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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
Commission File Number: 0-13086
FNB FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56 - 1382275
(State or other jurisdiction of (I.R.S. Employer
inc orporation or organization) Identification Number)
202 South Main Street, Reidsville, North Carolina 27320
(Address of principal executive offices) (Zip Code)
(336) 342-3346
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal years,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
4,402,397 common shares were outstanding as of July 31, 2003, with a par value
per share of $1.00.
FNB FINANCIAL SERVICES CORPORATION
FORM 10-Q
INDEX
Page
----
PART I INANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
June 30, 2003 and December 31, 2002
Consolidated Statements of Income and Comprehensive Income Three 4
Months and Six Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows 5
Six months ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Controls and Procedures 20
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8 - K 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands except per share data)
June 30, December 31,
2003 2002
(Unaudited) (Audited)
----------- ------------
ASSETS
Cash and due from banks $ 39,915 $ 24,524
Investment securities:
Securities available for sale 142,525 125,084
Federal Home Loan Bank and Federal Reserve Bank Stock 2,775 3,732
Loans, net of allowance for credit losses of $7,092 at
June 30, 2003 and $7,059 at December 31, 2002 562,288 556,541
Premises and equipment, net 12,558 10,916
Accrued income and other assets 15,602 13,235
-------- --------
Total assets $775,663 $734,032
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 72,418 $ 61,651
Interest bearing 588,989 543,354
-------- --------
Total deposits 661,407 605,005
Federal funds purchased and retail repurchase agreements 6,716 8,258
Other borrowings 32,500 52,500
Accrued expenses and other liabilities 9,549 3,936
-------- --------
Total liabilities 710,172 669,699
-------- --------
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 4,404,404 at June 30, 2003 and
4,467,239 at December 31, 2002 4,404 4,467
Paid-in capital 22,626 23,833
Retained earnings 36,835 34,549
Accumulated other comprehensive income 1,626 1,484
-------- --------
Total shareholders' equity 65,491 64,333
-------- --------
Total liabilities and shareholders' equity $775,663 $734,032
======== ========
See notes to unaudited consolidated financial statements.
3
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest income
Loans $ 9,020 $ 9,218 $ 18,099 $ 18,242
Federal funds sold and overnight deposits 28 23 41 43
Investment securities
Taxable 1,017 1,221 2,280 2,752
Tax exempt 272 96 419 193
Other 45 58 95 119
----------- ----------- ----------- -----------
Total interest income 10,382 10,616 20,934 21,349
----------- ----------- ----------- -----------
Interest expense
Deposits 3,979 4,243 8,096 9,141
Federal funds purchased and other borrowings 403 368 819 672
----------- ----------- ----------- -----------
Total interest expense 4,382 4,611 8,914 9,813
----------- ----------- ----------- -----------
Net interest income 6,000 6,005 12,019 11,536
Provision for credit losses 282 680 777 965
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 5,718 5,325 11,242 10,571
Other income
Service charges on deposit accounts 871 663 1,631 1,245
Net gain on sale of securities 240 318 562 318
Net gain on disposition of asset 0 94 0 104
Income from investment services 102 77 243 146
Mortgage banking fees 482 282 946 442
Other income 72 114 180 223
----------- ----------- ----------- -----------
Total noninterest income 1,767 1,548 3,562 2,478
Other expenses
Salaries and employee benefits 2,580 2,524 5,127 4,936
Occupancy expense 275 270 557 529
Furniture and equipment expense 578 482 1,109 979
Insurance expense, including FDIC assessment 48 52 96 97
Marketing expense 85 74 182 119
Printing and supply expense 92 94 210 229
Other expenses 1,100 1,081 2,089 2,019
----------- ----------- ----------- -----------
Total noninterest expense 4,758 4,577 9,370 8,908
Income before income taxes 2,727 2,296 5,434 4,141
Income tax expense 953 761 1,911 1,354
----------- ----------- ----------- -----------
Net income 1,774 1,535 3,524 2,787
Other comprehensive income (loss) 485 973 142 (87)
----------- ----------- ----------- -----------
Comprehensive income $ 2,259 $ 2,508 $ 3,666 $ 2,700
=========== =========== =========== ===========
Per share data
Net income, basic $ 0.40 $ 0.33 $ 0.79 $ 0.60
Net income, diluted $ 0.39 $ 0.32 $ 0.77 $ 0.59
Cash dividends $ 0.14 $ 0.13 $ 0.28 $ 0.26
Weighted average shares outstanding, basic 4,467,707 4,635,296 4,455,772 4,605,891
Weighted average shares outstanding, diluted 4,610,202 4,739,204 4,581,468 4,694,325
See notes to unaudited consolidated financial statements.
