% for 1999, and expected lives of seven 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.
59
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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) at December 31 consists
of the following:
2001 2000 1999
------- ------- -------
(In thousands)
Unrealized holding gains (losses) arising during the year $ 3,954 $ 4,999 $(5,717)
Reclassification adjustment for gains included in net income 1,753 60 118
------- ------- -------
Other comprehensive income (loss) before tax 2,201 4,939 (5,835)
Income tax expense (benefit) related to other comprehensive income . 858 1,926 (2,275)
------- ------- -------
Other comprehensive income (loss) $ 1,343 $ 3,013 $(3,560)
======= ======= =======
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:
For the year ended December 31, 2001
----------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income per share of common stock:
Income available to common shareholders $6,478,000 4,527,823 $ 1.43
========
Effect of dilutive securities:
Stock options -- 69,779
---------- ---------
Net income per share of common stock - assuming
dilution:
Income available to common shareholders and
assumed conversion $6,478,000 4,597,602 $ 1.41
========== ========== ========
60
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
========== ========== ========
61
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
Note 16 - FNB Financial Services Corporation (Parent Company)
The parent company's principal asset is its investment in its
subsidiary, FNB Southeast. The principal source of income of the parent company
is dividends received from its subsidiary.
2001 2000 1999
-------- -------- --------
Condensed balance sheets (In thousands)
Assets
Cash and due from banks $ 818 $ 410 $ 982
Securities 11 11 12
Investment in wholly-owned subsidiary 60,478 55,685 49,630
Other assets 1,401 286 106
-------- -------- --------
Total assets $ 62,708 $ 56,392 $ 50,730
======== ======== ========
Shareholders' equity and other liabilities $ 62,708 $ 56,392 $ 50,730
======== ======== ========
Condensed statements of income
Dividends from subsidiary $ 3,044 $ 1,633 $ 1,808
Management fees 240 180 85
Gain on sale of securities -- 62 --
Other expenses (277) (244) (540)
-------- -------- --------
Income before tax benefit 3,007 1,631 1,353
Income tax benefit 10 1 14
-------- -------- --------
Income before equity in undistributed net income of subsidiary 3,017 1,632 1,367
Equity in undistributed net income of subsidiary 3,461 2,970 2,881
-------- -------- --------
Net income $ 6,478 $ 4,602 $ 4,248
======== ======== ========
Condensed statements of cash flows
Cash flows from operating activities
Dividends received from subsidiary $ 3,044 $ 1,633 $ 1,808
Management fees received 240 180 10
Cash paid for franchise tax, registration cost, acquisition cost
and other (267) (181) (451)
(Increase) in other assets (1,115) (180) (17)
-------- -------- --------
Net cash provided by operating activities 1,902 1,452 1,350
-------- -------- --------
Cash flows from investing activities
Investment in subsidiary 11 (134) 2,163
Proceeds from sale of securities -- 63 --
-------- -------- --------
Net cash provided (used in) by investing activities 11 (71) 2,163
-------- -------- --------
Cash flows from financing activities
Repurchase of common stock -- -- (2,084)
Dividends paid, net of DRIP (2,290) (2,002) (1,790)
Proceeds from employee 401(k) -- 6 189
Exercise of stock options 785 43 96
-------- -------- --------
Net cash (used in) financing activities (1,505) (1,953) (3,589)
-------- -------- --------
Increase (decrease) in cash 408 (572) (76)
Cash at beginning of year 410 982 1,058
-------- -------- --------
Cash at end of year $ 818 $ 410 $ 982
======== ======== ========
Reconciliation of net income to cash provided by operating activities
Net income 6,478 $ 4,602 $ 4,248
Adjustments to reconcile net income to net cash provided
by operating activities
(Increase) decrease in other assets (1,115) (180) (17)
Equity in undistributed net income of subsidiary (3,461) (2,970) (2,881)
-------- -------- --------
Net cash provided by operating activities $ 1,902 $ 1,452 $ 1,350
======== ======== ========
62
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
-------------------
2001 2000
------- --------
(In thousands)
Commitments to extend credit $78,139 $77,589
Standby letters of credit 376 179
------- -------
Total commitments and contingent liabilities $78,515 $77,768
======= =======
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, 2001 and 2000, and the assumptions and
components of net periodic pension cost for the two years in the period ended
December 31, 2001.
2001 2000
------- -------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 3,737 $ 3,580
Service cost 328 295
Interest cost 325 247
Actuarial loss 839 (238)
Benefits paid (656) (147)
------- -------
Benefit obligation at end of year 4,573 3,737
------- -------
Change in plan assets
Fair value of plan assets at beginning of year 2,938 3,139
Actual return on plan assets (256) (54)
Employer contribution 316 0
Benefits paid (656) (147)
------- -------
Fair value of plan assets at end of year 2,341 2,938
------- -------
Plan assets less than projected benefit obligation (2,232) (799)
Funded status
Unrecognized net actuarial (gain) loss 1,525 160
Unrecognized prior service charge 87 100
------- -------
Pension liability $ (620) $ (539)
======= =======
63
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
2001 2000
------- -------
Weighted-average assumptions
Discount rate 7.25% 7.50%
Expected return on plan assets 9.00% 8.00%
Rate of compensation increase 5.00% 5.00%
Components of net periodic pension cost
Service cost $ 328 $ 295
Interest cost 324 246
Expected return on plan assets (294) (251)
Amortization of prior service cost 39 13
------- -------
Net periodic pension cost $ 397 $ 303
======= =======
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 $232,000 for 2001, $205,000
for 2000, and $229,000 for 1999.
