SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Commission File Number: 0-13086
FNB FINANCIAL SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)
North Carolina 56 - 1382275
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 South Main Street, Reidsville, North Carolina 27320
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(Address of principal executive offices) (Zip Code)
(336) 342-3346
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former fiscal years,
if changed since last report)
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 [ ]
4,483,704 common shares were outstanding as of October 31, 2002, with a par
value per share of $1.00.
FNB FINANCIAL SERVICES CORPORATION
FORM 10-Q
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 1
Consolidated Statements of Income and Comprehensive Income Three
months and nine months ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001 3 - 4
Notes to Consolidated Financial Statements 5 - 9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10 - 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 Controls and Procedures 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8 - K 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands except par value)
September 30, December 31,
2002 2001
(Unaudited) (Audited)
----------- ---------
ASSETS
Cash and due from banks $ 26,781 $ 23,673
Investment securities:
Securities available for sale 118,350 123,597
Federal Home Loan Bank and Federal Reserve Bank Stock 4,007 3,967
Loans, net of allowance for credit losses of $7,138 at
September 30, 2002 and $6,731 at December 31, 2001 547,038 528,614
Premises and equipment, net 10,891 11,381
Accrued income and other assets 13,341 13,593
-------- --------
Total assets $720,408 $704,825
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 56,573 $ 58,831
Interest bearing 534,959 527,929
-------- --------
Total deposits 591,532 586,760
Federal funds purchased and retail repurchase agreements 7,926 19,677
Other borrowings 52,500 30,000
Accrued expenses and other liabilities 5,093 5,680
-------- --------
Total liabilities 657,051 642,117
-------- --------
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 4,486,021 at September 30, 2002 and
4,568,907 at December 31, 2001 4,486 4,569
Paid-in capital 24,266 26,465
Retained earnings 33,113 30,178
Accumulated other comprehensive income 1,492 1,496
-------- --------
Total shareholders' equity 63,357 62,708
-------- --------
Total liabilities and shareholders' equity $720,408 $704,825
======== ========
See notes to unaudited consolidated financial statements.
1
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans $ 9,416 $ 10,638 $ 27,658 $ 33,529
Federal funds sold and overnight deposits 107 111 150 280
Investment securities
Taxable 1,235 2,119 3,987 6,135
Tax exempt 50 194 243 580
Other 58 71 177 231
----------- ----------- ----------- -----------
Total interest income 10,866 13,133 32,215 40,755
----------- ----------- ----------- -----------
Interest expense
Deposits 4,437 7,232 13,578 22,366
Federal funds purchased and other borrowings 431 496 1,103 1,929
----------- ----------- ----------- -----------
Total interest expense 4,868 7,728 14,681 24,295
----------- ----------- ----------- -----------
Net interest income 5,998 5,405 17,534 16,460
Provision for credit losses 250 315 1,215 798
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 5,748 5,090 16,319 15,662
Other income
Service charges on deposit accounts 783 516 2,028 1,609
Net gain on sale of securities -- 298 318 457
Net gain on disposition of asset -- -- 104 --
Income from investment services 51 62 197 136
Mortgage banking fees 318 12 760 60
Other income 101 188 323 343
----------- ----------- ----------- -----------
Total other income 1,253 1,076 3,730 2,605
Other expenses
Salaries and employee benefits 2,437 2,316 7,373 7,028
Occupancy expense 291 264 820 770
Furniture and equipment expense 458 470 1,437 1,439
Insurance expense, including FDIC assessment 55 46 152 131
Marketing expense 80 75 199 185
Printing and supply expense 100 108 329 281
Other expenses 617 692 2,635 1,996
----------- ----------- ----------- -----------
Total other expenses 4,038 3,971 12,945 11,830
Income before income taxes 2,963 2,195 7,104 6,437
Income tax expense 1,032 664 2,386 1,883
----------- ----------- ----------- -----------
Net income 1,931 1,531 4,718 4,554
Other comprehensive income (loss) 83 1,746 (4) 2,975
----------- ----------- ----------- -----------
Comprehensive income $ 2,014 $ 3,277 $4,714 $ 7,529
=========== =========== ====== ===========
Per share data
Net income, basic $ 0.43 $ 0.34 $ 1.03 $ 1.01
Net income, diluted $ 0.42 $ 0.33 $ 1.01 $ 0.99
Cash dividends $ 0.13 $ 0.13 $ 0.39 $ 0.38
Weighted average shares outstanding, basic 4,549,869 4,544,457 4,587,011 4,516,280
Weighted average shares outstanding, diluted 4,658,277 4,634,312 4,682,293 4,583,446
See notes to unaudited consolidated financial statements.