4
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Six Months Ended
June 30,
-----------------------
2003 2002
-------- --------
Cash flows from operating activities:
Interest received $ 19,193 $ 19,738
Fees and commissions received 3,880 2,280
Interest paid (9,204) (10,548)
Noninterest expense paid (10,141) (8,682)
Income taxes paid (1,963) (2,026)
Funding of loans held for sale (47,503) (12,232)
Proceeds from sales of loans held for sale 48,205 12,514
-------- --------
Net cash provided by operating activities 2,467 1,044
-------- --------
Cash flows from investing activities:
Proceeds from sales or calls of securities available for sale 77,882 33,029
Proceeds from maturities of securities available for sale 200 --
Purchase of securities (89,972) (220)
Capital expenditures (2,274) (218)
(Increase) decrease in other real estate owned (721) 823
Increase in loans (4,543) (8,033)
-------- --------
Net cash provided by (used in) investing activities (19,428) 25,381
-------- --------
Cash flows from financing activities:
Increase (decrease) in demand, savings and interest
checking accounts 13,411 (2,908)
Increase (decrease) in time deposits 42,991 (45,477)
Decrease in federal funds purchased and
Retail repurchase agreements (1,542) (779)
Increase (decrease) in other borrowings (20,000) 15,000
Proceeds from issuance of common stock 366 1,072
Repurchase of common stock (1,636) (1,100)
Dividends paid (1,238) (1,199)
-------- --------
Net cash provided by (used in) financing activities 32,352 (35,391)
-------- --------
Net increase (decrease) in cash and cash equivalents 15,391 (8,966)
Cash and cash equivalents, January 1 24,524 23,673
-------- --------
Cash and cash equivalents, June 30 $ 39,915 $ 14,707
======== ========
Supplemental disclosure of non-cash transactions:
Non-cash transfers from loans to other real estate $ 535 $ 394
======== ========
See notes to unaudited consolidated financial statements.
5
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Reconciliation of net income to net cash provided by operating activities:
Six Months Ended
June 30,
-----------------------
2003 2002
-------- --------
Net income $ 3,524 $ 2,787
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 777 965
Depreciation 751 684
Accretion and amortization 330 102
Gain on sale of securities available for sale (562) (318)
Funding of loans held for sale (47,503) (12,232)
Proceeds from sales of loans held for sale 48,205 12,514
Gain on other assets (4) (104)
Increase in accrued income and other assets (1,563) (2,557)
Decrease in accrued expenses and other liabilities (1,488) (797)
-------- --------
Net cash provided by operating activities $ 2,467 $ 1,044
======== ========
See notes to unaudited consolidated financial statements.
6
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, these statements do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
six-month period ended June 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
2. Significant Activities
FNB Financial Services Corporation (the "Company") is a North
Carolina financial holding company. The Company's wholly owned subsidiary,
FNB Southeast (the "Bank"), is a North Carolina chartered commercial bank.
As of June 30, 2003, the Bank operated thirteen banking offices in North
Carolina and five banking offices in Virginia. The Bank has two wholly
owned subsidiaries; FNB Southeast Investment Services, Inc., which
operated three offices, and FNB Southeast Mortgage Corporation, which
operated seven offices. The Company and the Bank are headquartered in
Reidsville, North Carolina.
3. Comprehensive Income
The Company's other comprehensive income for the three and six month
periods ended June 30, 2003 and 2002 consists of unrealized gains and
losses on available for sale securities, net of related income taxes, as
follows:
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Unrealized gains (losses) on
available for sale securities $ 1,033 $ 1,913 $ 795 $ 176
Reclassification of realized gains (240) (318) (562) (318)
------- ------- ------- -------
Other comprehensive income (loss)
before tax 793 1,595 233 (142)
Income tax effect (310) (622) (91) 55
------- ------- ------- -------
Other comprehensive income (loss) $ 483 $ 973 $ 142 $ (87)
======= ======= ======= =======
4. Segment Information
The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of
financial information to be disclosed in both annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
7
Operating segments are components of an enterprise with separate
financial information available for use by the chief operating decision
maker to allocate resources and to assess performance. The Company has
determined that it has one significant operating segment: the providing of
general financial services to the customers of its wholly owned
subsidiary, FNB Southeast. The various products offered by FNB Southeast
are those generally offered by community banks, and the allocation of
resources is based on the overall performance of the Company, rather than
the individual performance of banking offices or products.
