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VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549
RE: FNB Financial Services Corporation (the "Company") Annual Report on Form
10-K for the Fiscal Year Ended December 31, 2002
Ladies and Gentlemen:
On behalf of FNB Financial Services Corporation, enclosed for filing is the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002. The financial statements contained in the enclosed report do not reflect a
change from the previous year in any accounting principles or practices, or in
the method of applying any such principles or practices.
Please call Michael W. Shelton, the Company's Chief Financial Officer at (336)
634-4775 if you have any questions or if you require additional information.
Sincerely,
/s/Michael W. Shelton
- ---------------------
Michael W. Shelton
FNB Financial Services Corporation
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, 2002
|_| 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 19,
2003, 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 $73.7 million.
As of March 19, 2003 (the most recent practicable date), the registrant
had outstanding 4,432,237 shares of Common Stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
- -------- ------------------
1. Proxy Statement for the Annual Meeting of Part III
Shareholders to be held May 15, 2003 to be
mailed to shareholders within 120 days of
December 31, 2002.
FNB Financial Services Corporation
Form 10-K
Table of Contents
Index Page
- ----- ----
PART I
Item 1. Business .................................................................. 1
Item 2. Properties ................................................................ 16
Item 3. Legal ..................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ....................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 18
Item 6. Selected Financial Data ................................................... 19
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations ..................... 20
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 ............................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant ........................ 66
Item 11. Executive Compensation .................................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 66
Item 13. Certain Relationships and Related Transactions ............................ 66
Item 14. Controls and Procedures ................................................... 66
PART IV
Item 15. Exhibits, the Financial Statement Schedules, and Reports on Form 8-K ...... 68
Signatures ................................................................ 72
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer
PART I
Item 1. Business
General
FNB Financial Services Corporation (the "Company") is a North Carolina
financial holding company with consolidated assets of $734.0 million, deposits
of $605.0 million and shareholders' equity of $64.3 million, each as of December
31, 2002. 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 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 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 2002, 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.
The Bank 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 eight 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 senior executives; (c) completed the merger with
Black Diamond to extend the Company's reach into selected Virginia markets; (d)
completed a systematic review and revision of its loan administration, loan
policy and credit procedures; and (e) enhanced its mix of products and services
by forming investment services and mortgage banking subsidiaries.
1
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 and Virginia. On September 25, 2002, the Bank announced it had
entered into an agreement to acquire the Harrisonburg, Virginia branch of
Guaranty Bank. This purchase was completed on January 24, 2003. The Company
intends to hire additional qualified personnel to help manage its planned growth
and to develop new products that are consistent with the Company's customer
service orientation. The Company also plans, where appropriate, to continue 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 93-year history, the
Company's banking activities were centered near Reidsville, North Carolina, 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 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 acquired Black Diamond which had 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 primarily 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.
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) continue to upgrade, modify and expand its
internal systems, procedures, equipment and software to improve operating
efficiencies. The Company will continue to analyze technological developments in
the banking industry for opportunities to improve or augment its services and
products; however, management will continue to make every effort to maintain the
Company's personalized approach.
2
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 type 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 2002, the most recent date for
which data are available, was 27.2%, 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,
----------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Triad Region:
Reidsville (1) .......................... $226,819 $198,885 $219,474
Eden (2) ................................ 45,333 50,873 55,417
Madison ................................. 22,482 22,302 23,387
Ruffin .................................. 10,872 11,152 10,793
Greensboro (1) .......................... 77,548 72,749 57,109
-------- -------- --------
Subtotal ...................... 383,054 355,961 366,180
-------- -------- --------
Wilmington Region:
Wilmington (2) .......................... 55,259 52,489 47,051
Burgaw .................................. 25,247 26,496 21,125
-------- -------- --------
Subtotal ...................... 80,506 78,985 68,176
-------- -------- --------
Norton Region:
Norton .................................. 58,551 67,545 57,936
Pennington Gap .......................... 22,933 26,103 26,772
Richlands ............................... 22,174 26,203 26,258
-------- -------- --------
Subtotal ...................... 103,658 119,851 110,966
-------- -------- --------
Harrisonburg Region:
Harrisonburg (3) ........................ 37,787 31,963 24,129
-------- -------- --------
Total deposits ................ $605,005 $586,760 $569,451
======== ======== ========
- ------------------------
(1) Includes three banking offices for all years.
(2) Includes two banking offices for all years.
(3) Includes one banking office for 2002 and 2001, and two offices for 2000.
The following is a summary description of the Company's market areas.
Triad Region - Rockingham County. Rockingham County 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 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
3
Employment Security Commission reported a December 2002 unemployment rate of
8.5% 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 approximately 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 5.8% for
December 2002, compared to a statewide unemployment rate of 6.1%.
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
area has experienced extensive industrial development and service/trade sector
growth over the past twenty years. Industries in the 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 2002 unemployment rate of 5.8% for New Hanover
County.
Norton Region. Norton is located in southwestern Virginia in the midst of
the Appalachian Mountains. The mining, retail and service industries of this
region operate from an abundant natural resource base that includes natural gas,
coal, timber and mineral deposits. The area is served by several U.S. Highways
and by major rail connections. The Bank operates branches in Norton (Wise
County), Pennington Gap (Lee County) and Richlands (Tazewell County). For
December 2002, the Virginia Employment Commission reported the unemployment rate
in Wise County was 5.5%.
Harrisonburg Region. Rockingham County, Virginia 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. The Bank operates one branch in
Harrisonburg, serving the counties of Rockingham and Augusta. The Bank has added
a second branch in this market with the completion of the branch purchase from
Guaranty Bank on January 24, 2003. According to the Virginia Employment
Commission, the December 2002 unemployment rate for Harrisonburg was 1.3%
compared to a statewide unemployment rate of 3.6%.
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, 2002, were $563.6 million, or
76.8% of total 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, 2002, the Company had no large
loan concentrations (exceeding ten percent of its portfolio) in any particular
industry.
4
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,
------------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Real estate:
Commercial $170,657 30.3% $168,419 31.5% $119,584 23.9%
Residential 119,316 21.2 130,264 24.4 150,825 30.1
Construction 87,696 15.6 55,861 10.4 66,148 13.2
-------- ----- -------- ----- -------- -----
Total real estate 377,669 67.1% 354,544 66.3% 336,557 67.2%
Commercial, financial and
agricultural 87,458 15.5% 90,858 17.0% 74,981 15.0%
-------- ----- -------- ----- -------- -----
Consumer:
Direct 34,074 6.0% 37,112 6.9% 46,463 9.3%
Home equity 54,073 9.6 46,169 8.6 39,204 7.8
Revolving 10,326 1.8 6,662 1.2 3,432 0.7
-------- ----- -------- ----- -------- -----
Total consumer 98,473 17.4% 89,943 16.7% 89,099 17.8%
-------- ----- -------- ----- -------- -----
Total loans $563,600 100.0% $535,345 100.0% $500,637 100.0%
======== ===== ======== ===== ======== =====
Real Estate Loans. Loans secured by real estate for a variety of purposes
constituted $377.7 million or 67.1%, of the Company's total loans at December
31, 2002. These real estate loans are of various sizes ranging up to $6.8
million, and are 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
amounts to at least 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 recoveries on commercial real estate loans of $18,000 in 2002
and net charge-offs of $7,000 in 2001, and $346,000 in 2000.
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, 2002, it held $119.3 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 on residential real estate loans
of $43,000 in 2002, $36,000 in 2001, and $13,000 in 2000.
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 2002, 2001, and 2000, the Company earned loan
origination fees from these types loans of $746,000, $376,000, and $264,000,
respectively. At December 31, 2002, it held $3.2 million of such loans for sale,
and during 2002 it sold an aggregate of $28.0 million of such loans. The Company
sells these loans on a non-recourse basis.
5
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, 2002, 2001, and 2000, the
Company held $87.7 million, $55.9 million, and $66.1 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, although the Company occasionally will make a "mini-permanent" loan for
purposes of construction and development of up to a five year term. Rates are
typically variable, and the Company typically charges an origination fee. The
Company experienced no net charge-offs from construction and development loans
during 2002, 2001, or 2000.
Commercial Loans. The Company makes loans for commercial purposes to
various types of businesses. At December 31, 2002, the Company held $87.5
million of commercial loans, or 15.5% 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 from
commercial loans of $803,000 in 2002, $485,000 in 2001, and $62,000 in 2000.
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, 2002, the Company held $98.5 million of consumer loans,
including home equity lines of credit. During 2002, 2001, and 2000,
respectively, the Company experienced net consumer charge-offs of $133,000,
$336,000, and $258,000.
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 typically have
retail lending limits ranging from $75,000 to $250,000. Community executives can
generally approve commercial relationships up to $750,000. If the lending
request exceeds the community executive's lending limit, the loan must be
submitted to and approved by the senior credit officer. The senior credit
officer has authority to approve commercial relationships to $1,000,000. Under
joint approval, the senior credit officer and selected regional executives may
approve loans up to $1,750,000 million. All loans in excess of $1,750,000
million must be approved by the President and Chief Executive Officer, who may
approve loans up to $2,500,000.
The Company has a 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 $250,000 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 periodically
engages a third party consultant to review its loan portfolio. The Company has
used the findings of the previous examinations to further enhance credit quality
through improved credit administration policies and procedures.
6
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 of the Company in each such
category, is issused 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 4 in the Notes to Consolidated Financial Statements on page
55 of this Annual Report on Form 10-K.
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 federal agency and
municipal securities, mortgage-backed securities and other investment
securities.
See also Note 3 in the Notes to Consolidated Financial Statements on page
54 of this Annual Report on Form 10-K.
Deposits
The Company offers a variety of deposit products 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,
------------------------------
2002 2001 2000
------ ------ ------
Non-interest bearing demand ................ 10.2% 10.0% 9.6%
Savings, NOW, MMI .......................... 16.5 15.9 14.5
Certificates of deposit .................... 73.3 74.1 75.9
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
The Company accepts deposits at its 17 banking offices, 15 of which have
automated teller machines ("ATMs"). 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 competitive fees 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 deposit
relationships 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 in certain markets over the age of
55. At December 31, 2002, the Company had $257.4 million in certificates of
deposit of $100,000 or more. The Bank has 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 in-market deposit growth.
Management believes these deposits provide effective funding sources and serve
to broaden the
7
Company's funding base. The table below presents the scheduled
maturities of time deposits of $100,000 or more at December 31, 2002.
Scheduled maturity of time deposits of $100,000 or more Amount
------------------------------------------------------- -------------
(In thousands)
Less than three months ................................. $ 59,022
Three through six months ............................... 38,400
Seven through twelve months ............................ 102,248
Over twelve months ..................................... 57,727
--------
Total time deposits ............................... $257,397
========
See also Note 7 in the Notes to Consolidated Financial Statements on page
57 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 two investment advisors who split their time among the
Company's branches and are available to current customers and potential
customers of the Company. The advisors offer a complete line of investment
products and services. The Company receives a commission based on the advisors'
sales. The Company benefits by earning additional fee income and by attracting
additional people to its branches that may become customers of the Bank. The
subsidiary generated revenues of $308,000 in 2002, and $203,000 in 2001.
Mortgage Banking
In June 2001, the Company established FNB Southeast Mortgage Corporation
as a wholly-owned subsidiary of FNB Southeast. At inception, the new subsidiary
purchased selected assets of Airlie Mortgage Company, Inc., a successful
mortgage brokerage company operating three offices in the coastal area near
Wilmington, North Carolina. The Company expanded the subsidiary during 2002 by
hiring additional mortgage loan originators. As a result of this strategy, fee
income generated by the subsidiary increased to $1,144,000 in 2002 compared to
$144,000 in 2001.
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. The Company has a full
time marketing professional on staff and engages a marketing firm to assist with
creative design, research, public relations, media placement, etc. as well as
assisting with promoting the overall image of the Company to the general public
and investment community.
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.
8
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
mobile phones and other means.
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 local advisory
boards, comprised of 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 are used in
promoting its services. Management pursues 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 are used to announce new banking
services as they are added.
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
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 numerous 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 generally 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 2002, the Company
competed with 21 commercial banks and three savings institutions, as well as
numerous credit unions. For the same period, the Company competed with nine
commercial banks, two savings institution and several credit unions in the
Wilmington region of North Carolina. In the Norton region of Virginia as of June
2002, the Company competed with 19 commercial banks. For the same period, the
Company competed with 15 commercial banks in the Harrisonburg region of
Virginia.
Employees
On December 31, 2002, the Company had approximately 188 full-time and 10
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.