2
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Nine Months Ended
September 30,
------------------
2002 2001
---- ----
Cash flows from operating activities:
Interest received $ 32,645 $ 40,852
Fees and commissions received 3,658 3,203
Interest paid (14,914) (25,323)
Noninterest expense paid (12,369) (10,498)
Income taxes paid (2,752) (1,951)
Funding of loans held for sale (18,824) (12,363)
Proceeds from sales of loans held for sale 18,964 12,541
--------- ---------
Net cash provided by operating activities 6,408 6,461
--------- ---------
Cash flows from investing activities:
Proceeds from sales or calls of securities available for sale 55,318 119,414
Proceeds from maturities of securities available for sale -- 20,500
Purchase of securities (49,587) (147,718)
Capital expenditures (369) (612)
(Increase) decrease in other real estate owned (1,319) 307
(Increase) decrease in loans (18,831) (23,494)
--------- ---------
Net cash used in investing activities (14,788) (31,603)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in demand, savings and interest
checking accounts (1,749) 12,187
Increase in time deposits 6,521 20,795
Increase (decrease) in federal funds purchased and
retail repurchase agreements (11,751) 3,165
Increase (decrease) in other borrowings 22,500 (4,000)
Proceeds from issuance of common stock 1,200 690
Repurchase of common stock (3,450) --
Dividends paid (1,783) (1,733)
--------- ---------
Net cash provided by financing activities 11,488 31,104
--------- ---------
Net increase in cash and cash equivalents 3,108 5,962
Cash and cash equivalents, January 1 23,673 15,952
--------- ---------
Cash and cash equivalents, September 30 $ 26,781 $ 21,914
========= =========
Supplemental disclosure of non-cash transactions:
Non-cash transfers from loans to other real estate $ 1,526 $ 1,647
========= =========
See notes to unaudited consolidated financial statements.
3
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Reconciliation of net income to net cash provided by operating activities:
Nine Months Ended
September 30,
------------------
2002 2001
---- ----
Net income $ 4,718 $ 4,554
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 1,215 798
Depreciation 961 1,114
Accretion and amortization 131 353
(Gain) loss on sale of securities available for sale (318) (457)
Funding of loans held for sale (18,824) (12,363)
Proceeds from sales of loans held for sale 18,964 12,541
(Gain) loss on other assets (104) (13)
(Increase) decrease in accrued income and other assets 252 23
Increase (decrease) in accrued expenses and other liabilities (587) (89)
-------- --------
Net cash provided by operating activities $ 6,408 $ 6,461
======== ========
See notes to unaudited consolidated financial statements.
4
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, these statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month
period ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
2. Nature of Operations
FNB Financial Services Corporation (the "Company") is a North Carolina
financial holding company. The Company's wholly owned subsidiary, FNB
Southeast (the "Bank"), is a North Carolina chartered commercial bank. FNB
Southeast operates two wholly owned subsidiaries, FNB Southeast Investment
Services, Inc. and FNB Southeast Mortgage Corporation.
As of September 30, 2002, FNB Southeast operated thirteen banking
offices in North Carolina and four banking offices in Virginia. The Company
and the Bank are headquartered in Reidsville, North Carolina.
3. Comprehensive Income
The Company's other comprehensive income for the three and nine month
periods ended September 30, 2002 and 2001 consists of unrealized gains and
losses on available for sale securities, net of related income taxes, as
follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Unrealized gains (losses) on
available for sale securities $ 135 $ 2,863 $ 311 $ 4,878
Reclassification of realized gains -- (298) (318) (457)
Income tax effect (52) (819) 3 (1,446)
------- ------- ------- -------
Other comprehensive income (loss) $ 83 $ 1,746 $ (4) $ 2,975
======= ======= ======= =======
5
4. Segment Information
The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of
financial information to be disclosed in both annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
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 financial services to the customers of its wholly owned subsidiary,
FNB Southeast. The various products offered by FNB Southeast 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
performance of banking offices or products.