5. Net Income Per Share
Basic and diluted earnings per share amounts have been computed
based upon net income as presented in the accompanying income statements
divided by the weighted average number of common shares outstanding or
assumed to be outstanding as summarized.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average number of shares
used in basic EPS 4,467,707 4,635,296 4,455,772 4,605,891
Effect of dilutive stock options 142,495 103,908 125,696 88,434
--------- --------- --------- ---------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 4,610,202 4,739,204 4,581,468 4,694,325
========= ========= ========= =========
As of June 30, 2003, there were 114,833 potentially dilutive share
options not included in the weighted average calculation since the option
exercise prices are greater than the fair market value of the common
shares.
6. Investment Securities
June 30, 2003 December 31, 2002
----------------------- -----------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
Available for sale:
U.S. Agency securities $ 82,284 $ 83,644 $ 97,364 $ 99,024
Mortgage backed securities 24,680 24,992 17,945 18,388
State and municipal obligations 32,574 33,550 7,036 7,351
Other 321 339 306 321
-------- -------- -------- --------
Total available for sale 139,859 142,525 122,651 125,084
Federal Reserve Bank and Federal
Home Loan Bank stock 2,775 2,775 3,732 3,732
-------- -------- -------- --------
Total investment securities $142,634 $145,300 $126,383 $128,816
======== ======== ======== ========
8
7. Loans (net of unearned income)
(Dollars in thousands) June 30, December 31,
2003 2002
-------- ------------
Loan Category:
Real estate - commercial $163,561 $170,657
Real estate - residential 98,670 116,074
Real estate - construction 105,903 87,696
Commercial, financial and agricultural 89,635 87,458
Consumer 109,071 98,473
-------- --------
Subtotal loans 566,840 560,358
Loans held for sale 2,540 3,242
-------- --------
Gross loans $569,380 $563,600
======== ========
8. Allowance for Credit Losses
June 30, 2003 December 31, 2002
------------------------ ------------------------
% of Loans % of Loans
(Dollars in thousands) in Each in Each
Category to Category to
Allowance Total Loans Allowance Total Loans
--------- ----------- --------- -----------
Balance at end of period
applicable to:
Real estate - construction 5 19 $ 7 16
Real estate - mortgage 58 46 180 51
Commercial 5,102 16 5,201 16
Consumer 1,927 19 1,671 17
------ ------ ------ ------
Total $7,092 100% $7,059 100%
====== ====== ====== ======
9
9. Analysis of Allowance for Credit Losses
Six Months Ended
June 30,
----------------------
(Dollars in thousands) 2003 2002
------- -------
Balance, beginning of period $ 7,059 $ 6,731
Charge-offs 906 857
Recoveries (162) (69)
------- -------
Net charge-offs 744 788
------- -------
Allowance charged to operations 777 965
------- -------
Balance, end of period $ 7,092 $ 6,908
======= =======
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.26% 0.29%
======= =======
Ratio of allowance for credit losses to
month end loans 1.25% 1.27%
======= =======
10. Nonperforming Assets
June 30, December 31,
(Dollars in thousands) 2003 2002
-------- ------------
Nonaccrual (1) $8,913 $3,614
Past due 90 days or more and still accruing interest 54 65
Other real estate 1,847 1,662
Renegotiated troubled debt -- --
(1) Other than amounts listed above, there are no other loans which: (a)
represent or result from trends or uncertainties which management
reasonably expects will materially affect future operating results,
liquidity, or capital resources, or (b) represent material credits
about which management is aware of any information which causes
management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements.
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 included in 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.
Summary
On January 27, 2003 the Company completed the acquisition of the
Harrisonburg, Virginia branch of another financial institution. The Company
acquired approximately $5.4 million in loans and $11.0 million in deposits.
Assets at June 30, 2003 were $775.7 million, an increase of $41.6 million
since December 31, 2002. An increase in investment securities available for sale
of $17.4 million, combined with an increase in net loans of $5.8 million,
contributed to this increase in assets during the first six months of 2003. Over
the past six months, noninterest-bearing deposits increased $10.8 million, while
interest-bearing deposits rose $45.6 million.
