<PAGE> 1
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, 1999
[ ] 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
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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. [ ]
The aggregate market value of the registrant's Common Stock at March
10, 2000 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 $50.1 million.
As of March 10, 2000 (the most recent practicable date), the
registrant had outstanding 4,484,173 shares of Common Stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
- -------- ------------------
1. Proxy Statement for the Annual Meeting of Shareholders Part III
to be held May 18, 2000, to be mailed to shareholders
within 120 days of December 31, 1999.
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FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
INDEX
PAGE
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<S> <C> <C> <C>
PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 21
Item 3. Legal Proceedings............................................... 22
Item 4. Submission of Matters To a Vote of Security Holders............. 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 23
Item 6. Selected Financial Data......................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 32
Item 8. Financial Statements and Supplementary Data..................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 69
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 69
Item 11. Executive Compensation.......................................... 69
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 69
Item 13. Certain Relationships and Related Transactions.................. 69
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..................................................... 70
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
FNB Financial Services Corporation (the "Company") is a North Carolina
bank holding company with consolidated assets of $588 million, deposits of $484
million and shareholders' equity of $51 million, each as of December 31, 1999.
The Company was organized in 1984, although its predecessor and wholly-owned
subsidiary, FNB Southeast, opened as Rockingham Savings Bank and Trust in 1910,
then was chartered as a national bank in 1918 under the name of First National
Bank of Reidsville. Effective March 15, 1999, FNB Southeast changed its charter
from a national bank to a North Carolina state bank. In addition, on August 31,
1999, the Company acquired Black Diamond Savings Bank, a federal savings bank
headquartered in Norton, Virginia. 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. By the
end of 1999, FNB Southeast increased its number of branches from five to ten by
closing a branch in Eden and opening new branches in the Rockingham County towns
of Eden, Ruffin and Madison and in the new markets of Greensboro, Burgaw and
Wilmington, North Carolina. The acquisition of Black Diamond added five branches
in Norton, Harrisonburg, Pennington Gap, and Richlands, Virginia. As of, and for
the twelve months ended December 31, 1994, the Company reported net interest
income, loans and deposits of $6.6 million, $79.8 million and $132.5 million,
respectively. As a result of its strategy, at December 31, 1999, the Company
reported net interest income of $20.4 million, loans of $413.3 million and
deposits of $484.2 million.
The Company's subsidiary banks are community oriented and focus
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 of North Carolina and Virginia by retaining its
personalized approach and community focus.
Under the leadership of Ernest J. Sewell, who became President and
Chief Executive Officer in January 1995, the Company adopted the following
three-part strategy: (1) increase market share and geographic reach through
opportunistic acquisitions in markets where the mix of economic, operational,
cultural and other factors are favorable; (2) position the Company to manage its
planned growth by adding experienced personnel and upgrading its internal
systems and procedures; and (3) generate internal growth at its existing banking
offices by offering new and complementary services and products. To accomplish
these objectives, during the past five years the Company has: (a) increased the
number of its branch offices to ten by opening new offices in Eden, Ruffin,
Madison, Greensboro, Burgaw, and Wilmington, North Carolina; (b) expanded by
approximately 60% the number of its full-time personnel by adding 54 new
employees, including several new vice presidents and senior vice presidents; (c)
completed the merger with Black Diamond to extend the Company's reach into
Virginia in the Norton, Virginia region, where Black Diamond has a very strong
market presence and in the Harrisonburg, Virginia market; (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
broadening the scope of its commercial lending activities and by updating and
extending its ATM terminals and network.
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The Company plans to continue to pursue these objectives by
strengthening its presence in existing markets and opportunistically reaching
into new markets in North Carolina, Virginia and South Carolina. The Company
will seek to hire qualified personnel to help manage its planned growth and to
develop new products that are uniquely consistent with the Company's service
orientation. The Company also plans, where appropriate, to upgrade its systems
and procedures and refine its ability to offer customers sophisticated services
without sacrificing its personalized approach.
STRATEGY
Expand Banking Operations. Throughout most of its 90-year history, the
Company's banking activities were centered in Reidsville, North Carolina,
located in Rockingham County in the north central part of the State. Beginning
in 1995, however, the Company initiated a growth strategy to further penetrate
markets in which it had an existing market share and expand into and develop new
and contiguous markets, such as Wilmington and Greensboro, North Carolina and
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) install high-quality,
well-trained management to serve the market; (ii) ascertain that the market is
underserved by financial institutions whose primary focus is to cater to the
individualized needs of customers; and (iii) find reasonably priced facilities.
Management believes that it has been successful in implementing these strategic
elements in its expansion program to date.
The Company has acquired two parcels of property in Greensboro, North
Carolina and expects to open two branches in early second quarter 2000. The
Company leases a branch in Burgaw, North Carolina and opened this branch in
December, 1999. The eastern North Carolina town of Burgaw is contiguous to the
Wilmington market, and the Company currently has one branch in Greensboro.
In August, 1999 the Company merged with Black Diamond and acquired
offices in Norton, Harrisonburg, Pennington Gap and Richlands, Virginia. These
branches serve the market areas of Wise, Tazewell, Russell, Lee, Rockingham and
Augusta Counties in Virginia.
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 would flourish. The Company
believes that there is value to be added by providing the opportunity for
greater personalized banking relationships than 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 future 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 the communities
in which they work and live; and (2) finalize a program to upgrade, modify and
expand its internal systems, procedures, equipment and software designed to
improve marketing and operating efficiencies. The Company will also continue to
analyze technological developments in the banking industry for opportunities to
improve or augment its services and products, although management will make
every effort to maintain the Company's personalized approach as pressures to
succumb to
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technological advances mount. The Company believes that FNB Southeast's change
from a nationally-chartered institution to a state-chartered one in March 1999
and its acquisition of Black Diamond are ways in which the Company solidified
its foundation for future growth.