5. Net Income Per Share
Basic and diluted earnings per share amounts have been computed based
upon net income as presented in the accompanying income statements divided
by the weighted average number of common shares outstanding or assumed to
be outstanding as summarized.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average number of shares
used in basic EPS 4,549,869 4,544,457 4,587,011 4,516,280
Effect of dilutive stock options 108,408 89,855 95,282 67,166
--------- --------- --------- ---------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 4,658,277 4,634,312 4,682,293 4,583,446
========= ========= ========= =========
As of September 30, 2002, there were 179,416 potentially dilutive share
options not included in the weighted average calculation since the option
exercise prices are greater than the fair market value of the common shares.
6
6. Investment Securities Available for Sale
September 30, 2002 December 31, 2001
--------------------- ---------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------- ---------------------
U.S. Agency securities $ 90,807 $ 92,453 $104,039 $106,032
Mortgage backed securities 20,361 20,744 8,477 8,628
State and municipal obligations 4,431 4,834 8,325 8,628
Other 306 319 304 309
-------- -------- -------- --------
Total available for sale $115,905 $118,350 $121,145 $123,597
======== ======== ======== ========
7. Loans (net of unearned income)
(Dollars in thousands) September 30, December 31,
2001 2002
---- ----
Loan Category:
Real estate - commercial $174,915 $168,419
Real estate - residential 120,022 129,212
Real estate - construction 82,061 55,861
Commercial, financial and agricultural 80,745 90,858
Consumer 95,521 89,943
-------- --------
Subtotal loans 553,264
534,293
Loans held for sale 912 1,052
-------- --------
Gross loans $554,176 $535,345
======== ========
7
8. Allowance for Credit Losses
September 30, 2002 December 31, 2001
------------------ -----------------
% of Loans % of Loans
(Dollars in thousands) in Each in Each
Category Category to
Allowance to Total Loans Allowance Total Loans
--------- -------------- --------- -----------
Balance at end of period applicable to:
Real estate - construction 10 15 $ 18 10
Real estate - mortgage 156 22 104
56
Commercial 5,066 46 4,773
17
Consumer 1,906 17 1,836
17
------ ------ ------ ------
Total $7,138 100% $6,731 100%
====== ====== ====== ======
9. Analysis of Allowance for Credit Losses
Nine Months Ended
September 30,
---------------------
(Dollars in thousands) 2002 2001
---- ----
Balance, beginning of period $ 6,731 $ 6,311
Charge-offs 1,080 661
Recoveries (272) (112)
------- -------
Net charge-offs 808 549
------- -------
Allowance charged to operations 1,215 798
------- -------
Balance, end of period $ 7,138 $ 6,560
======= =======
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.20% 0.14%
======= =======
Ratio of allowance for credit losses to
month end loans 1.29% 1.26%
======= =======
8
10.
Nonperforming Assets
September 30, December 31,
(Dollars in thousands) 2001 2002
---- ----
Nonaccrual (1) $2,566 $ 2,260
Past due 90 days or more and still accruing interest 9 6
Other real estate 2,500 2,707
(1) Other than amounts listed above, there are no other loans which: (a)
represent or result from trends or uncertainties which management
reasonably expects will materially affect future operating results,
liquidity, or capital resources, or (b) represent material credits about
which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with the
loan repayment terms.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information set forth below 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 to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that 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.
Summary
Assets at September 30, 2002 were $720.4 million, an increase of $15.6
million since December 31, 2001. The increase in assets was primarily due to an
increase in the Company's net loan portfolio. In the first nine months of 2002,
deposits have increased $4.7 million and other borrowings have increased $22.5
million.
Net income for the quarter ended September 30, 2002 of $1.9 million was
$400,000, or 26.1% higher than the amount earned in the third quarter last year.
Diluted earnings per share for the current quarter were $0.42 per share compared
to $0.33 per share for the third quarter last year. For the nine months to date,
earnings of $4.7 million were higher than the same period last year by $164,000,
or 3.6%, and diluted earnings per share totaled $1.01 compared to $0.99 in the
same period last year.
Interest Income and Interest Expense
Third quarter total interest income was $10.9 million, a decrease of 17.3%
over the same quarter last year. Average earning assets for the quarter were
$677.8 million, compared to $698.4 million for the year ago period. Interest
income from loans was $9.4 million, down 11.5% from $10.6 million in the third
quarter of 2001. The decrease in interest income was driven primarily by a
dramatic decline in the prime lending rate. Average loans of $553.8 million were
7.2% higher than the $516.7 million last year. For the third quarter, the
average yield on loans was 6.74% compared to 8.17% in 2001. For the nine months
ended on September 30, 2002, total interest income was $32.2 million, down 21.0%
from $40.8 million in the same period in 2001, on a 3.3% decrease in average
earning assets.