9
Supervision and Regulation
Bank 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, the
Bank and any subsidiaries. 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 the Bank. Supervision,
regulation and examination of the Company and the Bank by the regulatory
agencies are intended primarily for the protection of depositors rather than
shareholders of the Company. Statutes and regulations which contain wide-ranging
proposals for altering the structures, regulations and competitive relationship
of financial institutions are introduced regularly. The Company cannot predict
whether or in what form any proposed statute or regulation will be adopted or
the extent to which the business of the Company and the Bank may be affected by
such statute or regulation.
General. There are a number of obligations and restrictions imposed on
bank holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
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 may 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 bank's total assets at the time the bank became undercapitalized or (ii)
the amount which is necessary (or would have been necessary) to bring the bank
into compliance with all acceptable capital standards as of the time the bank
fails to comply with such capital restoration plan. The Company, as a registered
bank holding company, is subject to the regulation of the Federal Reserve. 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, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by its deposit insurance
funds 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 deposit insurance funds. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
As a result of the Company's ownership of the Bank, the Company is also
registered under the bank holding company laws of North Carolina. Accordingly,
the Company is also subject to regulation and supervision by the Commissioner.
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. 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 is 8%. At least half of the total capital is required to
be "Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of
10
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.
Capital Requirements for the Bank. 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 North Carolina chartered, FDIC-insured
commercial bank that is a member of the Federal Reserve System, the Bank is also
subject to 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.
The Bank exceeded all applicable capital requirements as of December 31, 2002.
Dividend and Repurchase Limitations. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any 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.
Although the payment of dividends and repurchase 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.
North Carolina commercial banks, such as the Bank, 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. Also, an insured depository
institution, such as the Bank, is prohibited from making capital distributions,
including the payment of dividends, if, after making such distribution, the
institution would become "undercapitalized" (as such term is defined in the
applicable law and regulations).
Deposit Insurance Assessments. The Bank is subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by members of the Bank Insurance Fund, such as the Bank, shall be as
specified in a schedule required to be issued by the FDIC. FDIC assessments for
deposit insurance range from 0 to 31 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
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, 2002, the Bank was in compliance with
this requirement.
11
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 July 2002.
Prompt Corrective Action. The FDIC 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 institution in question is "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, 2002, the Bank had the
requisite capital levels to qualify as "well capitalized".
Changes in Control. 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-disapproval) must be obtained prior to any
person acquiring control of the Company. Control is conclusively presumed to
exist if, among other things, a person acquires more than 25% of any class of
voting stock of the Company or controls in any manner the election of a majority
of the directors of the Company. Control is presumed to exist if a person
acquires more than 10% of any class of voting stock and the stock is registered
under Section 12 of the Securities Exchange Act of 1934 or the acquiror will be
the largest shareholder after the acquisition.
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934. 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.
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,
12
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.
Gramm-Leach-Bliley Act. Federal legislation adopted by Congress during
1999, the Gramm-Leach-Bliley Act (the "GLB Act"), has dramatically changed
various federal laws governing the banking, securities, and insurance
industries. The GLB Act has expanded opportunities for banks and bank holding
companies to provide services and engage in other revenue-generating activities
that previously were prohibited to them.
In general, the GLB Act (i) expands opportunities to affiliate with
securities firms and insurance companies; (ii) overrides certain state laws that
would prohibit certain banking and insurance affiliations; (iii) expands the
activities in which banks and bank holding companies may participate; (iv)
requires that banks and bank holding companies engage in some activities only
through affiliates owned or managed in accordance with certain requirements; (v)
reorganizes responsibility among various federal regulators for oversight of
certain securities activities conducted by banks and bank holding companies; and
(vi) requires banks to adopt and implement policies and procedures for the
protection of the financial privacy of their customers, including procedures
that allow customers to elect that certain financial information not to be
disclosed to certain persons.
The GLB Act has expanded opportunities for the Bank to provide other
services and obtain revenues in the future but, at present, it has not had a
significant effect on our respective operations as they are presently conducted.
However, this expanded authority also may present us with new challenges as we
compete with larger financial institutions that expand their services and
products into the same areas that are now feasible for smaller,
community-oriented financial institutions. The economic effects of the GLB Act
on the banking industry, and on competitive conditions in the financial services
industry generally, may be profound.
USA PATRIOT Act. In response to the events of September 11th, President
George W. Bush signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the
federal government new powers to address terrorist threats through many means,
including broadened anti-money laundering requirements. For example, by way of
amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act encourages
information sharing among banks, bank regulatory agencies, and law enforcement
bodies to prevent money laundering. Additionally, Title III of the USA PATRIOT
Act imposes several affirmative obligations on a broad range of financial
institutions, including banks, thrifts, brokers, dealers, credit unions, money
transfer agents, and parties registered under the Commodity Exchange Act.
13
Pursuant to Section 352 of the USA PATRIOT Act, all financial institutions
must establish anti-money laundering programs that include, at a minimum: (i)
internal policies, procedures, and controls, (ii) specific designation of an
anti-money laundering compliance officer, (iii) ongoing employee training
programs, and (iv) an independent audit function to test the anti-money
laundering program. Also, Section 326 of the Act requires certain minimum
standards with respect to customer identification and verification. Section 312
of the Act requires financial institutions that establish, maintain, administer,
or manage private banking accounts or correspondent accounts in the United
States for non-United States persons or their representatives (including foreign
individuals visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and controls
designed to detect and report money laundering. Furthermore, effective December
25, 2001, financial institutions were prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell banks
(foreign banks that do not have a physical presence in any country), and are
subject to certain recordkeeping obligations with respect to correspondent
accounts of foreign banks. Bank regulators are directed to consider institutions
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 was signed into law and became some of the most sweeping federal
legislation addressing accounting, corporate governance and disclosure issues.
The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public
companies and imposes significant new requirements for public company governance
and disclosure requirements. Some of the provisions of the Sarbanes-Oxley Act
became effective immediately while others will be implemented over the coming
months.
In general, the Sarbanes-Oxley Act mandates important new corporate
governance and financial reporting requirements intended to enhance the accuracy
and transparency of public companies' reported financial results. It establishes
new responsibilities for corporate chief executive officers, chief financial
officers and audit committees in the financial reporting process and creates a
new regulatory body to oversee auditors of public companies. It backs these
requirements with new SEC enforcement tools, increases criminal penalties for
federal mail, wire and securities fraud, and creates new criminal penalties for
document and record destruction in connection with federal investigations. It
also increases the opportunity for more private litigation by lengthening the
statute of limitations for securities fraud claims and providing new federal
corporate whistleblower protection.
The full impact of the Sarbanes-Oxley Act cannot be fully measured until
the SEC acts to implement the numerous provisions for which Congress has
delegated implementation authority. The economic and operational effects of this
new legislation on public companies, including the Bank, will be significant in
terms of the time, resources and costs associated with complying with the new
law. Because the Sarbanes-Oxley Act, for the most part, applies equally to
larger and smaller public companies, the Bank will be presented with additional
challenges as a smaller, community-oriented financial institution seeking to
compete with larger financial institutions in its market.
Other. Additional 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.
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.
14
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.
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.
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.
15
Item 2. Properties
The Company leases or owns 17 banking offices, as shown in the following
table:
Location Owned or Leased Deposits (1) ATM (2) Year Opened/Purchased
-------- --------------- ------------ ------- ---------------------
202 South Main Street
Reidsville, North Carolina Owned (3) $151,150 Yes 1910(4)
1646 Freeway Drive
Reidsville, North Carolina Owned 37,111 Yes 1972
202 Turner Drive
Reidsville, North Carolina Owned 38,558 Yes 1969
801 South Van Buren Road
Eden, North Carolina Owned 29,608 Yes 1996
151 North Fieldcrest Road
Eden, North Carolina Leased (expires 2008) 15,725 No 1996
605 North Highway Street
Madison, North Carolina Owned 22,482 Yes 1997
9570 US 29 Business
Ruffin, North Carolina Leased (expires 2004) 10,872 No 1997
2132 New Garden Road
Greensboro, North Carolina Owned 39,704 Yes 1997
4638 Hicone Road
Greensboro, North Carolina Owned 21,630 Yes 2000
3202 Randleman Road
Greensboro, North Carolina Owned 16,214 Yes 2000
704 South College Road
Wilmington, North Carolina Leased (expires 2007) 54,062 Yes 1997
7210 Wrightsville Avenue
Wilmington, North Carolina Leased (expires 2003) 1,197 Yes 2000
301 East Fremont Street
Burgaw, North Carolina Leased (expires 2004) 25,247 Yes 1999
600 Trent Street
Norton, Virginia Owned 58,551 Yes 1973
2302 Second Street
Richlands, Virginia Owned 22,174 Yes 1977
700 East Morgan Avenue
Pennington Gap, Virginia Owned 22,933 Yes 1979
440 South Main Street
Harrisonburg, Virginia Owned 37,787 Yes 1988
(1) Deposits as of December 31, 2002, in thousands of dollars.
(2) Each of the ATMs situated at a banking office is a drive-up ATM.
(3) Consists of 27,000 square feet in a two story building and includes the
Company's executive offices.
(4) Original office opened in different location in 1910. Current office
opened in 1980.
16
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, 2002.
17
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 cash dividends
paid for each share during the fiscal quarters for each of the last two fiscal
years. Only one cash dividend was paid during each of the fiscal quarters
listed.
Calendar Period High Low Dividends Paid
--------------- ---- --- --------------
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
Quarter ended March 31, 2002 $14.73 $13.08 $ 0.13
Quarter ended June 30, 2002 17.25 14.05 0.13
Quarter ended September 30, 2002 17.49 15.50 0.13
Quarter ended December 31, 2002 17.24 15.25 0.14
As of March 19, 2003, there were approximately 1,613 beneficial owners of
the Company's common stock, including 1,225 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 18 in the Notes to Consolidated Financial Statements on page
63 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, 2002 in offerings that were not registered under the Securities Act of
1933, as amended.
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 audited consolidated 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.
18
Table 1. Selected Financial Data
(In thousands, except per share, ratio and other data) At and For the Year Ended December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Income Statement Data:
Net interest income $ 23,753 $ 21,705 $ 22,659 $ 20,427 $ 18,378
Provision for credit losses 1,300 1,278 2,525 1,401 1,171
Other income 5,285 4,740 2,891 2,977 3,085
Other expenses 17,429 15,838 16,100 15,193 12,872
Net income 6,782 6,478 4,602 4,248 5,022
Balance Sheet Data:
Assets $734,032 $704,825 $685,904 $588,419 $549,746
Loans (1) 563,600 535,345 500,637 414,011 362,252
Allowance for credit losses 7,059 6,731 6,311 4,436 3,452
Deposits 605,005 586,760 569,451 484,242 459,595
Other borrowings 52,500 30,000 41,000 31,500 17,500
Shareholders' equity 64,333 62,708 56,392 50,730 53,631
Per Common Share Data:
Net income, basic $ 1.49 $ 1.43 $ 1.03 $ 0.95 $ 1.19
Net income, diluted (2) 1.46 1.41 1.02 0.93 1.13
Cash dividends declared 0.53 0.51 0.45 0.46 0.30
Book value 14.40 13.72 12.56 11.30 11.81
Tangible book value 14.35 13.65 12.47 11.20 11.68
Other Data:
Branch offices 17 17 18 15 14
Full-time employees 188 204 196 189 184
Performance Ratios:
Return on average assets 0.97% 0.91% 0.72% 0.76% 0.97%
Return on average equity 10.63 10.75 8.96 8.49 11.21
Net interest margin (tax equivalent) 3.57 3.25 3.83 3.88 3.78
Dividend payout 35.55 35.94 44.42 47.98 25.37
Efficiency (3) 59.71 59.05 62.20 64.50 59.50
Asset Quality Ratios:
Allowance for credit losses to period end loans 1.25% 1.26% 1.26% 1.07% 0.95%
Allowance for credit losses to period end
non-performing loans (4) 191.87 297.04 195.87 338.00 221.00
Net charge-offs to average loans 0.18 0.17 0.14 0.11 0.26
Non-performing assets to period end loans
and foreclosed property (4) 0.94 0.92 0.84 0.45 0.85
Capital and Liquidity Ratios:
Average equity to average assets 9.09% 8.45% 8.07% 9.06% 8.69%
Leverage capital 8.53 8.64 8.22 9.30 10.30
Tier 1 risk based capital 11.20 11.58 11.28 13.20 15.30
Total risk based capital 12.45 12.83 12.53 14.30 16.30
Average loans to average deposits 96.17 85.96 87.91 83.49 79.31
Average loans to average deposits
and borrowings 86.85% 79.63% 79.22% 77.34% 74.47%
(1) Loans net of unearned income, before allowance for losses.
(2) Assumes the exercise of outstanding options to acquire common stock. See
Note 14 to the Company's consolidated financial statements.