Maintain a Friendly Environment for Employees and Customers. The
Company has instituted various programs to instill high morale among its
employees which the Company believes translates into exceptional customer
service. The Company also holds lively weekly sales meetings to elicit ideas
about products and services to emphasize. The Company believes that the overall
effect of these programs is to improve morale, customer service and financial
performance.
MARKET AREAS
For operational purposes, the Company groups its markets into four
regions, the Triad and Wilmington regions of North Carolina and the Norton and
Harrisonburg regions of Virginia. The Company's deposit market share in
Reidsville, North Carolina as of June, 1999, the most recent date for which data
are available, was 37.1%, which ranked first among banks and thrift
institutions, and in all of Rockingham County equaled 26.3% as of the same date,
which also ranked first. The Company's deposit market share in Norton, Virginia,
as of the same date, was 39.1%, which also ranked first among banks and thrift
institutions. The following table summarizes the banking offices, deposits and
market share for the Company's offices, categorized by city.
DEPOSITS AT DECEMBER 31,
------------------------------------
REGION/CITY 1999 1998 1997
- ----------- -------- -------- --------
(IN THOUSANDS)
TRIAD REGION:
Reidsville (1) ..... $177,480 $171,389 $152,221
Eden (2) ........... 59,406 54,040 45,305
Madison ............ 22,891 21,576 14,611
Ruffin ............. 9,244 7,418 5,014
Greensboro ......... 39,614 32,825 19,822
-------- -------- --------
Subtotal ..... 308,635 287,248 236,973
-------- -------- --------
WILMINGTON REGION:
Wilmington ......... 42,332 57,757 35,301
Burgaw ............. 6,995 -- --
-------- -------- --------
Subtotal ..... 49,327 57,757 35,301
-------- -------- --------
NORTON REGION:
Norton ............. 55,436 53,165 49,589
Pennington Gap ..... 25,913 22,720 22,708
Richlands .......... 23,018 21,408 19,581
-------- -------- --------
Subtotal ..... 104,367 97,293 91,878
-------- -------- --------
HARRISONBURG REGION:
Harrisonburg (3) ... 21,913 17,297 19,969
-------- -------- --------
Total ........ $484,242 $459,595 $384,121
======== ======== ========
- ------------------
(1) Includes three banking offices for all years.
(2) Includes two banking offices for 1999, and three offices for 1998 and 1997.
(3) Includes two banking offices for 1999, and one office for 1998 and 1997.
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The following is a summary description of the Company's market areas.
Triad - Rockingham County. Rockingham County was formed in 1785 and is
located in the north central area of North Carolina. It has a land area of 568
square miles and a population of approximately 90,000. Surrounding counties are
Guilford to the south, Caswell to the east and Stokes County to the west. The
county is bordered on the north by the Commonwealth of Virginia. Piedmont Triad
International Airport is located 20 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 efforts to serve its citizens.
Rockingham County's economy remained strong through 1999 with unemployment of
4.1% at September 1999.
Triad - 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 and electronics equipment. The area has access to
major domestic and international markets from Interstate Highways 40 and 85 and
U.S. Highways 29, 70, 220 and 421, major rail connections and the Piedmont Triad
International Airport. Entrepreneur magazine ranked the Triad area as fourth in
a list of the top 20 cities in which to establish a small business. According to
the North Carolina Employment Security Commission, the Triad area of North
Carolina reported an unemployment rate of 2.4% as of October, 1999.
Wilmington. Wilmington is the county seat and the industrial center of
New Hanover County and its recent rate of growth has been topped by only one
other city in North Carolina. The total population of New Hanover County is
approximately 150,000 and it is served by Interstate Highway 40 and U.S.
Highways 17 and 74, as well as major rail connections. The area is serviced by
national and regional airlines through facilities at the New Hanover
International Airport in New Hanover County. The New Hanover County area has
experienced extensive industrial development and service/trade sector growth
over the past 20 years. The Wilmington area industries 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 only two deep water
ports), a light manufacturing center, a chemical manufacturing center and the
distribution hub of southeastern North Carolina. At October, 1999, the North
Carolina Employment Security Commission reported a 3.4% unemployment rate for
the Wilmington metropolitan area.
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. Black Diamond, headquartered in Norton, operates
branches in Norton (Wise County), Pennington Gap (Lee County) and Richlands
(Tazewell County). At May, 1999, the unemployment rate in Norton/Wise County
was 10.3%, an improvement over recent years.
Harrisonburg. Rockingham County is centrally located in the Shenandoah
Valley in west central Virginia. Harrisonburg, the county seat, 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 major rail
connections. Black Diamond operates two branches in Harrisonburg, serving the
Counties of Rockingham and Augusta. According to the Virginia Employment
Commission, the November 1999 unemployment rate for Harrisonburg was 1.2%.
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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 businesses and other organizations that are located in or
conduct a substantial portion of their business in the Company's market areas.
The Company's total loans at December 31, 1999 were $414.0 million, or 74.0% of
total earning assets. The Company also makes secured construction loans to home
builders and residential mortgagees, which are often secured by first and second
real estate mortgages. At December 31, 1999, the Company had no large loan
concentrations (exceeding ten percent of its portfolio) in any particular
industry.
Loan Composition. The following table sets forth, at the dates
indicated, the composition of the Company's loan portfolio and the related
percentage composition.