Interest income on investments totaled $1.3 million for the current
quarter, down 43.7% from $2.4 million for the year ago quarter. The change was
primarily attributable to a 41.4% decrease in the average balance of the
investment portfolio from $169.7 million in the third quarter of 2001 to $99.3
million in the third quarter of 2002. Due to calls and sales of securities
within the portfolio over the last year, interest income on taxable investment
securities decreased $884,000, while interest income on tax exempt securities
decreased $144,000. Investment income for the nine month period decreased from
$6.9 million in 2001 to $4.4 million in 2002 for the same reasons.
Third quarter total interest expense was $4.9 million compared to $7.7
million for the third quarter of last year, a 37.0% decrease. Average interest
bearing liabilities for the third quarter 2002 decreased 4.5% to $579.6 million
from $607.2 million for the third quarter of 2001. Overall cost of funds for the
second quarter was 3.33% and 5.05% in 2002 and 2001, respectively. Total
interest expense for the first nine months of 2002 was $14.7 million, a 39.6%
decrease from the $24.3 million expense for the first nine months of 2001.
10
Interest expense on deposits for the third quarter decreased 38.7% to $4.4
million as average interest bearing deposits for the quarter decreased 8.7% to
$516.2 million from $565.4 million in 2001. The Company elected to fund a
managed decrease in relatively high cost deposits with proceeds from called or
sold investment securities rather than reinvesting in securities near the
perceived bottom of the interest rate cycle. The average rate for the quarter on
interest bearing deposits decreased to 3.41% from 5.07% one year earlier.
Deposit interest expense for the nine months ended September 30, 2002, decreased
from $22.4 million in 2001 to $13.6 million in 2002.
Interest expense on federal funds purchased and other borrowings was
$431,000 for the quarter ended September 30, 2002, down 13.1% from $496,000 in
the third quarter of 2001. The decrease was primarily attributable to a decline
in the average rate paid on purchased funds to 2.69% in the third quarter of
2002 compared to 4.72% in the third quarter of 2001. For the nine months ended
June 30, 2002 interest expense for this category was $1.1 million, down from
$1.9 million in 2001 to $1.1 million in 2002.
Comparable net interest margins are as follows:
Liability
Time Period Asset Yield Rate Interest Rate Spread
- ----------- ----------- ---- --------------------
Third Quarter, 2002 6.38% - 3.33% = 3.05%
Third Quarter, 2001 7.52% - 5.05% = 2.47%
Year-To-Date, 2002 6.56% - 3.49% = 3.07%
Year-To-Date, 2001 8.05% - 5.46% = 2.59%
Noninterest Income and Expense
Noninterest income in the third quarter of this year increased 16.5% to
$1.3 million from $1.1 million in the same period last year. For the current
quarter, there were no net gains from sales of investment securities, compared
to $298,000 of net gains in the third quarter of last year. Deposit service
charges of $783,000 for the third quarter of 2002 increased 51.7% from the
$516,000 in the third quarter of 2001. This increase was due to the successful
implementation of a new service that allows customers to overdraw their demand
deposit accounts, on a temporary basis, in accordance with the terms of the
service. Noninterest income in the third quarter of 2002 included $318,000 in
mortgage banking fees and $51,000 in investment service fees compared to
revenues of $12,000 and $62,000, respectively, in such categories for the
previous year. The increase in mortgage banking fees for the nine months of 2002
was attributable to the operation and expansion of the mortgage banking
subsidiary established in June of 2001. Total noninterest income for the first
nine months of 2002 totaled $3.7 million, a 43.2% increase over the $2.6 million
earned in the first nine months of 2001. During the second quarter of 2002, the
Company recognized a gain of $94,000 on the sale of mortgage servicing rights.
Deposit service charges of $2.0 million for the nine months were 26.0% higher
than the $1.6 million recorded in the same period last year.
Noninterest expense for the third quarter of 2002 was $4.0 million, a 1.7%
increase over the $3.9 million expense in the third quarter of 2001. Compared to
the year ago quarter, salaries and employee benefits increased $121,000 due to
higher insurance and retirement costs; occupancy expense increased $27,000; and
furniture and equipment expense decreased $12,000. Other expense for the 2002
third quarter totaled $617,000, compared to $692,000 for the year ago quarter.