(3) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income.
(4) Non-performing loans and non-performing assets include loans past due 90
days or more that are still accruing interest.
19
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 72 of this Annual Report on Form 10-K.
Overview
The Company earned $6.78 million in 2002, a 4.7% increase over the $6.48
million earned in 2001. Diluted net income per share of $1.46 for 2002
represents a 3.5% increase over diluted net income per share of $1.41 in 2001.
Total assets at December 31, 2002 stood at $734.0 million compared to $704.8
million one year earlier. The increase in assets is primarily attributable to a
$28.3 million increase in gross loans. Gross loans at December 31, 2002 totaled
$563.6 million, up from $535.3 million at year-end 2001. Investment securities
available for sale, which is the next largest component of assets, increased
1.0% to $124.9 from $123.6 million over the same respective periods.
During 2002, deposits increased 3.1% to $605.0 million at December 31,
2002. Total purchased funds at December 31, 2002 totaled $60.8 million compared
to $49.7 million at the prior year-end. Shareholders' equity increased 2.6% to
$64.3 million at year-end 2002. Book value per share was $14.40 compared to
$13.72 one year earlier.
The Company's subsidiary bank, FNB Southeast, is a North Carolina
chartered commercial bank that, as of December 31, 2002, operated thirteen
banking offices in North Carolina and four banking offices in Virginia. On
January 24, 2003, the Bank completed the acquisition of the Harrisonburg,
Virginia, branch of another financial institution, bringing its total branches
to 18. 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, and provides 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 2002 was $23.9
million, which represented a 8.3% increase from the previous year. In 2001,
taxable equivalent net interest income decreased to approximately $22.1 million
from approximately $23.0 million in 2000. Actual net interest income for 2002
was $23.8 million, a 9.4% increase from $21.7 million recorded in 2001. The
increase in net interest income is attributable to reduced volumes of time
deposits and lower overall rates paid on time deposits. The net effect was to
increase the interest rate spread, which is the average yield on earning assets
minus the average rate paid on interest bearing liabilities. While the average
yield on earning assets declined in 2002, that decline was more than offset by
the reduction in average rates paid on interest bearing liabilities. Average
loans outstanding during the 2002 fiscal year were $547.8 million compared to
$515.3 million in 2001, an increase of 6.3%. In the previous year, average loans
outstanding were 12.1% higher than 2000. Average investment securities during
2002 were $110.3 million compared to $157.4 million in 2001 and $135.8 million
in 2000.
Trends in interest rates remained downward for the year, as the Federal
Reserve decreased the federal funds rate by 50 basis points in November of 2002,
which followed numerous interest rate reductions in 2001. As a result, the prime
lending rate declined to 4.25% at December 31, 2002 from 4.75% at December 31,
2001 and 9.50% at December 31, 2000. This had the effect of decreasing both the
earning asset yield and the interest bearing liability rate. During the year the
decline in the interest
20
bearing liability rate outpaced the decline in the earning asset yield.
Additionally, the decline in interest rates resulted in an increase in the fair
market 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.
The weighted average yield on earning assets decreased 127 basis points to
6.48% for 2002 compared to 7.75% for 2001 and 8.73% for 2000. This decrease in
the asset yield in 2002 was primarily attributable to the decreased yield on
loans. This was partially offset by an increase of approximately $32 million in
average loans outstanding from the lower yielding investments. During the
current year, the yield on loans decreased 157 basis points to 6.79% from 8.36%
in 2001. This decline is due to variable rate loans that repriced lower during
the year in response to decreases in the underlying index.
The weighted average rate paid on interest bearing liabilities declined
177 basis points to 3.41% in 2002 from 5.18% in 2001 and 5.58% in 2000. Average
interest bearing deposits for 2002 totaled $511.9 million, a 5.9% decrease from
$544.1 million in 2001. The average balance in 2000 was $472.1 million. The
overall rate for interest bearing deposits decreased 167 basis points to 3.52%
in 2002 compared to 5.19% in the prior year.
The overall rate on purchased funds decreased 246 basis points during
2002. Average purchased funds totaled $61.1 million in 2002, an increase of
$13.5 million from $47.6 million in 2001. This increase was primarily
attributable to higher levels of FHLB advances utilized during 2002. In 2000,
average purchased funds totaled $57.4 million. Average FHLB borrowings for 2002
were $46.1 million compared to $34.4 million in 2001. The average rate paid on
purchased funds was 2.51%, 4.97% and 6.47% for 2002, 2001 and 2000,
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 2002 and 2001, and between 2001
and 2000.
Non-interest Income and Expense
Non-interest income of $5.3 million in 2002 was $545,000, or 11.5%, more
than the previous year amount of $4.7 million. In 2000, non-interest income was
$2.9 million. One category of noninterest income, gain on sale of securities,
experienced a significant increase in 2001 but declined in 2002. Gains on sale
of securities for 2002 totaled $318,000, down from $1.8 million in 2001 and
$60,000 in 2000. Service charges on deposit accounts increased to $2.8 million
from $2.2 million in 2001 and $2.1 million in 2000. The Company was able to
capitalize on increased fees and increased volume of demand deposits and other
accounts with service charges. In May 2002, the Company introduced a new
service, overdraft privilege, that contributed to the increase in service
charges on deposit accounts.
Personnel expense of $9.8 million in 2002, exceeded the previous year
expense of $9.3 million by $506,000, or 5.5%. Personnel expense in 2000 was $8.7
million. At December 31, 2002, the Company had approximately 188 full-time and
10 part-time employees, compared with 204 full-time and 8 part-time employees at
December 31, 2001. Occupancy expenses totaled $1.1 million for 2002, which was
up 1.9% from $1.0 million in 2001. Furniture and equipment expenses totaled $1.9
million in the current year, a 4.4% increase from $1.8 million recorded in 2001.
The efficiency ratio, which measures non-interest expense as a percentage of net
interest income plus non-interest income, was 59.7% in 2002 versus a 59.0%
efficiency ratio posted in 2001 and 62.2% in 2000. Other expenses were $3.7
million compared to $2.8 million in 2001. Part of the year-over-year increase
was attributable 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.
21
Income tax expense in 2002 was $3.5 million, an increase from $2.9 million
in 2001. The effective tax rate in 2002 increased to 34.2% from 30.6% in 2001.
The increase in the effective tax rate for 2002 is primarily due to the
increased current expense required to provide adequate income tax provision at
the year-end 2002. Income tax expense in 2000 was $2.3 million, with an
effective rate of 33.5%.
Financial Condition
The Company's consolidated assets of $734.0 million at year end increased
4.1% over the previous year, following an increase of 2.8% in 2001. Total
average assets decreased 1.7% to $701.5 million in 2002, compared to $713.5
million in 2001. During 2002, the Company experienced a 1.5% decrease in average
earning assets. Average earning assets totaled $670.6 million in 2002 compared
to $680.5 million in 2001. The decrease in 2002 was primarily attributable to a
reduction in the average investment securities balance, which was partly offset
by an increase in average outstanding loans. The reduction in the average
balance of securities was due to a combination of strong loan growth with a 3.2%
decline in average interest bearing deposits. Average non-interest bearing
deposits increased 4.2% in 2002.
During the fourth quarter of 2001 through the second quarter of 2002, the
Company implemented an asset liability strategy to reduce higher costing funding
sources with funds generated primarily from investment securities called by
issuers and the sales of other investment securities. Instead of reinvesting the
funds from investment calls and sales during historical lows in the interest
rate cycle, the Company elected to reduce the higher costing funding sources.
This strategy resulted in a shrinking of the balance sheet and increased
interest rate margins, as planned, since the reductions occurred in the least
attractive rate structures. Starting in the third quarter of 2002, the Company
returned to a more traditional strategy of attracting new deposits (primarily
certificates of deposit) and using the proceeds to fund loans and investment
growth.
Gross loan growth during 2002 was $28.3 million, with outstanding loans up
5.3% at year-end, which followed increases of 6.9% in 2001 and 20.9% in 2000.
Loans secured by real estate increased to $377.7 million in 2002 and represented
67.0% of total loans, compared with 66.3% at year end 2001. Within this
category, commercial real estate loans increased 1.3% during fiscal 2002 to a
level of $170.7 million, while residential real estate loans decreased 8.4% to
$119.3 million and construction loans increased 57.0% to $87.7 million.
Commercial, financial and agricultural loans totaled $87.5 million and
represented 15.5% of total loans, compared with 17.0% last year-end. Consumer
loans increased 9.5% during 2002, 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 $126.4 million at year-end
2002 were up $1.3 million, or 1.0%, from $125.1 million at year-end 2001. U.S.
Government agency securities continue to represent the major share of the total
portfolio, and totaled $115.3 million, or 91.2% of the portfolio at year-end
2002, compared to $112.5 million, or 89.9% 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 $1.3
million and amounted to at $7.0 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.
22
Total deposits increased $18.2 million to $605.0 million at December 31,
2002. This is a 3.1% increase over $586.8 million in deposits one year earlier.
This increase was driven by an $8.5 million, or 2.0% increase in time deposits,
a $2.8 million, or 4.8% increase in demand deposits and a $6.9 million, or 7.4%
increase in savings, NOW and MMI accounts.
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 $8.3 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, 2002, FNB Southeast had approximately 77
of such certificates of deposit totaling $11.5 million, with an overall rate of
3.54% for this portfolio. This certificate portfolio decreased by $9.2 million
during 2002. The Company also held $44.5 million in brokered certificates of
deposit at December 31, 2002 compared to $17.0 million one year earlier. The
brokered certificates have an original term of twelve to twenty-four months with
maturities of $34.5 million in 2003, and $10.0 million in 2004.
The Company also has a credit facility available 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 $124 million line with the Federal
Home Loan Bank of Atlanta to fund earning assets. FHLB borrowings totaled $52.5
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 credit 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"), Accounting by Creditors for Impairment of a
Loan, 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, 2002 and 2001.
23
Risk Percent of Commercial General
Grade Description Loans by Risk Grade Reserve Percentage
- ----- ----------- --------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Risk 1 Low Risk 0.22% 0.62% 0.00% 0.00%
Risk 2 Lower Than Average Risk 0.53 1.09 0.40 0.25
Risk 3 Average Risk 12.15 15.33 0.65 0.45
Moderately Higher
Risk 4 Than Average Risk 81.59 76.50 1.00 0.80
Higher Than
Risk 5 Average Risk 1.84 2.23 1.50 1.25
Risk 6 Special Mention 0.83 1.31 2.50 2.50
Risk 7 Substandard 2.83 2.90 15.00 15.00
Risk 8 Doubtful 0.00 0.03 50.00 50.00
Risk 9 Loss 0.00 0.00 100.00 100.00
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 2002, 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 general reserve percentage
was increased by 0.15% for risk grade 2 loans, 0.20% for risk grade 3 and risk
grade 4 loans, and by 0.25% for risk grade 5 loans. The Company had 96.3% of
total commercial loans in risk grade 1 through 5 in 2002 compared to 95.8% in
2001. The reserve percentages for risk grade 6, risk grade 7, risk grade 8 and
risk grade 9 remained consistent with the prior year. The net effect in 2002,
compared to 2001, was to reserve a higher percentage for risk grade 1 through
risk grade 5.
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, 2002
and 2001, the recorded investment in loans considered impaired was approximately
$10,567,000 and $6,857,000, respectively. Impaired loans at December 31, 2002
consisted of $818,000 of retail loans past due 90 days or more, and $9,749,000
of risk grade 7 and risk grade 8 commercial loans. Calculated reserves for
impaired loans at December 31, 2002 totaled $1,904,000 and $1,748,000 one year
earlier.
24
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, 2002.
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 2002 provision for credit losses of $1.3 million represented a 1.7%
increase from the level in 2001. As of December 31, 2002, nonperforming assets
totaled $5.3 million, primarily comprised of $3.6 million in non-accrual loans
and $1.7 million in other real estate owned. Those figures compare to year-ago
figures of $5.0 million for nonperforming assets, which consisted of $2.3
million in non-accrual loans and $2.7 million in other real estate owned. Net
charge-offs increased in 2002 to $972,000 or 0.18% of average loans outstanding,
compared with $858,000 or 0.17% of average loans outstanding in the prior year.
At December 31, 2002 the allowance for credit losses as a percentage of year end
loans was 1.25% versus 1.26% at December 31, 2001.
During 2002 and at December 31, 2002, 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. During 2002, there was also a $3.7
million increase in impaired loans. This migration was partially offset by a
decrease in retail loans past due 90 days or more from $924,000 at December 31,
2001 to $818,000 at December 31, 2002.