<TABLE>
<CAPTION>
Year Ended December 31
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1999 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Commercial $115,434 27.9% $ 94,798 26.2% $ 60,659 19.0%
Residential 130,676 31.6% 120,143 33.2% 120,257 37.7%
Construction 34,680 8.4% 29,794 8.2% 22,143 6.9%
-------- ----- -------- ----- -------- -----
Total real estate 280,790 67.9% 244,735 67.6% 203,059 63.6%
Commercial, financial and
agricultural 58,002 14.0% 49,822 13.8% 57,453 18.0%
-------- ----- -------- ----- -------- -----
Consumer:
Direct 32,778 7.9% 32,368 8.9% 31,556 9.9%
Home equity 32,836 7.9% 26,723 7.4% 21,425 6.7%
Revolving 9,605 2.3% 8,604 2.3% 5,974 1.8%
-------- ----- -------- ----- -------- -----
Total consumer 75,219 18.1% 67,695 18.6% 58,955 18.4%
-------- ----- -------- ----- -------- -----
Total $414,011 100.0% $362,252 100.0% $319,467 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Real Estate Loans. Loans secured by real estate for a variety of
purposes constituted $280.8 million, or 67.9%, of the Company's total loans at
December 31, 1999. The Company held at December 31, 1999 real estate loans of
various sizes ranging up to $4.9 million, secured by office buildings, retail
establishments, warehouses, motels, restaurants and other types of property.
Loan terms are typically limited to five years, although the installment
payments may be structured generally on a 15-year amortization basis. 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 project cash flow available for debt
service equals 120% of the debt service requirement. The Company also often
requires personal guarantees of the principal owners of the property and obtains
personal financial statements of the principal owners in such cases. The Company
experienced no net loan losses on commercial real estate loans during 1999, 1998
and 1997.
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, 1999 it held $130.7 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
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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 no loan losses in 1999, net loan losses of $4,000 in 1998, and net
loan recoveries of $180,000 in 1997.
The Company also originates residential loans for sale into the
secondary market. Through its mortgage banking division, the Company originates
both fixed and variable rate residential mortgage loans for sale with servicing
released. The Company is able to generate loan origination fees, typically
ranging from 1.0% to 1.5% of the loan balance which are recognized in income
when the loan is sold. During 1999, 1998 and 1997, the Company earned loan
origination fees of $249,000, $258,000 and $239,000, respectively. At December
31, 1999, the Company held $754,000 of such loans for sale, and during 1999 the
Company sold an aggregate of $3.8 million of such loans. The Company sells these
loans on a non-recourse basis.
The Company's current 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 $2.5 million, not to exceed $2.5 million. At December 31, 1999,
1998 and 1997, the Company held $34.7 million, $29.8 million and $22.1 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 otherwise substantially pre-leased, or
residential projects that are either presold or are being built by the proposed
occupant. The leases on commercial projects must generally result in a loan to
capitalized lease value of no greater than 75% and a net cash flow to debt
service ratio of at least 120%. The Company historically has required a personal
guarantee from the developer or builder. Loan terms are typically 12 to 15
months on a commercial project and nine months on a residential project,
although the Company occasionally will make a "mini-permanent" loan for purposes
of construction and development up to a three to five year term. Rates are
typically variable and the Company typically charges an origination fee. During
1999, the Company experienced no net loan losses, losses of $48,000 in 1998,
and no such losses in 1997.
Commercial Loans. The Company makes loans for commercial purposes in
various lines of businesses. At December 31, 1999, the Company held $58.0
million of commercial loans, or 14.0% of its total loan portfolio. Equipment
loans are typically made on terms up to five years at fixed or variable rates,
with the financed equipment pledged as collateral to the Company. The Company
attempts to reduce its credit risk on these loans by limiting the loan to value
ratio to 80%. Working capital loans are made on terms typically not exceeding
one year. These loans may be secured or unsecured, but the Company attempts to
limit its credit risk by requiring the borrower to demonstrate the capacity to
produce net cash flow available for debt service of 125% to 150% of debt service
requirements. During 1999, the Company experienced a $5,000 net recovery on
commercial loans, net loan losses of $537,000 in 1998, and net loan losses of
$6,000 in 1997.
Consumer Loans. The Company makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans originated directly by the Company, home equity revolving lines of
credit, and unsecured revolving lines of credit. The home equity loans and
certain of the direct loans are secured by the borrower's residence, but the
Company attempts to underwrite the credit independent of the collateral value.
At December 31, 1999, the Company held $75.2 million of consumer loans,
including home equity revolving lines of credit. During 1999, 1998 and 1997,
respectively, the Company experienced net consumer loan losses of $249,000,
$204,000 and $77,000.
Credit Card Loans. In 1996, the Company began offering credit card
loans to individuals and businesses who meet the Company's underwriting
standards with respect to income, credit rating,
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established residence and employment. Credit card loans are subject to seasonal
fluctuations based on consumer spending habits, with the outstanding balances of
such loans rising at the end of each calendar year. At December 31, 1999, credit
card loans equaled approximately $4.4 million, or approximately 1.1% of the
Company's total loan portfolio. Net losses on credit card loans equaled $173,000
in 1999, $110,000 in 1998 and $19,000 in 1997. In February, 2000, the Company
sold its entire credit card portfolio of $3.4 million to a third party. The
Company received approximately a 3% premium on this sale. The loans were sold
without recourse.
Loan Approval and Review. The Company's loan approval policies provide
for various levels of officer lending authority. When the aggregate outstanding
loans to a single borrower exceeds 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 lending limits up to
$250,000; loans in excess of that limit must be approved by the city executive.
If the lending request exceeds the city executive's lending limit, which is
$500,000, the loan must be submitted to and approved by the appropriate senior
credit officer. The senior credit officer has authority to approve a loan up to
$750,000. Under joint approval, the senior credit officer and the senior vice
president -- corporate administration, may approve loans up to $1.5 million. All
loans in excess of $1.5 million must be approved by the President and Chief
Executive Officer, who may approve loans of up to $2.5 million.