Other expense in the first nine months of 2002 totaled $2.6 million, an increase
from $2.0 million from the first nine months of 2001. This increase was largely
attributable to the write-off of $138,000 in the first quarter of 2002 of an
uncollectable receivable from a U.S. government agency that guaranteed a portion
of a charged-off loan, a
11
$60,000 expense in the second quarter to buy-out a third party service agreement
and a $80,000 writedown in the second quarter related to the disposal of fixed
assets. This year's nine-month noninterest expense of $12.9 million was 9.4%
higher than the $11.8 million in the same period last year.
The provision for credit losses in the third quarter of 2002 was $250,000
compared to $315,000 in 2001. The allowance for credit losses as a percentage of
gross loans outstanding was 1.29% at September 30, 2002, an increase from 1.26%
at September 30, 2001. For the 2002 nine months, the provision totaled $1.2
million, compared to $798,000 for the same period in 2001. The increase in the
provision for credit losses was attributable to increased annualized net credit
losses to average loans of 0.20% in the first nine months of 2002 compared to
annualized net credit losses of 0.14% in the first nine months of 2001.
The effective income tax rate of 33.6% for the nine months of 2002 was
higher than the 29.3% rate for the same quarter of 2001. In the second quarter
of 2002, the Company sold a portion of the tax-exempt investment portfolio and
the related tax-exempt income stream. This has the effect of increasing the
effective income tax rate.
Financial Condition
The Company's total assets at September 30, 2002 and 2001 were $720.4
million and $724.5 million, respectively, a year -to-year decline of 0.6%. The
$4.0 million decline represents a 0.6% decrease over one year earlier. Since
December 31, 2001, assets have increased $15.6 million. This increase in assets
was primarily due to an increase in the Company's net loan portfolio. Average
earning assets for the 2002 third quarter were $677.8 million, or 2.9% lower
than the $698.4 million average in the same quarter last year.
Loans at September 30, 2002 totaled $554.2 million compared to $522.6
million one year earlier, an increase of 6.0%. Loans have increased 3.5% from
$535.3 million at December 31, 2001. Average loans for the third quarter of 2002
were $553.9 million, or 7.2% higher than the $516.7 million average in the same
period one year ago.
Investment securities of $122.4 million at September 30, 2002 were 23.7%
lower than the $160.3 million recorded one year earlier. Average investment
securities were $99.3 million and $169.7 million for the third quarter of 2002
and 2001, respectively. The decrease in the investment portfolio was due to
continued calls by issuers of various securities.
Deposits totaled $591.5 million at September 30, 2002, a 1.8% decrease
compared to $602.4 million one year ago, and a 0.8% increase from the $586.8
million recorded at December 31, 2001. At the end of the third quarter 2002,
noninterest bearing deposits were $56.6 million, or 9.6% of total deposits.
During the third quarter of 2002, the Company increased deposits by $53.2
million. This increase was primarily achieved through growth in short-term
certificates of deposits generated in local markets. Proceeds from this
initiative was used to payoff $9.0 million in outstanding Federal funds
purchased and fund the $1.9 million outflow of retail repurchase agreements at
June 30, 2002.
At September 30, 2002, borrowings from the Federal Home Loan Bank of
Atlanta (FHLB) totaled $52.5 million, an increase of 75.0% compared to $30.0 in
FHLB borrowings million at December 31, 2001. The increase in borrowings was due
to favorable funding rates and terms available at the FHLB at the time.
Shareholders' equity increased to $63.4 million at the end of the third
quarter 2002, compared to $62.7 million at December 31, 2001. The Company paid
dividends of $0.13 per share during the quarter ended September 30, 2002, the
same rate as the third quarter of 2001. Year to date dividends per share for
2002 were $0.39 compared to $0.38 in 2001. A stock repurchase program of up to
5% of the outstanding common stock was announced during the second quarter of
this year. This program is intended to help the Company achieve its goal of
building shareholder value while maintaining appropriate capital levels. Through
September 30, 2002, a total of 205,700 shares have been purchased. In accordance
with North Carolina state law, repurchased shares are cancelled and are no
longer considered issued.