Net income for the quarter ended June 30, 2003, of $1.8 million was
$239,000, or 15.6%, higher than the amount earned in the second quarter last
year. Diluted earnings per share for the current quarter was $0.39 per share
compared to $0.32 per share last year. For the six months to date of 2003,
earnings of $3.5 million were $737,000, or 26.4%, higher than the same period a
year ago. Diluted earnings per share for the six months ended June 30, 2003 and
2002 were $0.77 and $0.59, respectively.
Interest Income and Interest Expense
Total interest income was $10.4 million for the second quarter of 2003,
compared to $10.6 million during the same period in 2002. Average earning assets
for the current quarter were $717.5 million, an increase of 11.7% over the
second quarter average of $642.4 million a year ago. Interest income from loans
was $9.0 million, down 2.1% from $9.2 million in the second quarter of 2002. The
decrease in
11
interest income was driven primarily by a continuing decline in the prime
lending rate. Average loans of $573.5 million were 6.3% higher than the $539.4
million last year. For the six months ended on June 30, 2003, total interest
income was $20.9 million, compared to $21.3 million during the same period in
2002. Earning assets averaged $713.1 million during the first six months of
2003, a 9.6% increase over the 2002 average of $650.6 million.
Interest income on investments totaled $1.3 million for the three months
ended June 30, 2003 and 2002. The $36.5 million, or 37.4%, increase in the
average balance of the investment portfolio was offset by a decline in the yield
from 5.95% in 2002 to 4.60% in 2003. Investment income for the six-month period
totaled $2.8 million in 2003 and $3.1 million in 2002. Market pressure continues
on yields as interest rates are at the lowest point in 45 years.
Second quarter total interest expense was $4.4 million, compared to $4.6
million from the second quarter of last year, a 5.0% decrease. Average interest
bearing liabilities for the second quarter 2003 increased 13.5%, to $617.3
million from $543.8 million for the second quarter of 2002. Total interest
expense for the first six months of 2003 was $8.9 million, a 9.2% decrease from
the $9.8 million expense for the first six months of 2002. Overall cost of funds
for the six months ended June 30, 2003 and 2002 was 2.66% and 3.23%,
respectively.
Interest expense on deposits for the second quarter decreased 6.2%, to
$4.0 million for 2003 from $4.2 million in 2002. Average interest bearing
deposits increased 15.9%, to $555.1 million, from $478.8 for the second quarter
of 2002. A campaign directed at increasing certificates of deposit accounted for
a significant amount of this growth. Deposit interest expense for the six months
ended June 30, 2003, decreased from $9.1 million in 2002 to $8.1 million in
2003. The average rate for the six months on interest bearing deposits decreased
to 2.97% in 2003; from 3.72% one year earlier while the average balance of
interest bearing deposits increased 11.0%, from $494.9 million in 2002 to $549.4
million in 2003.
Interest expense on federal funds purchased and other borrowings was
$404,000 for the quarter ended June 30, 2003, up 9.4%, from $368,000 in the
second quarter of 2002. For the six months ended June 30, interest expense for
this category increased from $$673,000 in 2002 to $819,000 in 2003. The increase
was attributable primarily to an increase in the average balance of federal
funds purchased and other borrowings from $59.9 million in 2002 to $63.8 million
in 2003. This increase was partially offset by a decline in the average rate
paid on purchased funds from 3.23% for the first six months of 2002 to 2.66% for
the same period in 2003.
Comparable net interest margins are as follows:
Liability
Time Period Asset Yield Rate Interest Rate Spread
- ----------- ----------- ---- --------------------
Second Quarter, 2003 5.88% - 2.85% = 3.03%
Second Quarter, 2002 6.66% - 3.40% = 3.26%
Year-To-Date, 2003 5.98% - 2.93% = 3.05%
Year-To-Date, 2002 6.65% - 3.57% = 3.08%
Provision for Credit Losses
A provision for credit losses is charged against earnings in order to
maintain the allowance for credit losses at a level that reflects management's
evaluation of the incurred losses inherent in the portfolio. The amount of the
provision is based on continuing assessments of nonperforming and "watch list"
loans, analytical reviews of loan loss experience in relation to outstanding
loans, loan charge-offs, nonperforming asset trends and management's judgment
with respect to current and expected economic conditions and their impact on the
existing credit portfolio.