The Company has a continuous loan review procedure involving multiple
officers of the Company which is designed to promote early identification of
credit quality problems through its credit management committee. All loan
officers are charged with the responsibility of reviewing no less than annually
all credit relationships in excess of $100,000 in their respective portfolios.
All new relationships, that is, those not more than 60 days old, in excess of
$100,000 are reviewed by a credit management committee comprised of loan
officers and senior management every two weeks. Loan officers also review all
criticized and classified assets in their portfolio quarterly with the senior
loan officers of the Company. The officers are responsible for implementing,
where appropriate, approved action plans with respect to such criticized and
classified assets designed to improve the Company's credit position for an early
resolution of the problem loan. As part of its overall strategy to improve
policies and procedures, the Company also engaged a third party consultant to
review its loan portfolio, the first examination of which occurred in 1998. The
Company has used the findings of the examination to further enhance credit
quality through improved credit administration policies and procedures.
The Company's credit review system supplements the Company's loan
rating system, pursuant to which the Company may place the loan on its
criticized asset list or may classify the loan in one of various other
classification categories. A specified minimum percentage of loans in each
adverse asset classification category, based on the historical loss experience
in the Company in each such category, is used to determine the adequacy of the
Company's allowance for loan and lease losses quarterly. These credits 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.
Outsourcing of Certain Operational Functions. The Company has
agreements with third parties to provide a variety of specialized functions to
the Company in connection with its lending operations. In each of these
relationships, the Company benefits from the service provider's expertise and
economies of scale while retaining the flexibility to take advantage of changes
in available technology without impacting customer service.
DEPOSITS
The Company offers a variety of deposit programs to individuals and to
small and medium-sized businesses and other organizations at interest rates
generally competitive with local market conditions.
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The following table sets forth the mix of depository accounts at the Company as
a percentage of total deposits at the dates indicated.
AT DECEMBER 31,
---------------------------------
1999 1998 1997
----- ----- -----
Non-interest bearing demand 9.9% 9.8% 9.5%
Savings/NOW/MMI ........... 19.2% 19.0% 16.9%
Certificates of deposit ... 70.9% 71.2% 73.6%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The Company accepts deposits at its 15 banking offices, eight of which
have automated teller machines. In addition, the Company operates a network of
34 ATMs in Norton, Virginia and the surrounding area. The Company's memberships
in the "HONOR", "CIRRUS" and "PLUS" networks allow customers access to their
depository accounts from regional ATM facilities. The Company charges fees
ranging from $1.50 to $1.75 per transaction for the use of its ATM facilities by
those who are not depositors with the Company. See "Properties." The Company
controls deposit flows primarily through the pricing of such deposits and to a
certain extent through promotional activities, such as its "Prestige" and
"Priority" accounts for deposits of $25,000 and $75,000, respectively, and the
"FNB Club" which extends special privileges and sponsors group excursions to
sites and performances of interest to account holders over the age of 55. The
Company also offers as a convenience to come to a customer's home or place of
business to pick up a non-cash deposit the customer wishes to make. At December
31, 1999, the Company had $133.4 million in certificates of deposit of $100,000
or more. In January 1998, the Company joined an electronic network which allows
it to post interest rates and attract certificates of deposit nationally. The
investors are generally credit unions or commercial banks and amounts are
typically just under $100,000, to assure FDIC insurance coverage. Deposit rates
are set weekly by senior management of the Company. Management believes that the
rates it offers are competitive with those offered by other institutions in the
Company's market areas.
INVESTMENT SERVICES
The Company offers the services of an investment advisor employed by
American Express Financial Advisors who splits his time among six of the
Company's branches and is available to depositors, as well as those who are not
account holders in the Company. This advisor offers mutual fund services, tax
and estate planning and other financial services and the Company receives a
commission based on the advisor's sales. The Company benefits by attracting
customers to its branches who may not otherwise have reason to transact business
there and by earning additional fees. In 1999, the Company earned fees in the
amount of $52,000 from commissions generated from these services.
MARKETING
The Company currently markets its services through advertising
campaigns and in printed material, such as newspapers, magazines and direct
mailings, as well as through promotional items, such as caps, pens, pencils and
shirts. The Company's officers are also heavily involved in local civic affairs
and philanthropic organizations in order to focus customers on products and
services at a personal level. The Company occasionally sponsors community events
and holds grand opening ceremonies for its new branches to which local
dignitaries are invited to speak and participate in the festivities. Since the
Company does not have a fully-staffed marketing department, the Company's
marketing, advertising and public relations campaigns focus on the following two
components:
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o Value. Among other things, the Company offers attractive rates
for its financial products, including its certificates of
deposit and checking accounts. This pricing structure has been
successful in attracting depositors who are motivated by the
Company's rates, as well as by the variety of individualized
services the Company promotes and offers.
o Convenience and Service. All personnel of the Company aim
toward serving the individual needs of the Company's
customers. For example, senior personnel are accessible on
very short notice, even after normal banking hours, by way of
pagers and other means. In addition, all employees are
eligible to earn incentive compensation for sales and
cross-sales to customers.
Management intends to continue to market the Company's services through
a combination of advertising campaigns, public relations activities and local
affiliations. In most of its markets, the Company has established advisory
boards, comprised of local community leaders, to promote the Company. While the
key messages of value, convenience, service and reliability will continue to
play a major role in the Company's marketing and public relations efforts,
management may also focus on targeted groups, such as professionals, in addition
to small to medium-sized local businesses.