Risk grade loans classified special mention, substandard and doubtful
decreased from $13.1 million at year-end 2001 to $12.6 million at year-end 2002.
The reserve requirement for this category of loans totaled $2.1 million for 2001
and decreased to $1.7 million for 2002. Retail loans past due 90 days or more at
December 31, 2002 were $818,000, with a $323,000 reserve requirement. This
compares to $924,000 in retail loans past due 90 days or more and a reserve
requirement of $391,000 at December 31, 2001.
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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Allowance percentage 1.25% 1.26% 1.26% 1.07% 0.95%
Net charge-off percentage 0.18% 0.17% 0.14% 0.11% 0.26%
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.
25
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. The Bank
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, 2002,
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 2002, the Company deployed cash flow from operating and financing
activities to fund increases in the loan portfolio. Overall, cash and cash
equivalents increased by $851,000 to $24.5 million at December 31, 2002.
As presented in the consolidated statement of cash flows, the Company
generated $5.6 million in operating cash flow during 2002, down 19.7% from $6.9
million in 2001. This decrease was primarily attributable to the funding of
loans held for sale in excess of proceeds from the sale of such loans, although
an increase in noninterest expense and income taxes paid also contributed to the
decline. These declines were partly offset by an increase in the amount that
interest received exceeded interest paid in each year. In 2002, interest
received in excess of interest paid was $23.8 million, while in 2001, interest
received in excess of interest paid was $20.7 million. This change resulted from
the growth in earning assets and improving net interest margin in 2002.
In 2002, the Company had a net increase of $27.8 million in loans compared
to $37.2 million in 2001. In 2002, the Company received $92.3 million from sales
and calls of securities, while purchasing $92.4 million. The turnover in the
security portfolio was attributable to the reduction in interest rates during
the year. In 2001, the Company purchased $149.4 million of securities, while
receiving $154.4 million from sales and calls and $20.6 million from maturities.
The Company's major financing sources during 2002 were a $9.7 million
increase in savings, NOW and MMI deposits, an $8.5 million increase in time
deposits and a $22.5 million increase in other borrowings, for a combined total
of $40.7 million versus a combined total of $6.3 million during 2001. In total,
cash flows from growth in deposits were $18.2 million in 2002, versus $17.3
million in 2001. Partially offsetting these cash inflows in 2002 was a decrease
of $11.4 million in federal funds and repurchase agreements and repurchases of
$4.1 million of the Company's common stock.
Liquidity is further enhanced by an approximately $124 million line of
credit with the Federal Home Loan Bank of Atlanta (FHLB) collateralized by FHLB
stock, investment securities, qualifying one to four 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 initiated
through an advance application that is subject to approval by the FHLB before
funds are advanced under the credit agreement.
26
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 overnight
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, 2002 and for the upcoming twelve month period,
the Company had scheduled loan maturities of $162.8 million, securities
maturities of $200,000 and $345.6 million in maturing time deposits. The Company
also has $100.0 million in deposits with no contractual maturity, and $61.7
million in demand deposit accounts that are subject to withdrawal during 2002.
The Company has $20.0 million of borrowings that are scheduled for repayment in
2003. Anticipated capital expenditures during 2003 are approximately $1.4
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,
2002.
One Year Over One
(Dollars in thousands) and Less Year Total
-------- -------- --------
Commitments to extend credit $102,779 $4,679 $107,458
Standby letters of credit 283 -- 283
-------- ------ --------
Total commitments and contingent liabilities $103,062 $4,679 $107,741
======== ====== ========
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.
27
Application of Critical Accounting Policies
The Company's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and financial
condition. The Company's significant accounting policies are discussed in detail
in Note 1 of the consolidated financial statements of the Company's 2002 Annual
Report. The following is a summary of the allowance for credit losses, one of
the most complex and judgmental accounting policies of the Company.
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 credit losses incurred as of the balance sheet date.
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. Management also analyzes the
loan portfolio on an ongoing basis to evaluate current risk levels, and risk
grades are adjusted accordingly. While management uses the best information to
make evaluations, future adjustments may be necessary, if economic or other
conditions differ substantially from the assumptions used.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No.
142, "Goodwill and Other Intangible Assets." SFAS 141 supersedes Accounting
Principles Board (APB) Opinion No. 16, "Business Combinations", and SFAS 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. The implementation of this Statement did
not have a material impact 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).
28
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
implementation of this Statement did not have a material impact on the Company's
financial statements.
The FASB has issued SFAS 145 "Rescission of FASB Statements No. 4, 44, and
64,Amendment of FASB Statement No. 13, and Technical Corrections".
This Statement rescinds SFAS No.4,"Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS 44,"Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS 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 have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of SFAS 145 related to the rescission of SFAS 4 shall
be applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early application
of the provisions of this Statement related to the rescission of SFAS 4 is
encouraged. The provisions in paragraphs 8 and 9(c) of SFAS 145 related to SFAS
13 shall be effective for transactions occurring after May 15, 2002, with early
application encouraged. All other provisions of SFAS 145 shall be effective for
financial statements issued on or after May 15, 2002, with early application
encouraged. Management does not anticipate the implementation of this Statement
to have a material impact on the Company's consolidated financial statements.
In June 2002 the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) 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 provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Management
does not anticipate the implementation of this Statement to have a material
impact on the Company's financial statement.
The FASB has issued SFAS 147,"Acquisitions of Certain Financial
Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". FASB Statement 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 Statements No. 141,"Business Combinations," and No.
142,"Goodwill and Other Intangible Assets." Thus, the requirement in paragraph 5
of Statement 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.
29
In addition, SFAS 147 amends SFAS Statement No. 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 financial statements.
In December 2002, the FASB issued SFAS Statement No. 148,"Accounting for
Stock-Based Compensation-Transition and Disclosure". In light of
recent switches by a number of companies to the recognition and measurement
provisions of SFAS 123,"Accounting for Stock-Based Compensation," (and of
announcements by other entities of their intentions to switch), the FASB has
amended SFAS 123 to add two new transitional approaches when changing from the
APB Opinion 25 intrinsic value method of accounting for stock-based employee
compensation to the SFAS 123 fair value method. In addition, SFAS 123 has been
amended to require disclosure of additional information concerning the effects
of stock-based employee compensation on earnings. Finally, SFAS 148 amends APB
Opinion 28,"Interim Financial Reporting," to call for disclosure of SFAS 123 pro
forma information on a quarterly basis. Management does not anticipate the
implementation of this Statement to have a material impact on the Company's
financial statements.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"),"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (an interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34)." FIN 45 clarifies the requirements of FASB Statement No. 5 (SFAS
5),"Accounting for Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. For guarantees that
fall within the scope of FIN 45, the Interpretation requires that guarantors
recognize a liability equal to the fair value of the guarantee upon its
issuance. The Corporation's primary guarantees included within the scope of FIN
45 relates to financial standby letters of credit issued to commercial
customers. FIN 45 requires the liability recognized in standalone arm's-length
transactions to be the premium received or receivable by the guarantor.
Management does not anticipate the implementation of this interpretation to have
a material impact on the Company's financial statements.
In January 2003 the FASB issued FASB Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities (an interpretation of ARB
No.51)." FIN 46 addresess the consolidation by business enterprises of certain
variable interest entities. Management does not anticipate the implementation of
this interpretation to have a material impact on the Company's financial
statements.
Based on the Company's operations as of December 31, 2002, none of these
standards are expected to have 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.
30
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 that 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, 2002, to be 0.81%. This ratio indicates that a larger balance of
liabilities compared to assets, could potentially reprice during the upcoming
twelve month 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 48.2% 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 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 that 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, 2002.
31
Table 2
Average Balance and Net Interest Income Analysis
Fully Taxable Equivalent Basis
(In thousands, except percentages)
Year Ended December 31,
----------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- ------- --------- -------- -------
Interest earning assets:
Loans, net (1) $ 547,816 $37,199 6.79% $ 515,287 $43,069 8.36%
Taxable investment securities 100,418 5,375 5.35 136,782 7,916 5.79
Tax-exempt investment securities (2) 5,766 452 7.84 15,083 1,114 7.39
Other securities 4,082 232 5.68 5,530 297 5.37
Overnight deposits 12,548 205 1.63 7,851 317 4.04
Federal funds sold -- -- 0.00 -- -- 0.00
--------- ------- --------- -------
Total earning assets 670,630 43,463 6.48 680,533 52,713 7.75
Non-earning assets:
Cash and due from banks 14,597 15,048
Premises and equipment 11,072 11,738
Other assets 12,159 12,673
Less: Allowance for credit loss (6,928) (6,503)
--------- ---------
Total assets $ 701,530 $ 713,489
========= =========
Interest bearing liabilities:
Savings and NOW $ 45,172 231 0.51 $ 44,407 314 0.71
MMI 50,531 1,061 2.10 46,379 1,583 3.41
Time deposits 416,226 16,730 4.02 453,305 26,364 5.82
Federal funds purchased, borrowed funds and
securities sold under agreements to
repurchase 61,121 1,533 2.51 47,617 2,368 4.97
--------- ------- --------- -------
Total interest bearing liabilities 573,050 19,555 3.41 591,708 30,629 5.18
Other liabilities and shareholder's equity
Demand deposits 57,708 55,358
Other liabilities 6,982 6,168
Shareholders' equity 63,790 60,255
--------- ---------
Total liabilities and shareholders' equity $ 701,530 $ 713,489
========= =========
Net interest income and net yield on
earning assets (3) $23,908 3.57% $22,084 3.25%
======= ==== ======= ====
Interest rate spread (4) 3.07% 2.57%
==== ====
Year Ended December 31,
------------------------------------
2000
------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense Rate
--------- -------- -------
Interest earning assets:
Loans, net (1) $ 459,731 $43,588 9.48%
Taxable investment securities 117,263 7,084 6.04
Tax-exempt investment securities (2) 13,788 1,132 8.21
Other securities 4,769 334 7.00
Overnight deposits 3,885 270 6.95
Federal funds sold 2,828 153 5.41
--------- -------
Total earning assets 602,264 52,561 8.73
Non-earning assets:
Cash and due from banks 17,504
Premises and equipment 11,231
Other assets 10,313
Less: Allowance for credit loss (5,102)
---------
Total assets $ 636,210
=========
Interest bearing liabilities:
Savings and NOW $ 46,686 634 1.36%
MMI 41,905 1,819 4.34
Time deposits 383,488 23,355 6.09
Federal funds purchased, borrowed funds and
securities sold under agreements to
repurchase 57,362 3,709 6.47
--------- -------
Total interest bearing liabilities 529,441 29,517 5.58
Other liabilities and shareholder's equity
Demand deposits 50,877
Other liabilities 4,519
Shareholders' equity 51,373
---------
Total liabilities and shareholders' equity $ 636,210
=========
Net interest income and net yield on
earning assets (3) $23,044 3.83%
======= ====
Interest rate spread (4) 3.15%
====
- ------------------------
(1) The average loan balances include non-accruing loans and only interest
income actually collected and recognized.
(2) The fully tax equivalent basis is computed using a federal tax rate of
34%.
(3) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(4) 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,
--------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
------------------------------------- -------------------------------------
Volume (2) Rate (2) Total Volume (2) Rate (2) Total
Variance Variance Variance Variance Variance Variance
---------- -------- -------- ---------- -------- --------
Interest income:
Loans, net $ 2,719 $(8,589) $ (5,870) $ 5,267 $(5,786) $ (519)
Taxable investment securities (2,104) (437) (2,541) 1,179 (347) 832
Tax-exempt investment securities (1) (688) 26 (662) 77 (95) (18)
Other securities (78) 13 (65) 53 (90) (37)
Deposits with FHLB 190 (302) (112) 276 (229) 47
Federal funds sold and securities
purchased under the agreement to resale -- -- -- (153) -- (153)
------- ------- -------- ------- ------- -------
Total interest income 22 (9,272) (9,250) 6,699 (6,547) 152
------- ------- -------- ------- ------- -------
Interest expense:
Savings and NOW 5 (88) (83) (31) (289) (320)
MMI 142 (664) (522) 194 (430) (236)
Time deposits (2,156) (7,478) (9,634) 4,252 (1,243) 3,009
Federal funds purchased, borrowed funds
and securities sold under agreements
to repurchase 672 (1,507) (835) (630) (711) (1,341)
------- ------- -------- ------- ------- -------
Total interest expense (1,337) (9,737) (11,074) 3,785 (2,673) 1,112
------- ------- -------- ------- ------- -------
Increase (decrease) in net interest income $ 1,359 $ 465 $ 1,824 $ 2,914 $(3,874) $ (960)
======= ======= ======== ======= ======= =======
- ------------------------
(1) Yields on nontaxable securities are stated on a taxable-equivalent basis,
assuming a 34% Federal tax rate. The adjustments made to convert to a
taxable-equivalent basis were $155,000 for 2002, $379,000 for 2001 and
$385,000 for 2000.