The provision for credit losses in the second quarter of 2003 was $282,000
compared to $680,000 in 2002. The allowance for credit losses as a percentage of
gross loans outstanding was 1.25% at June 30, 2003 and December 31, 2002,
compared to 1.27% at June 30, 2002. Annualized net credit losses, as a
12
percent of average loans, was 0.26% and 0.38% for the quarters ended June 30,
2003 and 2002, respectively. Year to date annualized net credit loss declined to
0.26% of average loans in 2003, compared to 0.29% for the same period in 2002.
For the first six months of 2003, the provision was $777,000, compared to
$965,000 for the same period a year ago.
Noninterest Income and Expense
Noninterest income in the second quarter of this year increased 14.2% to
$1.8 million from $1.5 million in the same period last year. For the current
quarter, $240,000 of net gains from sales of investment securities were
recognized, a decrease from $318,000 of net gains in the second quarter of last
year. Deposit service charges of $871,000 for the second quarter of 2003
increased 31.3% from the $663,000 in the second quarter of 2002. The
introduction in the second quarter of 2002 of a new fee-based overdraft
protection product contributed to this increase. Noninterest income in the
second quarter of 2003 included $482,000 in mortgage banking fees and $102,000
in investment service fees compared to revenues of $282,000 and $77,000,
respectively, for the previous year. The increase in mortgage banking fees for
the first half of 2003 was attributable to the continuing growth of the mortgage
banking subsidiary, combined with the refinancing activity associated with the
declining interest rate environment. Total noninterest income for the first half
of 2003 totaled $3.6 million; a 43.7% increase over the $2.5 million earned in
the first half of 2002. Deposit service charges of $1.6 million for the six
months were 31.0% higher than the $1.2 million recorded in the same period last
year. Mortgage banking fees totaled $946,000 for the first six months of 2003,
compared to $442,000 for the same period in 2002, an increase of 113.8%.
Noninterest expense for the second quarter of 2003 was $4.8 million, a
4.0% increase over the $4.6 million expense in the second quarter of 2002.
Salaries and employee benefits increased $56,000 because of higher insurance and
retirement costs and furniture and equipment expense rose $96,000, compared to
second quarter 2002. Other expense for the second quarters of 2003 and 2002
totaled $1.1 million. Other expense in the first half of 2003 totaled $2.1
million, an increase of $70,000 from the first half of 2002. This year's
six-month noninterest expense of $9.4 million was 5.2% higher than the $8.9
million in the same period last year.
Income Taxes
The effective income tax rate of 35.2% for the first six months of 2003
was higher than the 32.7% rate for the same period of 2002. The lower effective
tax rate for 2002 was primarily due to the reduced amount of current expense
required to provide adequate income tax provision during the first six months of
2002. The Company anticipates the effective tax rate for the 2003 full year will
be similar to the results of the first six months of 2003.
Financial Condition
The Company's total assets at June 30, 2003 and 2002 were $775.7 million
and $671.3 million, respectively. The $104.3 million growth represents a 15.5%
increase over one year earlier. Since December 31, 2002, assets have increased
$41.6 million. An increase of $16.5 million in investment securities available
for sale, combined with a $9.1 million rise in interest-bearing balances due
from banks, contributed to the increase in total assets. Average earning assets
for the second quarter of 2003 were $717.5 million, or 11.7%, higher than the
$642.4 million average for the same quarter last year.
Loans at June 30, 2003 totaled $569.4 million, compared to $543.5 million
one year earlier, an increase of 4.8%. Loans have increased 1.0% from $563.6
million at December 31, 2002. Average loans for the second quarter of 2003 were
$573.5 million, a 6.3% increase over the $539.4 million average in this same
period last year.
Investment securities of $145.3 million at June 30, 2003 were 56.3% higher
than the $92.9 million balance a year ago. Average investment securities were
$134.0 million and $97.5 million for the second quarter of 2003 and 2002,
respectively. The Company elected to use the proceeds from successful campaigns
directed at increasing core deposits to fund the growth in the investment
portfolio.