A vital part of the Company's marketing plan is the execution of a
public relations strategy. Many traditional public relations methods will be
used in promoting its services. Management intends to pursue media coverage,
including general press, industry periodicals and other media covering banking
and finance, consumer issues and special interests. Press releases, quarterly
shareholder reports, media alerts and presentations will announce new banking
services as they are added. In addition, a professional marketing firm has been
engaged by the Company to assist in promoting the overall image of the Company
to the general public and investment community.
COMPETITION
Commercial banking in the Southeast 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, commercial banks, thrift institutions, credit
unions, and other financial institutions and financial intermediaries. The
Company competes in its market areas with some of the largest banking
organizations in the Southeast, several of which have as many as 200 to 300
branches in North Carolina and Virginia. The Company's competition is not
limited to financial institutions based in North Carolina and Virginia. The
enactment of federal legislation authorizing nationwide interstate banking has
greatly increased the size and financial resources of some of the Company's
competitors. Consequently, many of the Company's competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers, such as trust services that the Company
does not offer. As a result of the interstate banking legislation, the Company's
market is open to future penetration by banks located in other states provided
the other state allows acquisitions of its banking institutions by North
Carolina banking institutions, thereby increasing competition.
The management of the Company believes banks compete in the following
areas: convenience of location, interest rates for deposits and loans, types of
accounts and services offered, and quality of the personnel providing services.
In its early years, the Company sought to attract depositors and borrowers
primarily through offering competitive interest rates for both loans and
deposits. More recently, the Company has determined to compete primarily through
the quality of its services, experience of its
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personnel and community oriented approach. The Company also relies on the
personal contacts of its officers and directors to attract depositors and
borrowers in its target market of small to medium-sized businesses. In addition
to its central Board of Directors, the Company has established local advisory
boards in most of the communities served to promote contacts in the business
communities.
EMPLOYEES
As of December 31, 1999, the Company had approximately 182 full-time
and 13 part-time employees. None of the employees of the Company are represented
by any collective bargaining unit. The Company considers its relations with its
employees to be good.
SUPERVISION AND REGULATION
The following discussion is intended to be a summary of the material
regulations and policies applicable to the Company and its wholly-owned
subsidiaries, FNB Southeast and Black Diamond, and does not purport to be a
comprehensive discussion. The Company and its subsidiaries are extensively
regulated under both federal and state law. Generally, these laws and
regulations are intended to protect depositors and borrowers, not shareholders.
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Any change in applicable law or regulation
may have a material effect on the business of the Company and its subsidiaries.
REGULATION OF THE COMPANY
GENERAL. The Company is a bank holding company, registered with the
Board of Governors of the Federal Reserve ("Federal Reserve") under the Bank
Holding Company Act of 1956 ("BHC Act") and with the North Carolina Commissioner
of Banks (the "Commissioner") under the North Carolina Bank Holding Company Act
of 1984, as amended (the "North Carolina Act"). As such, the Company and its
subsidiaries are subject to the supervision, examination, and reporting
requirements of the BHC Act and the North Carolina Act and the regulations of
the Federal Reserve and the Commissioner.
Prior to March 15, 1999, FNB Southeast was a national bank regulated by
the Office of the Comptroller of the Currency ("OCC"). Effective March 15, 1999,
FNB Southeast converted its charter from a national bank to a North Carolina
state bank and became a member of the Federal Reserve.
The Company is a member of the Federal Deposit Insurance Corporation
("FDIC"), and as such, its deposits are insured by the FDIC to the extent
provided by law. The Company is also subject to numerous state and federal
statutes and regulations that affect its business, activities, and operations.
As a North Carolina bank and member of the Federal Reserve, the Company is
supervised and examined by the Federal Reserve and the Commissioner, and is also
subject to the backup supervisory authority of the FDIC. Such agencies regularly
examine the operations of the Company and are given authority to approve or
disapprove mergers, consolidations, the establishment of branches, and similar
corporate actions. Such agencies also have the power to prevent the continuance
or development of unsafe or unsound banking practices or other violations of
law.
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BANK HOLDING COMPANY REGULATION. The Company, as a bank holding
company, is also subject to examination, regulation and periodic reporting under
the Bank Holding Company Act of 1956, as amended ("BHC Act"), as administered by
the Federal Reserve. The Federal Reserve has adopted capital adequacy guidelines
for bank holding companies on a consolidated basis.
The Company is required to obtain the prior approval of the Federal
Reserve to acquire all, or substantially all, of the assets of any bank or bank
holding company. Prior Federal Reserve approval is also required for the Company
to acquire direct or indirect ownership or control of any voting securities of
any bank or bank holding company if, after giving effect to such acquisition, it
would, directly or indirectly, own or control more than 5% of any class of
voting shares of such bank or bank holding company.
The Company is required to give the Federal Reserve prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, Federal Reserve order or directive, or any
condition imposed by, or written agreement with, the Federal Reserve. Such
notice and approval is not required for a bank holding company that would be
treated as "well capitalized" under applicable regulations of the Federal
Reserve, that has received a composite "1" or "2" rating at its most recent bank
holding company inspection by the Federal Reserve, and that is not the subject
of any unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHC Act does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without limitation,
certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from
engaging in, or acquiring 5% or more of any class of voting securities of any
company engaged in, non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve has
determined by regulation to be so closely related to banking as to be a proper
incident thereto are:
o making or servicing loans;
o performing certain data processing services;
o providing discount brokerage services;
o acting as fiduciary, investment or financial advisor;
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o leasing personal or real property;
o making investments in corporations or projects designed
primarily to promote community welfare; and
o acquiring a savings and loan association.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, depository institutions are liable to the FDIC for losses suffered or
anticipated by the FDIC in connection with the default of a commonly controlled
depository institution or any assistance provided by the FDIC to such an
institution in danger of default.