12
Asset Quality
The credit loss allowance ratio at September 30, 2002 was 1.29% compared to
1.26% at December 31, 2001 and 1.26% at September 30, 2001. For the third
quarter of 2002, provision charges against earnings totaled $250,000 compared to
$315,000 in the third quarter one year earlier. Net charge-offs for the 2002
third quarter totaled $20,000, or a 0.01% annualized loss ratio based on average
loans outstanding. This compares to net charge-offs of $252,000, or 0.20%
annualized loss ratio for the 2001 third quarter. During the third quarter of
2002, the Company received recoveries totaling approximately $180,000 on two
credit relationships that had been charged-off in previous years. Annualized net
charge-offs for the first nine months of 2002 and 2001 were 0.20% and 0.14%,
respectively, based on average loans outstanding.
The Company's allowance for credit losses is analyzed quarterly by
management. This analysis includes a methodology that segments the loan
portfolio by selected types and considers the current status of the portfolio,
historical charge-off experience, current levels of delinquent, impaired and
non-performing loans, as well as economic and other risk factors. It is also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology employed and other analytical
measures in comparison to a group of peer banks. Management believes the
allowance for loan losses is sufficient to absorb known risk in the portfolio.
No assurances can be given that future economic conditions will not adversely
affect borrowers and result in increased losses.
Other real estate owned decreased to $2.5 million at September 30, 2002,
compared to $2.7 million at December 31, 2001. Approximately $1.5 million has
been transferred from loans into other real estate and approximately $1.8
million of such assets were disposed of during the first nine months of 2002.
The Company has not incurred a net loss on disposition of other real estate in
the current year.
Capital Resources
Banks and financial holding companies, as regulated institutions, must meet
required levels of capital. The North Carolina Commissioner of Banks and the
Board of Governors of the Federal Reserve, which are the primary regulatory
agencies for FNB Southeast and the Company, respectively, have 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 their assets in accordance with the guidelines.
As shown in the table below, the Company and its wholly-owned banking
subsidiary have capital levels exceeding the minimum levels for "well
capitalized" banks and financial holding companies as of September 30, 2002.
Regulatory Guidelines
---------------------------------
Well Adequately FNB
Ratio Capitalized Capitalized Company Southeast
----------- ----------- ------- ---------
Total Capital 10.0% 8.0% 12.5% 12.3%
Tier 1 Capital 6.0 4.0 11.2 11.1
Leverage Capital 5.0 4.0 8.7 8.6
13
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS 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 provides 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. 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. The
provisions of both Statements have been adopted. The implementation did not have
a material effect on the Company's financial statements.
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). The provision of the Statement has been adopted. The implementation
did not have a material effect on the Company's financial statements.
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. The provision of
the Statement has been adopted. The implementation did not have a material
effect on the Company's financial statements.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002." This Statement rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, No. 64,
"Extinguishments of Debt to Satisfy Sinking-Fund Requirements." This Statement
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
and amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that
14
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. Management does not anticipate implementation of this
Statement will have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance set forth in Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The scope of SFAS 146 includes (1) costs related to terminating
a contract that is not a capital lease (2) termination benefits received by
employees who are involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract and (3) costs to consolidate facilities or
relocate employees. SFAS 146 will be effective for exit or disposal activities
that are initiated after December 31, 2002. At the present time, the adoption of
this standard is not expected to have a material impact on the Company's
financial position or results of operations.
The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions, an amendment of SFAS 72 and SFAS 144 and FASB Interpretation No.
9". SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and
17 When a Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method," provided
interpretive guidance on the application of the purchase method to acquisitions
of financial institutions. Except for transactions between two or more mutual
enterprises, SFAS 147 removes acquisitions of financial institutions from the
scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with SFAS 141, "Business
Combinations," and SFAS 142, "Goodwill and Other Intangible Assets." Thus, the
requirement in paragraph 5 of SFAS 72 to recognize (and subsequently amortize)
any excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an unidentifiable
intangible asset no longer applies to acquisitions within the scope of SFAS 147.
In addition, SFAS 147 amends SAFS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS 144 requires for other long-lived assets that
are held and used. Paragraph 5 of SFAS 147, which relates to the application of
the purchase method of accounting, is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The provisions in paragraph
6 related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted. Management does not anticipate the implementation of this statement
to have a material impact on the Company's consolidated financial position or
consolidated results of operations.
15
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.