(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, 2002 As of December 31, 2001 As of December 31, 2000
--------------------------------- --------------------------------- ---------------------------------
Weighted Weighted Weighted
Amortized Fair Average Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield Cost Value Yield
--------- -------- -------- --------- -------- -------- --------- -------- --------
U.S. Treasury $ -- $ -- 0.00% $ -- $ -- 0.00% $ 200 $ 200 6.39%
U.S. government agency 115,309 117,412 4.58 112,516 114,660 6.13 127,859 127,301 5.81
State and municipal
obligations (1) 7,036 7,351 7.44 8,325 8,628 8.46 16,097 16,928 8.31
Other debt securities 306 321 6.83 304 309 6.83 1,331 1,309 6.35
Other equity 3,732 3,732 5.58 3,967 3,967 6.19 3,967 3,967 7.33
-------- -------- -------- -------- -------- --------
Total investment
securities (1) $126,383 $128,816 4.58 $125,112 $127,564 6.32 $149,454 $149,705 6.24
======== ======== ======== ======== ======== ========
As of December 31, 2002
---------------------------------------------------------------------------------------------
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% $58,877 4.08% $43,821 5.31% $12,611 4.40% $115,309 4.58%
State and municipal obligations (1) 200 6.29 907 4.96 2,199 4.94 3,730 4.51 7,036 7.44
Other debt securities -- 0.00 -- 0.00 306 6.83 -- 0.00 306 6.83
---- ------- ------- ------- --------
Total debt securities (1) $200 6.29 $59,784 4.10 $46,326 5.26 $16,341 4.43 $122,651 4.58
==== ======= ======= ======= ========
- ------------------------
(1) Yields stated on a tax equivalent basis.
34
Table 5
Loan Portfolio Composition
(In thousands, except percentages)
As of December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Real Estate:
Commercial $170,657 30.3% $168,419 31.5% $119,584 23.9% $ 94,798 26.2% $ 94,798 26.2%
Residential 119,316 21.2 130,264 24.4 150,825 30.1 120,143 33.2 120,143 33.2
Construction 87,696 15.6 55,861 10.4 66,148 13.2 29,794 8.2 29,794 8.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate 377,669 67.1 354,544 66.3 336,557 67.2 244,735 67.6 244,735 67.6
Commercial, financial and
Agricultural 87,458 15.5 90,858 17.0 74,981 15.0 49,822 13.8 49,822 13.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer:
Direct 34,074 6.0 37,112 6.9 46,463 9.3 32,368 8.9 32,368 8.9
Home equity 54,073 9.6 46,169 8.6 39,204 7.8 26,723 7.4 26,723 7.4
Revolving 10,326 1.8 6,662 1.2 3,432 0.7 8,604 2.3 8,604 2.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer 98,473 17.4 89,943 16.7 89,099 17.8 67,695 18.6 67,695 18.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $563,600 100.0% $535,345 100.0% $500,637 100.0% $362,252 100.0% $362,252 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
As of December 31, 2002
-----------------------------------------------------------------------------------
Rate Structure for Loans
Maturity Maturing Over One Year
----------------------------------------------- ------------------------------
Over One Over Predetermined Floating or
One Year Year to Five Interest Adjustable
or Less Five Years Years Total Rate Rate
-------- ---------- -------- -------- ------------- -----------
Commercial, financial and agricultural $ 47,310 $ 60,856 $ 14,778 $122,944 $ 29,827 $ 45,807
Real estate - construction 59,604 16,401 3,882 79,887 8,495 11,788
Real estate - residential 12,488 44,853 61,975 119,316 90,756 16,072
Real estate - commercial 29,991 85,315 14,682 129,988 45,863 54,134
Consumer 13,364 39,367 58,734 111,465 41,216 56,885
-------- -------- -------- -------- -------- --------
Total $162,757 $246,792 $154,051 $563,600 $216,157 $184,686
======== ======== ======== ======== ======== ========
As of December 31,
--------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Non-performing assets:
Non-accrual loans $3,614 $2,266 $3,222 $1,195 $1,474
Loans past due 90 days or more and still accruing interest 65 6 -- 117 87
Other real estate 1,662 2,707 1,007 534 1,518
35
Table 6
Summary of Allowance for Credit Losses
(In thousands except ratios and percentages)
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance, beginning of period $6,731 $6,311 $4,436 $3,452 $3,185
Charge-offs:
Commercial 1,017 510 65 -- 597
Real estate-construction -- -- -- -- --
Real estate-mortgage 32 43 359 -- 4
Consumer 220 448 380 512 407
------ ------ ------ ------ ------
Total charge-offs 1,269 1,001 804 512 1,008
------ ------ ------ ------
Recoveries:
Commercial 188 25 -- 5 12
Real estate-construction -- -- -- -- --
Real estate-mortgage 7 -- -- -- --
Consumer 102 118 154 90 92
------ ------ ------ ------ ------
Total recoveries 297 143 154 95 104
------ ------ ------ ------ ------
Net charge-offs 972 858 650 417 904
Provision charged to operations 1,300 1,278 2,525 1,401 1,171
------ ------ ------ ------ ------
Balance, end of period $7,059 $6,731 $6,311 $4,436 $3,452
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.18% 0.17% 0.14% 0.11% 0.26%
====== ====== ====== ====== ======
Ratio of allowance to year end loans 1.25% 1.26% 1.26% 1.07% 0.95%
====== ====== ====== ====== ======
Allocation of the Allowance for Credit Losses
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
$ % (1) $ % (1) $ % (1) $ % (1) $ % (1)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance at end of period applicable to:
Commercial 5,201 16 4,773 17 4,523 15 2,242 14 1,549 14
Real estate-construction 7 16 18 10 28 13 50 8 4 8
Real estate-mortgage 180 51 104 56 125 54 868 60 330 59
Consumer 1,671 17 1,836 17 1,635 18 1,276 18 1,320 19
----- --- ----- --- ----- --- ----- --- ----- ---
Total allocation 7,059 100 6,731 100 6,311 100 4,436 100 3,452 100
===== === ===== === ===== === ===== === ===== ===
(1) Percent of loans in each category to total loans.
36
Table 7
Regulatory Capital
(In thousands, except percentages)
As of or for year ended December 31,
------------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Total capital to risk weighted assets
Consolidated $69,614 12.4% $67,468 12.8% $62,028 12.5%
Subsidiary Bank 68,241 12.2 65,221 12.4 61,319 12.4
Tier 1 capital to risk weighted assets
Consolidated 62,622 11.2 60,888 11.6 55,841 11.3
Subsidiary Bank 61,253 11.0 58,658 11.2 55,132 11.1
Tier 1 capital to average assets
Consolidated 62,622 8.5 60,888 8.6 55,841 8.2
Subsidiary Bank 61,253 8.4 58,658 8.3 55,132 8.1
37
Table 8
Interest Sensitivity Analysis
(In thousands, except ratios)
As of December 31, 2002
-------------------------------------------------------------------------------
Total 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 $295,782 $ 17,607 $ 22,836 $ 336,225 $223,761 $559,986
U. S. government agency -- -- -- -- 115,310 115,310
State and municipal obligations -- 200 -- 200 6,836 7,036
Other investment securities 4,037 -- -- 4,037 -- 4,037
Overnight deposits 7,946 -- -- 7,946 -- 7,946
-------- -------- --------- --------- -------- --------
Total interest earning assets 307,765 17,807 22,836 348,408 345,907 694,315
-------- -------- --------- --------- -------- --------
Interest bearing liabilities:
NOW 18,276 -- -- 18,276 12,184 30,460
MMI 25,732 -- -- 25,732 25,732 51,464
Savings 10,817 -- -- 10,817 7,211 18,028
Time deposits 105,705 74,765 165,329 345,799 97,603 443,402
Overnight borrowings 8,258 -- -- 8,258 -- 8,258
Other borrowings 20,000 -- -- 20,000 32,500 52,500
-------- -------- --------- --------- -------- --------
Total interest bearing liabilities 188,788 74,765 165,329 428,882 175,230 604,112
-------- -------- --------- --------- -------- --------
Interest sensitivity gap $118,977 $(56,958) $(142,493) $ (80,474) $170,677 $ 90,203
======== ======== ========= ========= ======== ========
Ratio of interest sensitive assets to liabilities 1.63 0.24 0.14 0.81 1.97 1.15
38
Table 9
Market Risk of Financial Instruments
(In thousands, except percentages)
Contractual Maturities as of December 31, 2002
-----------------------------------------------------------------------
After Average Estimated
2003 2004 2005 2006 2007 Five Years Total Rate Value
-------- ------- -------- ------- ------- ---------- -------- ------- ---------
Financial assets:
Debt securities $ 200 $ 1,215 $ 15,263 $17,217 $26,089 $ 62,667 $122,651 4.58% $125,084
Loans:
Fixed rate 72,691 28,855 49,131 26,596 23,351 91,140 291,764 7.64 292,298
Variable rate 90,066 22,728 38,699 30,714 26,718 62,911 271,836 4.74 271,602
-------- ------- -------- ------- ------- -------- -------- --------
Total financial assets $162,957 $52,798 $103,093 $74,527 $76,158 $216,718 $686,251 5.94% $688,984
======== ======= ======== ======= ======= ======== ======== ========
Financial liabilities:
NOW $ 30,461 $ -- $ -- $ -- $ -- $ -- $ 30,461 0.25% $ 27,499
MMI 51,465 -- -- -- -- -- 51,465 2.04 51,424
Savings 18,027 -- -- -- -- -- 18,027 0.50 16,410
Time deposits 345,638 52,736 27,737 4,687 11,975 628 443,401 3.57 450,581
Other borrowings 20,000 7,500 -- -- 15,000 10,000 52,500 2.94 53,544
Federal funds purchased
and retail repurchase 8,258 -- -- -- -- -- 8,258 1.25 8,258
-------- ------- -------- ------- ------- -------- -------- --------
Total financial liabilities $473,849 $60,236 $ 27,737 $ 4,687 $26,975 $ 10,628 $604,112 3.09% $607,716
======== ======= ======== ======= ======= ======== ======== ========
Contractual Maturities as of December 31, 2001
----------------------------------------------------------------------- Average Estimated
Over 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 6.64% $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
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 3.89% $555,620
======== ======= ======== ======= ======= ======== ======== ========
39
Table 10
Quarterly Financial Data
(In thousands, except per share data)
2002 2001
---------------------------------------- ----------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- ------- ------- ------- ------- -------
Interest income $11,093 $10,866 $10,616 $10,733 $11,579 $13,133 $13,662 $13,960
Interest expense 4,874 4,868 4,611 5,202 6,334 7,728 8,164 8,403
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 6,219 5,998 6,005 5,531 5,245 5,405 5,498 5,557
Provision for credit losses 85 250 680 285 480 315 260 223
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for credit losses 6,134 5,748 5,325 5,246 4,765 5,090 5,238 5,334
------- ------- ------- ------- ------- ------- ------- -------
Other income 1,555 1,252 1,548 930 2,135 1,076 834 695
Other expenses 4,484 4,037 4,577 4,331 4,008 3,971 3,945 3,914
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,205 2,963 2,296 1,845 2,892 2,195 2,127 2,115
Income taxes 1,141 1,032 761 593 968 664 608 611
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 2,064 $ 1,931 $ 1,535 $ 1,252 $ 1,924 $ 1,531 $ 1,519 $ 1,504
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.46 $ 0.43 $ 0.33 $ 0.27 $ 0.42 $ 0.34 $ 0.34 $ 0.33
Diluted $ 0.45 $ 0.42 $ 0.32 $ 0.27 $ 0.42 $ 0.33 $ 0.33 $ 0.33
40
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 2002 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, 2002,
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, 2002, 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 Vice President,
Chief Executive Officer Chief Operating Officer Secretary and Treasurer
March 6, 2003
41
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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
January 31, 2003
42
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in thousands, except share data)
2002 2001
-------- --------
ASSETS
Cash and due from banks ........................................................... $ 24,524 $ 23,673
Investment securities:
Available for sale ........................................................... 125,084 123,597
Federal Home Loan Bank and Federal Reserve Bank Stock ........................ 3,732 3,967
Loans, net of allowance for credit losses of $7,059 in 2002 and $6,731 in 2001 ... 556,541 528,614
Premises and equipment, net ....................................................... 10,916 11,381
Accrued income and other assets ................................................... 13,235 13,593
-------- --------
Total assets ............................................................ $734,032 $704,825
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing .......................................................... $ 61,651 $ 58,831
Interest-bearing ............................................................. 543,354 527,929
-------- --------
Total deposits .......................................................... 605,005 586,760
Federal funds purchased and retail repurchase agreements .......................... 8,258 19,677
Other borrowings .................................................................. 52,500 30,000
Accrued expenses and other liabilities ............................................ 3,936 5,680
-------- --------
Total liabilities ....................................................... 669,699 642,117
-------- --------
Commitments and Contingent Liabilities: See Note 16
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 -
4,467,239 in 2002 and 4,568,907 in 2001 ...................................... 4,467 4,569
Paid-in capital ................................................................... 23,833 26,465
Retained earnings ................................................................. 34,549 30,178
Accumulated other comprehensive income ............................................ 1,484 1,496
-------- --------
Total shareholders' equity .............................................. 64,333 62,708
-------- --------
Total liabilities and shareholders' equity .............................. $734,032 $704,825
======== ========
See notes to consolidated financial statements
43
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
-------- ------- -------
Interest income
Loans .............................................. $ 37,199 $43,069 $43,588
Federal funds sold and overnight deposits .......... 205 317 423
Investment securities
Taxable ....................................... 5,375 7,916 7,084
Tax exempt .................................... 297 735 747
Other .............................................. 232 297 334
-------- ------- -------
Total interest income .................... 43,308 52,334 52,176
-------- ------- -------
Interest expense
Deposits ........................................... 18,022 28,261 25,808
Federal funds purchased and other borrowings ....... 1,533 2,368 3,709
-------- ------- -------
Total interest expense ................... 19,555 30,629 29,517
-------- ------- -------
Net interest income ..................................... 23,753 21,705 22,659
Provision for credit losses ............................. 1,300 1,278 2,525
-------- ------- -------
Net interest income after provision for credit losses ... 22,453 20,427 20,134
-------- ------- -------
Other income
Service charges on deposit accounts ................ 2,819 2,180 2,072
Other service charges and fees ..................... 696 460 703
Mortgage banking fees .............................. 1,144 144 8