Subsidiary banks of a bank holding company, such as FNB Southeast and
Black Diamond, are subject to certain quantitative and qualitative restrictions
imposed by the Federal Reserve Act on any extension of credit to, or purchase of
assets from, or letter of credit on behalf of, the bank holding company or its
subsidiaries, and on the investment in or acceptance of stocks or securities of
such holding company or its subsidiaries as collateral for loans. In addition,
provisions of the Federal Reserve Act and Federal Reserve regulations limit the
amounts of, and establish required procedures and credit standards with respect
to, loans and other extensions of credit to officers, directors and principal
stockholders of the Company, FNB Southeast, Black Diamond, and related interests
of such persons. Moreover, subsidiaries of bank holding companies are prohibited
from engaging in certain tie-in arrangements (with the holding company or any of
its subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted
certain risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. These
guidelines apply to the Company and its bank subsidiaries. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, qualifying noncumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes among other things, limited-life and perpetual
preferred stock, hybrid capital instruments, mandatory convertible securities,
qualifying subordinated debt, and the allowance for loan and lease losses,
subject to certain limitations and less required deductions. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. Banks and bank holding companies
subject to the risk-based capital guidelines are required to maintain a ratio of
Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total
capital to risk-weighted assets of at least 8%. The appropriate regulatory
authority may set higher capital requirements when particular circumstances
warrant.
RECENT DEVELOPMENTS. On November 12, 1999, the President of the United
States signed into law the Gramm-Leach-Bliley Act ("GLB"), which alters the
regulatory framework for banking and other
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financial services companies. The GLB creates a new type of holding company
called a "financial holding company." The new financial holding company
structure allows banks, insurance companies, and securities firms to affiliate
within a single entity, provided that the financial holding company satisfies
and maintains certain new regulatory standards. Bank holding companies that meet
these standards may elect to become financial holding companies, but if they
remain bank holding companies, they are subject to the restrictions on their
activities existing prior to the GLB, including those restrictions described
above imposed by the BHC Act.
The Company has not elected to become a financial holding company, so
it remains under essentially the same regulatory framework as it did before the
enactment of the GLB. However, the financial holding company structure created
by the GLB would allow insurance companies or securities firms operating under
the financial holding company structure to acquire the Company, and, if the
Company elects to become a financial holding company in the future, it could
acquire insurance companies or securities firms.
In addition to creating the more flexible financial holding company
structure, GLB introduced several additional customer privacy protections that
will apply to the Company and its subsidiaries. Federal regulators have issued a
draft of proposed privacy regulations implementing these protections for
comment. Pursuant to the GLB's rulemaking provisions, regulations must be
adopted by May 12, 2000, and institutions must begin privacy disclosures under
the GLB within six months of adoption of such regulations. The GLB's privacy
provisions require financial institutions to, among other things, (i) establish
and annually disclose a privacy policy, (ii) give consumers the right to opt out
of disclosures to nonaffiliated third parties, with certain exceptions, (iii)
refuse to disclose consumer account information to third-party marketers and
(iv) follow regulatory standards to protect the security and confidentiality of
consumer information.
REGULATION OF FNB SOUTHEAST
STATE LAW. The Company's wholly-owned subsidiary bank, FNB Southeast,
is also subject to extensive supervision and regulation by the Commissioner. The
Commissioner oversees state laws that set specific requirements for bank capital
and regulate deposits in, and loans and investments by, banks, including the
amounts, types, and in some cases, rates. The Commissioner supervises and
performs periodic examinations of North Carolina-chartered banks to assure
compliance with state banking statutes and regulations, and FNB Southeast is
required to make regular reports to the Commissioner describing in detail the
resources, assets, liabilities and financial condition of FNB Southeast. Among
other things, the Commissioner regulates mergers and consolidations of
state-chartered banks, the payment of dividends, loans to officers and
directors, record keeping, types and amounts of loans and investments, and the
establishment of branches.
DEPOSIT INSURANCE. As a member institution of the FDIC, FNB Southeast's
deposits are insured up to a maximum of $100,000 per depositor through the Bank
Insurance Fund ("BIF"), administered by the FDIC, and each member institution is
required to pay semi-annual deposit insurance premium assessments to the FDIC.
The BIF assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. Also, banks are required to pay additional annual
assessments at rates set by the Financing Corporation, which was established by
the Competitive Equality Banking Act of 1987.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions,
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the termination of deposit insurance by the FDIC, as well as the measures
described under the "Federal Deposit Insurance Corporation Improvement Act of
1991" below, as applicable to undercapitalized institutions. In addition, future
changes in regulations or practices could further reduce the amount of capital
recognized for purposes of capital adequacy. Such a change could affect the
ability of FNB Southeast to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the shareholders.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things:
o publicly available annual financial condition and management
reports for certain financial institutions, including audits
by independent accountants,
o the establishment of uniform accounting standards by federal
banking agencies,
o the establishment of a "prompt corrective action" system of
regulatory supervision and intervention, based on
capitalization levels, with greater scrutiny and restrictions
placed on depository institutions with lower levels of
capital,
o additional grounds for the appointment of a conservator or
receiver, and
o restrictions or prohibitions on accepting brokered deposits,
except for institutions which significantly exceed minimum
capital requirements.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
COMMUNITY REINVESTMENT ACT. FNB Southeast is also subject to the
Community Reinvestment Act ("CRA"), which requires the appropriate federal bank
regulatory agency, in connection with its examination of a bank, to assess a
bank's record in meeting the credit needs of the community served by that bank,
including low and moderate-income neighborhoods. Each institution is assigned
one of the following four ratings of its record in meeting community credit
needs: "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The regulatory agency's assessment of the bank's
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record is made available to the public. Further, such assessment is required of
any bank which has applied to (i) charter a national bank, (ii) obtain deposit
insurance coverage for a newly chartered institution, (iii) establish a new
branch office that will accept deposits, (iv) relocate an office or (v) merge or
consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding company
applying for approval to acquire a bank or other bank holding company, the
Federal Reserve will assess the record of each subsidiary bank of the applicant
bank holding company, and such records may be the basis for denying the
application.