During the first nine months of 2002 the Company had net cash provided by
operating activities of $6.4 million compared to $6.5 million of net cash
provided by operating activities in the nine months of 2001.
Net cash used by investing activities in the first nine months totaled
$14.8 million primarily based on the purchase of $49.6 million in investment
securities. This compares to the first nine months of 2001 when purchases of
$147.7 million in investment securities resulted in net cash used in investing
activities of $31.6 million. An increase in loans outstanding used $18.8 million
in cash during 2002, compared to an increase in outstanding loans in 2001 that
used $23.5 million of cash during the same period in 2001.
Financing activities in the first nine months of 2002 provided $11.5
million, based primarily on a $22.5 million increase in other borrowings and
$11.8 million used for the repayment of federal funds purchased and repurchase
agreements. During the first nine months of 2001, financing activities provided
$31.1 million. Time deposits provided $20.8 million of cash, while repayment of
other borrowing used $4.0 million of cash during the first nine months of 2001.
During the second and third quarter of 2002, the Company used $3.5 million to
repurchase 205,700 of 232,377 total shares authorized to be repurchased in
accordance with the share repurchase program approved by the Board in the second
quarter of 2002.
Overall cash and cash equivalents totaled $26.8 million at September 30,
2002 compared to $23.7 million at December 31, 2001 and $21.9 million at
September 30, 2001.
Liquidity is further enhanced by an approximately $115 million line of
credit with the FHLB collateralized by FHLB stock, investment securities and
qualifying 1 to 4 family residential mortgage loans, and qualifying commercial
real estate 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 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.
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 impacted by inflation.
16
Item 3. 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.
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 monitoring of interest
rate risk is 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. The Committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established policies.
The Company has not experienced any substantive changes in portfolio risk
during the nine months ended September 30, 2002.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Offider have reviewed
and evaluated the Company's disclosure controls and procedures within 90 days of
the filing of this report in accordance with Rule 13a-14 under the Exchange Act.
Based on their evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were adequate and effective to ensure that information required to be disclosed
is gathered, processed and reported in a timely manner.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the Chief Executive Officer and Chief Financial Officer's evaluation, nor were
there any significant deficiencies or material weaknesses in the controls which
require corrective action.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
17
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit No. Description
----------- -----------
3.01 Amended and Restated Articles of Incorporation.
3.02 Bylaws of Company, as amended.
4.01 Specimen Common Stock Certificate.
10.01 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 Omnibus Equity Compensation Plan of the Registrant.
10.03 Severance Policy for Senior Officers of the Registrant
(employed for five years or more).
10.04 Revised Severance Plan for Senior Officers of the Registrant
(employed for five years or more).
10.05 Severance Policy for Senior Officers of the Registrant
(employed for less than five years).
10.07 Benefit Equivalency Plan of the Registrant effective January
1, 1994.
10.08 Annual Management Incentive Plan of the Registrant.
10.09 Long Term Incentive Plan of the Registrant.
10.10 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 Split-Dollar Agreement dated January 27, 1995, between the
Registrant and Ernest J. Sewell.
10.13 Split-Dollar Agreement dated January 27, 1995, between the
Registrant and C. Melvin Gantt.
10.14 Split-Dollar Agreement dated December 8, 1995, between the
Registrant and Richard L. Powell.
10.15 Lease, dated January 31, 1997, between the Registrant and
Landmark Commercial, Inc., relating to the Wilmington branch
office.
10.16 Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
Incorporated by reference from Annual Report on Form 10-K.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on September 30,
2002, to announce plans to purchase the Harrisonburg, Virginia branch
of Guaranty Bank, a subsidiary of Guaranty Financial Corporation. The
transaction is subject to regulatory approval.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FNB FINANCIAL SERVICES CORPORATION
(Registrant)
November 13, 2002 /s/ Michael W. Shelton
-----------------------------------------------
Michael W. Shelton
(Vice President, Secretary and Treasurer)
19
CERTIFICATIONS
--------------
I, Ernest J. Sewell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FNB Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3 Base on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls;
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Ernest J. Sewell
---------------------------------------
Ernest J. Sewell
President and Chief Executive Officer
CERTIFICATIONS
--------------
I, Michael W. Shelton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FNB Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3 Base on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls;
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Michael W. Shelton
-------------------------------------------
Michael W. Shelton
Vice President, Secretary, Treasurer
and Chief Financial Officer