Investment services fees ........................... 308 203 48
Net gain on securities available for sale .......... 318 1,753 60
-------- ------- -------
Total other operating income ............. 5,285 4,740 2,891
-------- ------- -------
Other expenses
Salaries and employee benefits ..................... 9,787 9,281 8,699
Occupancy expense .................................. 1,053 1,033 871
Furniture and equipment expense .................... 1,926 1,844 1,507
Insurance expense, including FDIC assessment ....... 198 186 250
Marketing expense .................................. 289 241 447
Printing and supply expense ........................ 443 376 308
Other expenses ..................................... 3,733 2,877 4,018
-------- ------- -------
Total other expenses ..................... 17,429 15,838 16,100
-------- ------- -------
Income before income taxes .............................. 10,309 9,329 6,925
Income tax expense ...................................... 3,527 2,851 2,323
-------- ------- -------
Net income .............................................. 6,782 6,478 4,602
Other comprehensive income (loss) ....................... (12) 1,343 3,013
-------- ------- -------
Comprehensive income .................................... $ 6,770 $ 7,821 $ 7,615
======== ======= =======
Net income per share, basic ............................. $ 1.49 $ 1.43 $ 1.03
======== ======= =======
Net income per share, diluted ........................... $ 1.46 $ 1.41 $ 1.02
======== ======= =======
See notes to consolidated financial statements
44
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Common stock
Balance at beginning of period ......... $ 4,569 $ 4,488 $ 4,479
Stock repurchase ....................... (246) -- --
Stock issuance ......................... -- -- 3
Dividend reinvestment plan ............. -- 4 2
Exercise of stock options .............. 144 77 3
Employee 401(k) plan ................... -- -- 1
-------- -------- --------
Balance at end of period ............... 4,467 4,569 4,488
-------- -------- --------
Paid-in capital
Balance at beginning of period ......... 26,465 25,723 25,653
Stock repurchase ....................... (3,883) -- --
Stock issuance ......................... -- -- (3)
Dividend reinvestment plan ............. -- 34 28
Exercise of stock options .............. 1,249 708 40
Employee 401(k) plan ................... -- -- 5
Employee stock awards .................. 2 -- --
-------- -------- --------
Balance at end of period ............... 23,833 26,465 25,723
-------- -------- --------
Retained earnings
Balance at beginning of period ......... 30,178 26,028 23,458
Net income ............................. 6,782 6,478 4,602
Cash dividends paid .................... (2,411) (2,328) (2,032)
-------- -------- --------
Balance at end of period ............... 34,549 30,178 26,028
-------- -------- --------
Accumulated other comprehensive income
Balance at beginning of period ......... 1,496 153 (2,860)
Other comprehensive income (loss) ...... (12) 1,343 3,013
-------- -------- --------
Balance at end of period ............... 1,484 1,496 153
-------- -------- --------
Total shareholders' equity ... $ 64,333 $ 62,708 $ 56,392
======== ======== ========
See notes to consolidated financial statements
45
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received ....................................................................... $ 43,672 $ 52,467 $ 49,796
Fees and commission received ............................................................ 5,488 4,245 3,827
Interest paid ........................................................................... (19,915) (31,742) (28,030)
Noninterest expense paid ................................................................ (17,627) (15,029) (14,474)
Income taxes paid ....................................................................... (3,854) (2,657) (3,580)
Funding of loans held for sale .......................................................... (30,195) (18,766) (4,366)
Proceeds from sales of loans held for sale .............................................. 28,005 18,426 4,408
-------- --------- ---------
Net cash provided by operating activities ..................................... 5,574 6,944 7,581
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and calls of securities available for sale .......................... 92,311 154,383 6,337
Proceeds from maturities of securities available for sale ............................... -- 20,625 588
Purchase of securities .................................................................. (92,354) (149,402) (19,673)
Capital expenditures .................................................................... (599) (708) (3,661)
(Increase) decrease in other real estate owned .......................................... (480) 1,154 (473)
Net increase in loans ................................................................... (27,781) (37,219) (88,830)
-------- --------- ---------
Net cash used in investing activities ......................................... (28,903) (11,167) (105,712)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and interest checking accounts ............... 9,733 14,679 (3,449)
Net increase in time deposits ........................................................... 8,511 2,630 88,658
Net increase (decrease) in other borrowings ............................................. 22,500 (11,000) 9,500
Net increase (decrease) in federal funds purchased and retail repurchase agreements ..... (11,419) 7,140 (3,062)
Repurchase of common stock .............................................................. (4,129) -- --
Proceeds from issuance of common stock .................................................. 1,395 823 77
Dividends paid .......................................................................... (2,411) (2,328) (2,032)
-------- --------- ---------
Net cash provided by financing activities ..................................... 24,180 11,944 89,692
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents .................................... 851 7,721 (8,439)
Cash and cash equivalents, beginning of year ............................................ 23,673 15,952 24,391
-------- --------- ---------
Cash and cash equivalents, end of year .................................................. $ 24,524 $ 23,673 $ 15,952
======== ========= =========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate ...................................... $ 1,526 $ 2,854 $ 986
======== ========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income .............................................................................. $ 6,782 $ 6,478 $ 4,602
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses ........................................................ 1,300 1,278 2,525
Depreciation ....................................................................... 1,287 1,388 1,139
Accretion and amortization ......................................................... 203 455 477
Gain on sale of securities available for sale ...................................... (318) (1,753) (60)
Gain on other assets ............................................................... (104) -- (73)
Funding of loans held for sale ..................................................... (30,195) (18,766) (4,366)
Proceeds from sales of loans held for sale ......................................... 28,005 18,426 4,408
(Decrease) increase in accrued income and other assets ............................. 358 282 (1,247)
Increase (decrease) in accrued expenses and other liabilities ...................... (1,744) (844) 176
-------- --------- ---------
Net cash provided by operating activities ..................................... $ 5,574 $ 6,944 $ 7,581
======== ========= =========
See notes to consolidated financial statements
46
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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, 2002 and 2001, the Company had available for sale
securities of approximately $125,084,000 and $123,597,000, 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 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. 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 estimated at 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 potential dilutive 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, or a contracted third party, 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
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". The pro forma impact on net income and net income per share as if
the fair value of stock-based compensation plans had been recorded as a
component of compensation expense in the consolidated financial statements as of
the date of grant of awards related to such plans, pursuant to the provisions of
SFAS No. 123, "Accounting for Stock Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement No. 123", is disclosed as follows and in Note
Twelve.
(Dollars in thousands, except per share data) 2002 2001 2000
--------------------------------------------- ------ ------ ------
Net income, as reported $6,782 $6,478 $4,602
Less: Stock based compensation as calculated
per fair value method, net of tax effect (349) (522) (538)
------ ------ ------
Pro forma net income $6,433 $5,956 $4,064
Earnings per share:
Basic - as reported $ 1.49 $ 1.43 $ 1.03
Basic - pro forma $ 1.41 $ 1.32 $ 0.91
Diluted - as reported $ 1.46 $ 1.41 $ 1.02
Diluted - pro forma $ 1.38 $ 1.30 $ 0.90
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 2002, 2001, and 2000: dividend yield of 3.30% for 2002,
3.90% for 2001, and 4.75% for 2000; expected volatility of 16.0% for 2002, 42.0%
for 2001, and 33.0% for 2000; risk free interest rates of 3.47% for 2002, 4.92%
for 2001, and 5.85% for 2000, 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 and
thereafter vest ratably over a four year period. No option will be exercisable
after ten years from the date granted.
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.
50
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
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
The Financial Accounting Standards Board (FASB) has issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets."
SFAS 141 supersedes Accounting Principles Board (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. The implementation of this Statement did
not have a material impact on the Company's financial statements.
51
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
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. The
implementation of this Statement did not have a material impact on the Company's
financial statements.
The FASB has issued SFAS 145 "Rescission of FASB Statements No. 4, 44, and
64,Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145).
This Statement rescinds SFAS No.4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS 44,"Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS 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 have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of SFAS 145 related to the rescission of SFAS 4 shall
be applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early application
of the provisions of this Statement related to the rescission of SFAS 4 is
encouraged. The provisions in paragraphs 8 and 9(c) of SFAS 145 related to SFAS
13 shall be effective for transactions occurring after May 15, 2002, with early
application encouraged. All other provisions of SFAS 145 shall be effective for
financial statements issued on or after May 15, 2002, with early application
encouraged. Management does not anticipate the implementation of this Statement
to have a material impact on the Company's consolidated financial statements.
In June 2002 the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) 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
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
Management does not anticipate the implementation of this Statement to have a
material impact on the Company's financial statement.
The FASB has issued SFAS 147,"Acquisitions of Certain Financial
Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". FASB Statement 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
52
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
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 FASB Statements No. 141,"Business Combinations," and No.
142,"Goodwill and Other Intangible Assets." Thus, the requirement in paragraph 5
of Statement 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 SFAS No. 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 financial statements.
In December 2002, the FASB issued SFAS No. 148,"Accounting for
Stock-Based Compensation-Transition and Disclosure". In light of
recent switches by a number of companies to the recognition and measurement
provisions of SFAS 123,"Accounting for Stock-Based Compensation," (and of
announcements by other entities of their intentions to switch), the FASB has
amended SFAS 123 to add two new transitional approaches when changing from the
APB Opinion 25 intrinsic value method of accounting for stock-based employee
compensation to the SFAS 123 fair value method. In addition, SFAS 123 has been
amended to require disclosure of additional information concerning the effects
of stock-based employee compensation on earnings. Finally, SFAS 148 amends APB
Opinion 28,"Interim Financial Reporting," to call for disclosure of SFAS 123 pro
forma information on a quarterly basis. Management does not anticipate the
implementation of this Statement to have a material impact on the Company's
financial statements.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"),"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (an interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34)." FIN 45 clarifies the requirements of FASB Statement No. 5 (FAS
5),"Accounting for Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. For guarantees that
fall within the scope of FIN 45, the Interpretation requires that guarantors
recognize a liability equal to the fair value of the guarantee upon its
issuance. The Corporation's primary guarantees included within the scope of FIN
45 relates to financial standby letters of credit issued to commercial
customers. FIN 45 requires the liability recognized in standalone arm's-length
transactions to be the premium received or receivable by the guarantor.
Management does not anticipate the implementation of this interpretation to have
a material impact on the Company's financial statements.
In January 2003 the FASB issued FASB Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities (an interpretation of ARB
No.51)." FIN 46 addresses the consolidation by business enterprises of certain
variable interest entities. Management does not anticipate the implementation of
this interpretation to have a material impact on the Company's financial
statements.
53
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Based on the Company's operations as of December 31, 2002, none of these
standards are expected to have a material effect on the Company's financial
statements.