Effective May 12, 2000, the GLB's "CRA Sunshine Requirements" call for
financial institutions to disclose publicly certain written agreements made in
fulfillment of the CRA. Banks that are parties to such agreements also must
report to federal regulators the amount and use of any funds expended under such
agreements on an annual basis, along with such other information as regulators
may require. This annual reporting requirement is effective for any agreements
made after May 12, 2000.
MISCELLANEOUS. The dividends that may be paid by FNB Southeast are
subject to legal limitations. In accordance with North Carolina banking law,
dividends may not be paid unless FNB Southeast's capital surplus is at least 50%
of its paid-in capital.
Shareholders of banks may be compelled by bank regulatory authorities
to invest additional capital in the event their bank's capital shall have become
impaired by losses or otherwise. Failure to pay such an assessment could result
in a forced sale of a shareholder's bank stock.
The earnings of FNB Southeast will be affected significantly by the
policies of the Federal Reserve, which is responsible for regulating the United
States money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market transactions in United States government securities, changes in the rate
paid by banks on bank borrowings, and changes in reserve requirements against
bank deposits. These techniques are used in varying combinations to influence
overall growth and distribution of bank loans, investments, and deposits, and
their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. In view of changing conditions in the
national economy and money markets, as well as the effect of actions by monetary
and fiscal authorities, no prediction can be made as to possible future changes
in interest rates, deposit levels, loan demand or the business and earnings of
FNB Southeast.
REGULATION OF BLACK DIAMOND
GENERAL. Black Diamond is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Black Diamond is subject to broad
federal regulation and oversight extending to all its operations. Black Diamond
is a member of the Federal Home Loan Bank ("FHLB") of Atlanta and is subject to
certain limited regulation by the Federal Reserve Board. Black Diamond is a
member of the Savings Association Insurance Fund ("SAIF") of the FDIC, which
insures its deposits. As a result, the FDIC has certain regulatory and
examination authority over Black Diamond.
On March 15, 2000 the Company filed an application with the Office of
the Commission of Banks for the State of North Carolina to merge Black Diamond
into FNB Southeast. The effect of the merger, if approved, would be to operate
Black Diamond locations as branches of FNB Southeast.
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FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The Office of Thrift
Supervision ("OTS") has extensive authority over the operations of savings
associations. As part of this authority, Black Diamond is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. When these examinations are conducted by the OTS and the FDIC, the
examiners may require Black Diamond to provide for higher general or specific
loan loss reserves.
The OTS also has extensive enforcement authority over all savings
institutions, including Black Diamond. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Black
Diamond is prescribed by federal laws, and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. Black Diamond
is in compliance with the noted restrictions.
Black Diamond's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1999, Black Diamond's lending
limit under this restriction was $1.26 million. Black Diamond is in compliance
with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also adopted additional guidelines on asset quality and
earnings standards. The guidelines are designed to enhance early identification
and resolution of problem assets.
The guidelines are not expected to materially affect Black Diamond.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The FDIC is an
independent federal agency that insures deposits of banks and thrift
institutions up to certain specified limits and regulates such institutions for
safety and soundness. The FDIC administers two separate insurance funds, the BIF
for commercial banks and state savings banks, and the SAIF for savings
associations such as Black Diamond and banks that have acquired deposits from
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time, and may decrease these rates if the target level has been met. The FDIC
has established
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a risk-based assessment system for both SAIF and BIF members. Under this system,
assessments vary depending on the risk the institution poses to its deposit
insurance fund. An institution's risk level is determined based on its capital
levels, and the FDIC's level of supervisory concern about the institution.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, such as Black Diamond, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
On December 31, 1999, Black Diamond had total risk based capital of
$10.5 million (including approximately $9.2 million in core capital and $1.3
million in qualifying supplementary capital) and risk-weighted assets of $88.0
million (with no converted off-balance sheet assets); or total capital of 11.9%
of risk-weighted assets. This amount was $3.5 million above the 8% requirement
in effect on that date.
THRIFT CHARTER. Congress has considered legislation in various forms
that would require federal thrifts, such as Black Diamond, to convert their
charters to national or state bank charters. Black Diamond cannot determine
whether, or in what form, such legislation may eventually be enacted and there
can be no assurance that any legislation that is enacted would not adversely
affect Black Diamond and the Company.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has total risk-based capital of less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized," and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
At December 31, 1999, Black Diamond was categorized as "well
capitalized," meaning that Black Diamond's total risk-based capital ratio
exceeded 10.0%, Tier I risk-based capital ratio exceeded 6.0%, leverage capital
ratio exceeded 5.0%, and Black Diamond was not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS
regulations applicable to Black Diamond govern capital distributions by savings
institutions, which include cash dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account of a savings institution to make
capital distributions.
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Generally, the regulations create a safe harbor for specified levels of capital
distributions for institutions meeting at least their minimum capital
requirements, so long as such institutions notify the OTS and receive no
objection to the distribution from the OTS. Institutions and distributions that
do not qualify for the safe harbor are required to obtain prior OTS approval
before making any capital distributions.
Pursuant to a recent revision to these regulations, effective April 1,
1999, a "well capitalized" savings association, such as Black Diamond, will be
permitted to make capital distributions during a calendar year in an amount up
to the savings association's net income for the year plus the savings
association's retained net income for the preceding two years, without filing an
application for approval of the capital distribution with the OTS.