13
Deposits totaled $661.4 million at June 30, 2003, a 22.9% increase versus
$538.4 million one year ago, and a 9.3% increase from the $605.0 million
recorded at December 31, 2002. At the end of the second quarter 2003,
noninterest-bearing deposits were $72.4 million, or 10.9% of total deposits. The
increase in deposits was the result of campaigns designed to attract demand
deposits and certificates of deposit with a nine-month maturity. As mentioned in
the preceding paragraph, the growth in deposits funded the rise in the
investment portfolio, as well as contributing to the decrease in other
borrowings.
At June 30, 2003, borrowings at the Federal Home Loan Bank of Atlanta
(FHLB) totaled $32.5 million, a decrease of 38.1% compared to $52.5 million at
December 31, 2002. Federal funds purchased and retail repurchase agreements
totaled $6.7 million at June 30, 2003, a decrease of $1.5 million from December
31, 2002.
Shareholders' equity increased to $65.5 million at the end of the second
quarter 2003, compared to $64.3 million at December 31, 2002. The Company paid
dividends of $0.14 per share during the quarter ended June 30, 2003, a 7.7%
increase over the $0.13 per share dividend rate for the second quarter of 2002.
Year to date dividends per share for 2003 were $0.28, compared to $0.26 in 2002.
A second stock repurchase program of the outstanding common stock, initiated
during the fourth quarter of 2002, continued in 2003. This program is intended
to help the Company achieve its goal of building shareholder value while
maintaining appropriate capital levels. A total of 223,851 shares are eligible
to be repurchased, and through June 30, 2003, a total of 106,453 shares have
been purchased at an average price of $17.568. In accordance with state law,
repurchased shares are cancelled and are no longer considered issued.
Asset Quality
The credit loss allowance ratio was 1.25% at June 30, 2003 and December
31, 2002; and 1.27% at June 30, 2002. For the second quarter of 2003, provision
charges against earnings totaled $282,000, compared to $680,000 in the second
quarter of 2002. Net charge-offs for the second quarter of 2003 totaled
$366,000, or a 0.26% annualized loss ratio based on average loans outstanding.
This is a decrease from the net charge-offs for the second quarter of 2002
totaling $514,000, or 0.38% annualized loss ratio. Annualized net charge-offs
for the first six months of 2003 and 2002 were 0.26% and 0.29%, respectively,
based on average loans outstanding.
The Company's allowance for credit losses is analyzed quarterly by
management. This analysis includes a methodology that segments the loan
portfolio by selected types and considers the current status of the portfolio,
historical charge-off experience, current levels of delinquent, impaired and
non-performing loans, as well as economic and other risk factors. It is also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology employed and other analytical
measures in comparison to a group of peer banks. Management believes the
allowance for loan losses is sufficient to absorb known risk in the portfolio.
No assurances can be given that future economic conditions will not adversely
affect borrowers and result in increased losses.
Other real estate owned at June 30, 2003 was $1.8 million, compared to
$1.7 million at December 31, 2002. Approximately $535,000 has been transferred
from loans into other real estate and approximately $360,000 of such assets were
disposed of during the first six months of 2003. A net loss of $31,000 has been
recorded on disposition of other real estate in the current year.
Capital Resources
Banks and financial holding companies, as regulated institutions, must
meet required levels of capital. The Office of the Commissioner of Banks in
North Carolina and the Board of Governors of the Federal Reserve, which are the
primary regulatory agencies for FNB Southeast and the Company, respectively,
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are required to maintain a level of capital commensurate
with the risk profile assigned to their assets in accordance with the
guidelines.
14
As shown in the following table, the Company and its wholly-owned banking
subsidiary have capital levels exceeding the minimum levels for "well
capitalized" banks and financial holding companies as of June 30, 2002.
Regulatory Guidelines
--------------------------
Well Adequately FNB
Ratio Capitalized Capitalized Company Southeast
----- ----------- ----------- ------- ---------
Total Capital 10.0% 8.0% 11.9% 11.6%
Tier 1 Capital 6.0 4.0 10.7 10.4
Leverage Capital 5.0 4.0 8.4 8.1
New Accounting Pronouncements
During the first half of 2003, the Securities and Exchange Commission
promulgated rules to implement several provisions of the Sarbanes-Oxley Act of
2002. These rules included conditions for using financial measures that excluded
information that would be required under generally accepted accounting
principles, ("non-GAAP financial measures"). Additionally, new rules expand the
number of events that require current reporting on Form 8-K. Furthermore, new
rules have been issued pertaining to an audit committee and its need for a
financial expert and code of ethics requirements for senior management. Also,
new rules were issued defining audit committee responsibility for external
auditor retention and determination of external auditor independence. Additional
rules have been promulgated to implement provisions requiring management to
certify its responsibilities for establishing, maintaining and monitoring
internal reporting and disclosure controls. Management anticipates additional
costs to implement the various provisions of this law; however, it is difficult
to determine the full impact of implementation until such time as all rules have
been promulgated.