Reclassification
Certain items for 2000 and 2001 have been reclassified to conform with the
2002 presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
Note 2 - 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, 2002 and 2001 were $1,188,000 and $512,000,
respectively.
Note 3 - Investment securities
Investment securities at December 31 consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
2002:
Available for sale:
U.S. government agency securities ... $ 97,364 $1,660 $-- $ 99,024
Mortgage backed securities .......... 17,945 444 (1) 18,388
State and municipal obligations ..... 7,036 315 -- 7,351
Other ............................... 306 15 -- 321
-------- ------ --- --------
Total available for sale ............ 122,651 2,434 (1) 125,084
Federal Home Loan Bank and Federal
Reserve Bank stock .................. 3,732 -- -- 3,732
-------- ------ --- --------
Total investment securities .... $126,383 $2,434 $(1) $128,816
======== ====== === ========
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
======== ====== === ========
54
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
The amortized cost and estimated market value of debt securities at
December 31, 2002, 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 .......................... $ 200 $ 202
Due after one through five years ................. 59,784 60,655
Due after five through ten years ................. 46,326 47,571
Due after ten years .............................. 16,341 16,656
-------- --------
Total debt securities ....................... $122,651 $125,084
======== ========
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:
2002 2001 2000
------- ------- -------
(In thousands)
Proceeds from sales ........................... $ 3,913 $70,469 $ 6,277
Gross realized gains .......................... 318 1,771 98
Gross realized losses ......................... -- 18 38
At December 31, 2002, and 2001, investment securities with a carrying
value of approximately $54,872,000 and $73,300,000, respectively, were pledged
as collateral to secure public deposits and for other purposes.
Note 4 - Loans (net of unearned income)
Major classifications of loans at December 31, are as follows:
2002 2001
-------- --------
(In thousands)
Commercial, financial and agricultural ..... $ 87,458 $ 90,858
Consumer ................................... 98,473 89,943
Real estate:
Residential mortgage .................. 116,074 129,212
Commercial mortgage ................... 170,657 168,419
Construction .......................... 87,696 55,861
-------- --------
Subtotal loans ............................. 560,358 534,293
Loans held for sale ........................ 3,242 1,052
-------- --------
Gross loans ................. $563,600 $535,345
======== ========
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.
55
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
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, 2002 and 2001, the recorded investment in loans considered
impaired was approximately $10,567,000 and $6,857,000, respectively. The related
allowance for credit losses on these impaired loans was approximately $1,904,000
and $1,748,000, respectively. The average recorded investment in impaired loans
for the years ended December 31, 2002, 2001 and 2000 was approximately
$9,881,000, $6,451,000, and $2,892,000 respectively.
Nonperforming loans include non-accrual loans and loans past due 90 days
or more and still accruing interest. Nonperforming loans at December 31, 2002
consisted of $3,314,000 of non-accrual loans and $65,000 of loans 90 days or
more past due still accruing interest. Nonperforming loans at December 31, 2001
consisted of $2,266,000 of non-accrual loans and $6,000 of loans 90 days or more
past due still accruing interest. Nonperforming loans at December 31, 2000
consisted of $3,222,000 of non-accrual loans. The amount of interest income
recorded on nonperforming loans during 2002, 2001 and 2000 amounted to $475,000,
$89,000 and $40,000, respectively. Interest income on nonperforming loans is
recorded when cash is actually received.
The amount of potential problem loans totaled $10,567,000 at December 31,
2002. These loans are considered impaired by the Company. There are no other
identified potential problem loans at December 31, 2002.
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, 2002 and 2001 were $0 and
$19,961,000, respectively. During 2002, the Company sold the servicing rights
related to these loans to a third party service provider. Mortgage loans
serviced for other investors at December 31, 2002 and 2001, were $328,000 and
$428,000, 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 5 - Allowance for credit losses
Changes in the allowance for credit losses for the years ended December 31
were as follows:
2002 2001 2000
------- ------- -------
(In thousands)
Balance at beginning of year ... $ 6,731 $ 6,311 $ 4,436
Provision for credit losses .... 1,300 1,278 2,525
Recoveries ..................... 298 143 154
Losses charged off ............. (1,270) (1,001) (804)
------- ------- -------
Balance at end of year ......... $ 7,059 $ 6,731 $ 6,311
======= ======= =======
56
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Note 6 - Premises and equipment
Premises and equipment at December 31 is summarized as follows:
2002 2001
------- -------
(In thousands)
Land ......................................... $ 2,868 $ 2,859
Building and leasehold improvements .......... 7,196 7,107
Equipment .................................... 10,977 10,476
------- -------
Subtotal ..................................... 21,041 20,442
Less accumulated depreciation and amortization 10,125 9,061
------- -------
Total premises and equipment, net ....... $10,916 $11,381
======= =======
Note 7 - Deposits
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $257,397,000 and $224,532,000 in
2002 and 2001, respectively. The table below presents the scheduled maturities
of time deposits at December 31, 2002.
Year ending December 31, (In thousands)
------------------------ --------------
2003 ................................................... $345,638
2004 ................................................... 52,736
2005 ................................................... 27,737
2006 ................................................... 4,687
2007 ................................................... 11,975
Thereafter ............................................. 628
--------
Total time deposits ............................... $443,401
========
Note 8 - Federal funds purchased, retail repurchase agreements and other
borrowings
The following is a schedule of federal funds purchased, securities sold
under agreements to repurchase and FHLB borrowings:
Maximum
Balance Interest Rate Average Outstanding
as of as of Average Interest at Any
December 31 December 31 Balance Rate Month-end
----------- ------------- ------- -------- ----------
(In thousands, except percentages)
2002
Federal funds purchased and securities
sold under agreements to repurchase .... $ 8,258 1.25% $15,069 1.64% $25,739
FHLB borrowings ............................. 52,500 2.94% 46,052 2.79% 52,500
------- ------- -------
Total ............................. $60,758 $61,121 $78,239
======= ======= =======
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
======= ======= =======
57
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
At December 31, 2002, the Subsidiary Bank had an approximately $124
million line of credit with the FHLB under which $52.5 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 and qualifying commercial
real estate. The outstanding amounts consist of $20.0 million maturing in 2003,
$7.5 million maturing in 2004, $15.0 million maturing in 2007 and $10.0 million
maturing in 2011. The borrowings maturing in 2007 and 2011 both have one time
call features, and may be converted to a floating rate based on the three month
LIBOR rate at their respective call date.
Federal funds purchased represent unsecured overnight borrowings from
other financial institutions by the Subsidiary Bank. Securities sold under
agreements 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 9 - Income taxes
The components of income tax expense for the years ended December 31 are
as follows:
2002 2001 2000
------ ------- -------
(In thousands)
Current tax expense
Federal .............................. $2,928 $ 3,373 $ 2,996
State ................................ 275 96 53
------ ------- -------
Total current .............. 3,203 3,469 3,049
------ ------- -------
Deferred tax expense (benefit)
Federal .............................. 282 (539) (633)
State ................................ 42 (79) (93)
------ ------- -------
Total deferred ............. 324 (618) (726)
------ ------- -------
Total income tax expense ... $3,527 $ 2,851 $ 2,323
====== ======= =======
The significant components of deferred tax assets at December 31 are as
follows:
2002 2001
------ ------
(In thousands)
Deferred tax assets:
Allowance for credit losses ............................ $2,676 $2,489
Non-qualified deferred compensation plans .............. 390 888
Other .................................................. 165 52
------ ------
Total ..................................... 3,231 3,429
Deferred tax liabilities:
Depreciable basis of property and equipment ............ 515 234
Net unrealized gain on securities available for sale ... 949 956
Deferred loan fees ..................................... 208 281
Other .................................................. -- 82
------ ------
Total ..................................... 1,672 1,553
------ ------
Net deferred tax assets (liabilities) .................... $1,559 $1,876
====== ======
There is no valuation allowance for deferred tax assets as management
believes that realization of the deferred tax assets will more likely than not
be realized.
58
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
The provision for income taxes differs from that computed by applying the
federal statutory rate of 34% as indicated in the following analysis:
2002 2001 2000
------- ------- -------
(In thousands)
Tax based on statutory rates ...................... $ 3,505 $ 3,172 $ 2,354
Increase (decrease) resulting from:
Effect of tax-exempt income .................. (101) (228) (209)
State income taxes, net of federal benefit ... 229 11 (35)
Other, net ................................... (106) (104) 213
------- ------- -------
Total provision for income taxes ............. $ 3,527 $ 2,851 $ 2,323
======= ======= =======
Note 10 - Lease commitments
The minimum annual lease commitments under noncancelable operating leases
in effect at December 31, 2002, are as follows:
Year Ending December 31 (In thousands)
----------------------- --------------
2003 ..................................................... $ 274
2004 ..................................................... 246
2005 ..................................................... 240
2006 ..................................................... 240
2007 ..................................................... 240
Thereafter ............................................... 303
------
Total lease commitments ............................. $1,543
======
Rental expense was $429,000 in 2002, $401,000 in 2001, and $350,000 in
2000.
Note 11 - 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 two years.
2002 2001
----------- -----------
Balance, beginning of year $ 4,626,000 $ 3,716,000
Advances during year 2,417,000 4,184,000
Repayments during year (2,107,000) (3,274,000)
----------- -----------
Balance, end of year $ 4,936,000 $ 4,626,000
=========== ===========
59
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Note 12 - Stock based compensation
The Company may provide compensation to directors, employees and third
parties through stock grants or options. The Company did not issue stock grants
during 2002, 2001 or 2000.
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:
2002 2001 2000
-------------------------- ------------------------- -------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- --------- -------------- -------- --------------
Outstanding -
Beginning of year ..... 813,353 $14.46 798,084 $14.34 798,661 $14.33
Granted ............... 5,000 16.72 126,000 12.80 13,350 11.24
Exercised ............. (144,383) 9.76 (84,532) 10.11 (7,427) 7.11
Forfeited ............. (44,359) 19.86 (26,199) 17.01 (6,500) 14.96
-------- -------- --------
Outstanding - End
of year ............... 629,611 $15.14 813,353 $14.46 798,084 $14.34
======== ======== ========
Exercisable - End
of year ............... 494,858 563,753 $14.65 570,292 $13.51
Weighted average fair
value of options granted
during the year ............ $ 2.29 $ 4.08 $ 2.92
The following is a summary of information on outstanding and exercisable options
at December 31, 2002:
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 - 12.52 246,457 5.58 $ 11.39 193,220 $ 11.25
$12.94 - 25.50 383,154 5.53 17.55 301,638 18.57
------- -------
629,611 494,858
======= =======
60
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
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 2002, 2001, and 2000: dividend yield of 3.30% for 2002,
3.90% for 2001, and 4.75% for 2000; expected volatility of 16.0% for 2002, 42.0%
for 2001, and 33.0% for 2000; risk free interest rates of 3.47% for 2002, 4.92%
for 2001, and 5.85% for 2000, 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 and
thereafter vest ratably over a four year period. No option will be exercisable
after ten years from the date granted.
Note 13 - 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:
2002 2001 2000
----- ------ ------
(In thousands)
Unrealized holding gains arising during the year ....................... $ 298 $3,954 $4,999
Reclassification adjustment for gains included in net income ........... 318 1,753 60
----- ------ ------
Other comprehensive income (loss) before tax ........................... (20) 2,201 4,939
Income tax expense (benefit) related to other comprehensive income ..... (8) 858 1,926
----- ------ ------
Other comprehensive income (loss) ...................................... $ (12) $1,343 $3,013
===== ====== ======
61
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Note 14 - 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, 2002
--------------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income per share of common stock:
Income available to common shareholders ................... $6,782,000 4,560,554 $1.49
=====
Effect of dilutive securities:
Stock options ............................................. -- 96,403
---------- ---------
Net income per share of common stock - assuming dilution:
Income available to common shareholders and
assumed conversion ................................... $6,782,000 4,656,957 $1.46
========== ========= =====
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
========== ========= =====
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
========== ========= =====
62
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Note 15 - 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.