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 $130,000, $117,000, and $171,000 for 2001, 2000 and 1999,
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, 2001 and 2000.
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, 2001, the Subsidiary Bank had
undivided profits of approximately $30.4 million.
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.
64
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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, 2001, 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 Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In thousands, except for percentages)
December 31, 2001
Total Capital (To Risk Weighted Assets)
Consolidated $67,468 12.8% 42,058 8.0% $ N/A
Subsidiary Bank 65,221 12.4 41,944 8.0 52,430 10.0%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 60,888 11.6 21,029 4.0 N/A
Subsidiary Bank 58,658 11.2 20,972 4.0 31,458 6.0
Tier 1 Capital (To Average Assets)
Consolidated 60,888 8.6 28,205 4.0 N/A
Subsidiary Bank 58,658 8.3 28,155 4.0 35,256 5.0
December 31, 2000
Total Capital (To Risk Weighted Assets)
Consolidated $62,028 12.5% $39,609 8.0% $ N/A
Subsidiary Bank 61,319 12.4 39,586 8.0 49,483 10.0%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 55,841 11.3 19,805 4.0 N/A
Subsidiary Bank 55,132 11.1 19,793 4.0 29,690 6.0
Tier 1 Capital (To Average Assets)
Consolidated 55,841 8.2 27,215 4.0 N/A
Subsidiary Bank 55,132 8.1 27,203 4.0 34,004 5.0
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.
65
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------
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 at December 31 are
as follows:
2001 2000
--------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 23,673 $ 23,673 $ 15,952 $ 15,952
Investment securities
Available for sale 123,597 123,597 145,738 145,738
Other equity securities 3,967 3,967 3,967 3,967
Loans held for sale 1,052 1,052 712 712
Loans 534,293 536,291 499,925 495,003
Financial liabilities:
Deposits 586,760 598,187 569,451 572,423
Federal funds purchased and retail repurchase
agreements 19,677 19,677 12,537 12,537
Other borrowings 30,000 29,587 41,000 40,997
66
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.
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 16, 2002.
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 16, 2002.
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 16, 2021.
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 16, 2002.
67
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.................................. 41
Consolidated Balance Sheets as of December 31, 2001 and 2000....... 43
Consolidated Statements of Income and Comprehensive Income for
the years ended December 31, 2001, 2000 and 1999................... 44
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2001, 2000 and 1999................... 45
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.................................. 46
Notes to Consolidated Financial Statements......................... 47-67
(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 the Registrant effective
January 1, 1994.
10.08 (8) Annual Management Incentive Plan of the Registrant.
10.09 (8) Long Term Incentive Plan of the 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 the
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 the Registrant and
Landmark Commercial, Inc., relating to the Wilmington branch
office.
10.16 (2) Amendment to Benefit Equivalency Plan of the Registrant
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 the Registrant and Black
Savings Bank, FSB.
68
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.
Note: The exhibits listed above have been filed with the Securities and Exchange
Commission but are not included in this printed copy of the Company's Annual
Report on Form 10-K.
Exhibit references:
(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.
None.
69
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.
70
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 21, 2002 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 21, 2002
- -------------------------- (Principal Executive Officer)
Ernest J. Sewell
/s/ Michael W. Shelton Vice President and Chief Financial Officer March 21, 2002
- -------------------------- (Principal Financial and Accounting Officer)
Michael W. Shelton
/s/ Barry Z. Dodson Chairman of the Board March 21, 2002
- --------------------------
Barry Z. Dodson
/s/ Gary G. Blosser Director March 21, 2002
- --------------------------
Gary G. Blosser
/s/ Charles A. Britt Director March 21, 2002
- --------------------------
Charles A. Britt
/s/ O. Eddie Green Director March 21, 2002
- --------------------------
O. Eddie Green
/s/ Joseph H. Kinnarney Director March 21, 2002
- --------------------------
Joseph H. Kinnarney
/s/ E. Reid Teague Director March 21, 2002
- --------------------------
E. Reid Teague
/s/ Elton H. Trent, Jr. Director March 21, 2002
- --------------------------
Elton H. Trent, Jr.
/s/ Kenan C. Wright Director March 21, 2002
- --------------------------
Kenan C. Wright
71
Exhibit Index
Exhibit Description
- ------- -----------
11.0 Statement Regarding Computation of Per Share Earnings
12.0 Statement Regarding Computation of Ratios
21.01 Schedule of Subsidiaries
23.01 Consent of PricewaterhouseCoopers LLP
72