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, 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.
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.
15
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" (SFAS 147). 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 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 FASB 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 FASB Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" (SFAS 148), which amends
FASB Statement No. 123, "Accounting for Stock Based Compensation" (SFAS 123), to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. The provisions of the statement were effective December 31, 2002.
Management currently intends to continue to account for stock-based compensation
under the intrinsic value method set forth in Accounting Principles Board
("APB") Opinion 25 and related interpretations. For this reason, the transition
guidance of SFAS 148 does not have an impact on the Company's consolidated
balance sheet or consolidated statements of income and comprehensive income. The
Statement does amend existing guidance with respect to required disclosures,
regardless of the method of accounting used. The revised disclosure requirements
are presented herein.
16
The proforma 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 123
and SFAS 148, is disclosed as follows.
(Dollars in thousands, except per share data) June 30, June 30,
2003 2002
---- ----
Net income, as reported $3,524 $2,787
Less: Stock based compensation as calculated per
fair value method, net of tax effect (173) (349)
------ ------
Proforma net income $3,351 $2,438
Earnings per share:
Basic - as reported $ .79 $ .60
Basic - proforma $ .75 $ .53
Diluted - as reported $ .77 $ .59
Diluted - proforma $ .75 $ .52
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 2003 and 2002: dividend yield of 3.26% and 3.30%; expected
volatility of 4.58% and 16.0%; risk free interest rates of 3.50% and 3.47%, and
expected lives of seven years for both periods.
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.
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 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.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." FSAB Statements No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," establish accounting and reporting standards
for derivative instruments including derivatives embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. This
Statement 149 amends Statement 133 for certain decisions made by the Board as
part of the Derivatives Implementation Group (DIG) process. This Statement
contains amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting Measurements," and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities," No. 91 "Accounting
for Nonrefundable Fees and Costs Associated with
17
Originating or Acquiring Loans and Initial Direct Costs of Leases," No. 95,
"Statement of Cash Flows," and No. 126, "Exemption from Certain Required
Disclosures about Financial Instruments for Certain Nonpublic Entities." The
Company is presently evaluating the effect of this pronouncement.
In May 2003, FASB issued Statement of Financial Accounting Standards No.
150 "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are consistent
with the Board's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own equity
shares, depending on the nature of the relationship established between the
holder and the issuer. While the Board still plans to revise that definition
through an amendment to Concepts Statement 6, the Board decided to defer issuing
that amendment until it has concluded its deliberations on the next phase of
this project. That next phase will deal with certain compound financial
instruments including puttable shares, convertible bonds, and dual-indexed
financial instruments. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. Management does not anticipate the implementation
of this statement to have a material impact on the Corporation's consolidated
financial position or consolidated results of operations.
Based on the Company's operations as of June 30, 2003, none of these
standards are expected to have a material effect on the Company's financial
statements.
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.
18
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawals, loan funding and general corporate
activity create a need for liquidity for the Company. Liquidity is derived from
sources such as deposit growth; maturity, calls, or sales of investment
securities; principal and interest payments on loans; access to borrowed funds
or lines of credit; and profits.
During the first six months of 2003 the Company had net cash provided by
operating activities of $2.5 million. This was an increase from $1.4 million of
net cash provided by operating activities in the first half of 2002. The
increase is primarily attributable to the rise of $1.6 million in fees and
commissions received.
Net cash used in investing activities in the first six months of 2003
totaled $19.4 million. Purchases of investment securities in the current year
totaled $90.0 million and proceeds from sales, calls, or maturity of securities
were $78.1 million. This compares to the first half of 2002 when proceeds from
sales and/or calls of securities totaled $33.0 million, resulting in net cash
provided by investment activities of $25.4 million. An increase in loans
outstanding used $4.5 million in cash during 2003, compared to an increase in
outstanding loans in 2002 that used $8.0 million of cash during the same period
in 2002. Capital expenditures used $2.3 million in 2003, compared to $218,000 in
2002.