2002 2001 2000
-------- -------- --------
(In thousands)
Condensed balance sheets
Assets
Cash and due from banks ............................................ $ 1,070 $ 818 $ 410
Securities ......................................................... 11 11 11
Investment in wholly-owned subsidiary .............................. 62,964 60,478 55,685
Other assets ....................................................... 288 1,401 286
-------- -------- --------
Total assets ....................................................... $ 64,333 $ 62,708 $ 56,392
======== ======== ========
Shareholders' equity and other liabilities .............................. $ 64,333 $ 62,708 $ 56,392
======== ======== ========
Condensed statements of income
Dividends from subsidiary ............................................... $ 4,421 $ 3,044 $ 1,633
Management fees ......................................................... 300 240 180
Gain on sale of securities .............................................. -- -- 62
Other expenses .......................................................... 437 (277) (244)
-------- -------- --------
Income before tax benefit ............................................... 4,284 3,007 1,631
Income tax benefit ...................................................... 46 10 1
-------- -------- --------
Income before equity in undistributed net income of subsidiary .......... 4,288 3,017 1,632
Equity in undistributed net income of subsidiary ........................ 2,494 3,461 2,970
-------- -------- --------
Net income .............................................................. $ 6,782 $ 6,478 $ 4,602
======== ======== ========
Condensed statements of cash flows
Cash flows from operating activities
Dividends received from subsidiary ................................. $ 4,421 $ 3,044 $ 1,633
Management fees received ........................................... 300 240 180
Cash paid for franchise tax, registration cost, acquisition cost
and other .......................................................... (435) (267) (181)
Decrease (increase) in other assets ................................ 1,113 (1,115) (180)
-------- -------- --------
Net cash provided by operating activities ..................... 5,399 1,902 1,452
-------- -------- --------
Cash flows from investing activities
Investment in subsidiary ........................................... -- 11 (134)
Proceeds from sale of securities ................................... -- -- 63
-------- -------- --------
Net cash provided (used in) by investing activities ........... -- 11 (71)
-------- -------- --------
Cash flows from financing activities
Repurchase of common stock ......................................... (4,129) -- --
Dividends paid, net of DRIP ........................................ (2,411) (2,290) (2,002)
Proceeds from employee 401(k) ...................................... -- -- 6
Exercise of stock options .......................................... 1,393 785 43
-------- -------- --------
Net cash (used in) financing activities ....................... (5,147) (1,505) (1,953)
-------- -------- --------
Increase (decrease) in cash ............................................. 252 408 (572)
Cash at beginning of year ............................................... 818 410 982
-------- -------- --------
Cash at end of year ..................................................... $ 1,070 $ 818 $ 410
======== ======== ========
Reconciliation of net income to cash provided by operating activities
Net income .............................................................. $ 6,782 $ 6,478 $ 4,602
Adjustments to reconcile net income to net cash provided
by operating activities
Decrease (increase) in other assets and liabilities ........... 1,111 (1,115) (180)
Equity in undistributed net income of subsidiary .............. (2,494) (3,461) (2,970)
-------- -------- --------
Net cash provided by operating activities ............................... $ 5,399 $ 1,902 $ 1,452
======== ======== ========
63
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Note 16 - 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
-------------------
2002 2001
-------- -------
(In thousands)
Commitments to extend credit ........................ $107,458 $78,139
Commercial letters of credit ........................ 283 376
-------- -------
Total commitments and contingent liabilities ... $107,741 $78,515
======== =======
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 17 - 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, 2002 and 2001, and the assumptions and
components of net periodic pension cost for the two years in the period ended
December 31, 2002.
2002 2001
------- -------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year ............. $ 4,573 $ 3,737
Service cost ........................................ 383 328
Interest cost ....................................... 291 325
Amendments .......................................... 107
Actuarial (gain) loss ............................... (605) 839
Benefits paid ....................................... (229) (656)
------- -------
Benefit obligation at end of year ................... 4,520 4,573
------- -------
Change in plan assets
Fair value of plan assets at beginning of year ...... 2,341 2,938
Actual return on plan assets ........................ (362) (256)
Employer contribution ............................... 2,109 316
Benefits paid ....................................... (229) (656)
------- -------
Fair value of plan assets at end of year ............ 3,859 2,341
------- -------
Plan assets less than projected benefit obligation .. (661) (2,232)
Funded status
Unrecognized net actuarial (gain) loss .............. 1,502 1,525
Unrecognized prior service charge ................... 173 87
------- -------
Pension asset (liability) ........................... $ 1,014 $ (620)
======= =======
64
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
2002 2001
----- -----
Amounts recognized in the statement of financial position consists of:
Accrued benefit liability ................................................ $ -- $(918)
Intangible asset ......................................................... -- 87
Accumulated comprehensive income ......................................... -- 211
----- -----
Net amount recognized .................................................... $ -- $(620)
Weighted-average assumptions
Discount rate ............................................................ 7.25% 7.25%
Expected return on plan assets ........................................... 9.00% 9.00%
Rate of compensation increase ............................................ 5.00% 5.00%
Components of net periodic pension cost
Service cost ............................................................. $ 384 $ 328
Interest cost ............................................................ 291 324
Expected return on plan assets ........................................... (255) (294)
Amortization of prior service cost ....................................... 55 39
----- -----
Net periodic pension cost ................................................ $ 475 $ 397
===== =====
The Company has a Supplemental Executive Retirement Plan ("SERP") that
allows the Company to supplement the level of certain executives' retirement
income over the amount obtainable through the tax-qualified retirement plan.
Contributions to the SERP totaled $234,000 for 2002, $232,000 for 2001, and
$205,000 for 2000.
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 for 2002, $130,000 for 2001, and $117,000 for 2000.
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 plan participant makes an annual election to either
receive that year's compensation currently or to defer receipt until their
death, disability or retirement. Effective November 1, 1999, the deferred
compensation balances were transferred to a Rabbi trust. No liability exists as
of December 31, 2002 and 2001.
Note 18 - 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, 2002, the Subsidiary Bank had undivided
profits of approximately $32.9 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
65
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Subsidiary Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Subsidiary Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 2002, 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.
(In thousands, except percentages) For Capital
Adequacy
Actual Purposes
---------------- ---------------------------------------
Amount Ratio Amount Minimum Ratio
------- ----- ------- ----------------------------
(In thousands, except for percentages)
December 31, 2002
Total Capital (To Risk Weighted Assets)
Consolidated ........................... $69,614 12.4% $44,742 8.0%
Subsidiary Bank ........................ 68,241 12.2 44,717 8.0
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................... 62,622 11.2 22,371 4.0
Subsidiary Bank ........................ 61,253 11.0 22,359 4.0
Tier 1 Capital (To Average Assets)
Consolidated ........................... 62,622 8.5 29,351 4.0
Subsidiary Bank ........................ 61,253 8.4 29,202 4.0
December 31, 2001
Total Capital (To Risk Weighted Assets)
Consolidated ........................... $67,468 12.8% $42,058 8.0%
Subsidiary Bank ........................ 65,221 12.4 41,944 8.0
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................... 60,888 11.6 21,029 4.0
Subsidiary Bank ........................ 58,658 11.2 20,972 4.0
Tier 1 Capital (To Average Assets)
Consolidated ........................... 60,888 8.6 28,205 4.0
Subsidiary Bank ........................ 58,658 8.3 28,155 4.0
To Be Well
(In thousands, except percentages) Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------------
Amount Minimum Ratio
------- -----------------------------
December 31, 2002
Total Capital (To Risk Weighted Assets)
Consolidated ........................... $ N/A
Subsidiary Bank ........................ 55,897 10.0%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................... N/A
Subsidiary Bank ........................ 33,538 6.0
Tier 1 Capital (To Average Assets)
Consolidated ........................... N/A
Subsidiary Bank ........................ 36,502 5.0
December 31, 2001
Total Capital (To Risk Weighted Assets)
Consolidated ........................... $ N/A
Subsidiary Bank ........................ 52,430 10.0%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................... N/A
Subsidiary Bank ........................ 31,458 6.0
Tier 1 Capital (To Average Assets)
Consolidated ........................... N/A
Subsidiary Bank ........................ 35,256 5.0
Note 19 - 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.
66
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements - Continued
Cash and cash equivalents. For cash on hand and amounts due from banks the
carrying value is considered to be a reasonable estimate of fair value.
Investment securities. The fair value of investment securities is based on
quoted market prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. The
fair value of equity investments in the restricted stock of the Federal Reserve
Bank and Federal Home Loan Bank equals the carrying value.
Loans. The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of residential mortgage loans held for sale is based on quoted
market prices. The fair value of variable rate loans with frequent repricing and
negligible credit risk approximates book value.
Deposits. The fair value of noninterest-bearing demand deposits and NOW,
savings, and money market deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Retail Repurchase Agreements. The carrying
value of federal funds purchased and retail repurchase agreements is considered
to be a reasonable estimate of fair value.
Other borrowings. Other borrowings consists of FHLB borrowings with
varying maturities. The fair values of these liabilities are estimated using the
discounted values of the contractual cash flows. The discount rate is estimated
using the rates currently in effect for similar borrowings.
Commitments. The fair value of commitments to extend credit is considered
to approximate carrying value, since the large majority of these commitments
would result in loans that have variable rates and/or relatively short terms to
maturity. For other commitments, generally of a short-term nature, the carrying
value is considered to be a reasonable estimate of fair value. The various
commitment items were disclosed in Note 16.
The estimated fair values of financial instruments at December 31 are as
follows:
2002 2001
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents ...................... $ 24,524 $ 24,524 $ 23,673 $ 23,673
Investment securities
Available for sale ......................... 125,084 125,084 123,597 123,597
Other equity securities .................... 3,732 3,732 3,967 3,967
Loans held for sale ............................ 3,242 3,242 1,052 1,052
Loans .......................................... 560,358 560,658 534,293 536,291
Financial liabilities:
Deposits ....................................... 605,005 607,565 586,760 598,187
Federal funds purchased and retail repurchase
agreements ................................ 8,258 8,258 19,677 19,677
Other borrowings ............................... 52,500 53,544 30,000 29,587
67
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 15, 2003.
Item 11. Executive Compensation
Executive compensation and executive compensation plan information are
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 15, 2003.
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 15, 2003.
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 15, 2003.
Item 14. Controls and Procedures
Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, the Company's Chief
Executive Officer and the Chief Financial Officer evaluated the effectiveness of
the Company's disclosure controls and procedures in accordance with Rule 13a-14
under the Exchange Act. Based on their evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures enable the Company to record, process, summarize and report in a
timely manner the information that the Company is required to disclose in its
Exchange Act reports.
68
Changes in internal controls
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 evaluation referred to above.
PART IV
Item 15. 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 ................................................ 42
Consolidated Balance Sheets as of December 31, 2002 and 2001 ..................... 43
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000 ................................................. 44
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000 ................................................. 45
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000 .................................................................... 46
Notes to Consolidated Financial Statements ....................................... 47-66
(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 Long Term Incentive Plan of the Registrant for certain Senior
Management employees.
10.11(8) Employment Agreement dated May 18, 1995, between the
Registrant, as employer, and Ernest J. Sewell, President and
Chief Executive Officer of the Registrant.
10.12 Amendment to Employment Agreement between the Registrant, as
employer, and Ernest J. Sewell, President and Chief Executive
Officer of the Registrant dated May 16, 2002.
10.13(9) Split-Dollar Agreement dated January 27, 1995, between the
Registrant and Ernest J. Sewell.
69
10.14(10) Lease, dated January 31, 1997, between the Registrant and
Landmark Commercial, Inc., relating to the Wilmington branch
office.
10.15(2) Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
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.
99.01 Certification of Periodic Financial Report Pursuant to 18 USC
Section 1350.
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.
70
(b) Reports on 8-K.
The Company filed a Current Report on Form 8-K dated May 17, 2002
announcing that it plans to repurchase of up to 5% of the Company's common
stock.
The Company filed a Current Report on Form 8-K dated September 25, 2002
announcing plans to purchase the Harrisonburg, Virginia branch of Guaranty Bank,
a subsidiary of Guaranty Financial Corporation.
The Company filed a Current Report on Form 8-K dated December 2, 2002
announcing the continuation of the stock repurchase program, with authorization
from the Board of Director to repurchase up to 5% of the Company's common stock.
71
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.
72
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 20, 2003 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 20, 2003
- ------------------------- (Principal Executive Officer)
Ernest J. Sewell
/s/ Michael W. Shelton Vice President and Chief Financial Officer March 20, 2003
- ------------------------- (Principal Financial and Accounting Officer)
Michael W. Shelton
/s/ Barry Z. Dodson Chairman of the Board March 20, 2003
- -------------------------
Barry Z. Dodson
/s/ Gary G. Blosser Director March 20, 2003
- -------------------------
Gary G. Blosser
/s/ Charles A. Britt Director March 20, 2003
- -------------------------
Charles A. Britt
/s/ O. Eddie Green Director March 20, 2003
- -------------------------
O. Eddie Green
/s/ Joseph H. Kinnarney Director March 20, 2003
- -------------------------
Joseph H. Kinnarney
/s/ E. Reid Teague Director March 20, 2003
- -------------------------
E. Reid Teague
/s/ Elton H. Trent, Jr. Director March 20, 2003
- -------------------------
Elton H. Trent, Jr.
/s/ Kenan C. Wright Director March 20, 2003
- -------------------------
Kenan C. Wright
73