Financing activities in the 2003 first half provided $32.4 million, based
primarily on $56.4million rise in deposits. These cash inflows were partially
offset by a repayment of other borrowings of $21.5 million during the first six
months. During the 2002 first half, financing activities used $35.4 million. An
outflow of $48.4 deposits was partially of set by an increase of $14.2 million
in borrowings.
Overall cash and cash equivalents totaled $39.9 million at June 30, 2003
compared to $24.5 million at December 31, 2002 and $14.7 million at June 30,
2002.
Liquidity is further enhanced by an approximately $115 million line of
credit with the FHLB collateralized by FHLB stock, investment securities and
qualifying 1-4 family residential mortgage loans, and qualifying commercial real
estate loans. The Company provides various reports to the FHLB on a regular
basis throughout the year to maintain the availability of the credit line. Each
borrowing request to the FHLB is initiated through an advance application that
is subject to approval by the FHLB before funds are advanced under the credit
agreement.
The Company also has unsecured overnight borrowing lines totaling $19
million available through four financial institutions. These lines are used to
manage the day to day, short-term liquidity needs of the Company. Each Federal
funds line has a requirement to repay the line in full on a frequent basis,
typically within five to ten business days.
Effects of Inflation
Inflation affects financial institutions in ways that are different from
most commercial and industrial companies, which have significant investments in
fixed assets and inventories. The effect of inflation on interest rates can
materially impact bank operations, which rely on net interest margins as a major
source of earnings. Non-interest expenses, such as salaries and wages, occupancy
and equipment cost are also negatively impacted by inflation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the
19
favorable spread earned from the excess of interest income on interest-earning
assets, over interest expense on interest-bearing liabilities.
The Company considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The Company is asset sensitive, which means that falling interest rates could
result in a reduced amount of net interest income. The monitoring of interest
rate risk is part of the Company's overall asset/liability management process.
The primary oversight of asset/liability management rests with the Company's
Asset and Liability Committee. The Committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established policies.
The Company has not experienced any substantive changes in portfolio risk
during the six months ended June 30, 2003.
Item 4. 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.
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 II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not Applicable.
20
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2003, at the Annual Meeting of the Company's
shareholders, the following two proposals were voted on by
shareholders.
Proposal One
To elect three members of the Board of Directors as follows:
Three Directors to serve three-year terms ending in 2006. Votes for
each nominee were as follows:
Nominee For Withheld
Ernest J. Sewell 3,237,245 127,732
Charles A. Britt 3,309,728 55,249
Barry Z. Dodson 3,343,735 21,243
The following directors remain in office: O. Eddie Green, E. Reid
Teague, Gary G. Blosser, Joseph H. Kinnarney, Elton H. Trent, Jr.,
and Kenan C. Wright.
Proposal Two
To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the year ending December 31,
2003. The votes for this proposal were as follows:
For : 3,327,730
Against: 13,300
Abstain: 23,948
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.01 Amended and Restated Articles of Incorporation.
3.02 Bylaws of Company, as amended.
4.01 Specimen Common Stock Certificate.
10.01 Stock Compensation Plan of the Registrant approved April
11, 1989, by the shareholders of the Registrant, with
forms of stock option and stock bonus agreements attached.
10.02 Omnibus Equity Compensation Plan of the Registrant.
10.03 Severance Policy for Senior Officers of the Registrant
(employed for five years or more).
10.04 Revised Severance Plan for Senior Officers of the
Registrant (employed for five years or more).
10.05 Severance Policy for Senior Officers of the Registrant
(employed for less than five years).
10.07 Benefit Equivalency Plan of the Registrant effective
January 1, 1994.
10.08 Annual Management Incentive Plan of the Registrant.
10.09 Long Term Incentive Plan of the Registrant.
10.10 Long Term Incentive Plan of the Registrant for certain
Senior Management employees.
21
10.11 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 Split-Dollar Agreement dated January 27, 1995, between the
Registrant and Ernest J. Sewell.
10.14 Lease, dated January 31, 1997, between the Registrant and
Landmark Commercial, Inc., relating to the Wilmington
branch office.
10.15 Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
10.15 Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
10.15 Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
10.15 Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FNB FINANCIAL SERVICES CORPORATION
(Registrant)
August 12, 2003 /s/ Michael W. Shelton
--------------------------------------------
Michael W. Shelton
(Vice President, Secretary and Treasurer)
22