LIQUIDITY. All savings associations, including Black Diamond, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. This liquid asset
ratio requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations.
ACCOUNTING. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which
may be more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
and that financial reports must incorporate any other accounting regulations or
orders prescribed by the OTS. Black Diamond is in compliance with these amended
rules.
QUALIFIED THRIFT LENDER TEST. All savings associations, including Black
Diamond, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At December 31, 1999, Black Diamond met
the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties.
COMMUNITY REINVESTMENT ACT. The CRA requires the OTS, in connection
with the examination of Black Diamond, to assess the institution's record of
meeting the credit needs of its community and to
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<PAGE> 21
take such record into account in its evaluation of certain applications, such as
a merger or the establishment of a branch, by Black Diamond. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Black Diamond may be required to devote additional funds
for investment and lending in its local community. Black Diamond was examined
for CRA compliance in April 1998 and received a rating of "outstanding."
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Generally, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
However, recent regulations now permit executive officers and directors to
receive loans with the same terms as those widely available to other employees
through benefit or compensation plans, as long as the director or executive
officer is not given preferential treatment compared to the other participating
employees.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1999, Black Diamond was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. Black Diamond is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, Black Diamond is required to purchase and maintain stock
in the FHLB of Atlanta. At December 31, 1999, Black Diamond had $705,000 of FHLB
stock, which was in compliance with this requirement. In past years, Black
Diamond has received substantial dividends on its FHLB stock. For the fiscal
year ended December 31, 1999, dividends paid by the FHLB of Atlanta to Black
Diamond totaled approximately $56,000, which constitutes a $9,000 increase over
the amount of dividends
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<PAGE> 22
received in fiscal year 1998. No assurance can be given that such dividends will
continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Black Diamond's FHLB stock may result in a corresponding
reduction in Black Diamond's capital.
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<PAGE> 23
ITEM 2. PROPERTIES
The Company leases or owns 15 banking offices, as shown in the
following table:
<TABLE>
<CAPTION>
LOCATION OWNED OR LEASED ATM(1)(2) YEAR OPENED/PURCHASED
-------- --------------- --------- ---------------------
<S> <C> <C> <C>
202 South Main Street
Reidsville, North Carolina.......... Owned (3) X 1910 (4)
1646 Freeway Drive
Reidsville, North Carolina.......... Owned X 1972
202 Turner Drive
Reidsville, North Carolina.......... Owned X 1969
801 South Van Buren Road
Eden, North Carolina................ Owned X 1996
151 North Fieldcrest Road
Eden, North Carolina................ Leased (expires 2008) 1996
605 North Highway Street
Madison, North Carolina............. Owned X 1997
9570 U.S. 29 Business
Ruffin, North Carolina.............. Leased (expires 2004) 1997
2132 New Garden Road
Greensboro, North Carolina.......... Owned X 1997
704 South College Road
Wilmington, North Carolina.......... Leased (expires 2002) X 1997
301 East Fremont Street
Burgaw, North Carolina.............. Leased (expires 2004) X 1999
600 Trent Street
Norton, Virginia ................... Owned 1973
2302 2nd Street
Richlands, Virginia ................ Owned 1977
700 East Morgan Avenue
Pennington Gap, Virginia ........... Owned 1979
440 South Main Street
Harrisonburg, Virginia.............. Owned 1988
624 Chicago Avenue
Harrisonburg, Virginia ............. Leased (expires 2004) 1999
</TABLE>
- --------------
(1) Three additional remote ATM's are located in Reidsville, North Carolina
pursuant to leases that expire in 2001 and 2003. Each of the ATM's
situated at a banking office is a drive-up ATM.
(2) Black Diamond owns and operates a network of 34 ATMs located at
non-bank locations such as convenience stores and colleges. This
network generally covers the Norton, Virginia region and surrounding
areas.
(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.
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<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company is a party
to various legal proceedings. In the opinion of management, there is no
proceeding pending, or to the knowledge of management threatened, in which an
adverse decision could result in a material adverse change in the business or
results of operations of the Company.
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
ending December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Ernest J. Sewell, age 59, is the President, Chief Executive Officer and
a Director of the Company and FNB Southeast and a Director of Black Diamond. He
assumed his current position on January 26, 1995 after the resignation of
Willard B. Apple, Jr. from those positions on that date. Prior to joining the
Company and FNB Southeast, Mr. Sewell served as Senior Vice President of Branch
Banking and Trust Company, with 26 years of previous banking experience. He is a
member of the Board of Trustees of Annie Penn Memorial Hospital, Reidsville,
North Carolina, and is Chairman of its Investment Committee. Mr. Sewell also
serves on the boards of various charitable organizations in Rockingham County.
R. Michael Hendricks, age 36, is Senior Vice President, Corporate
Administration of FNB Southeast, and a Director of Black Diamond. He joined FNB
Southeast in 1997 as Senior Vice President and City Executive, prior to being
promoted to his current position in December, 1998. He had previously served as
Vice President, Business Services Manager at Branch Banking and Trust Company
and had 11 years banking experience prior to joining FNB Southeast.
Richard L. Powell, age 48, is Senior Vice President, Support Services,
of the Company and FNB Southeast, Assistant Secretary of the Company, and a
Director of Black Diamond. He joined the Company in 1986 as Assistant Vice
President and was promoted to Vice President in 1988 and to Senior Vice
President in 1993.
Michael W. Shelton, age 38, is Senior Vice President, Secretary and
Chief Financial Officer of FNB Southeast and Vice President, Secretary and
Treasurer of the Company, and a Director of Black Diamond. He joined FNB
Southeast in 1996 as Vice President and was promoted to Senior Vice President in
1998. He had previously served as Assistant Vice President at Branch Banking and
Trust Company and had eight years banking experience prior to joining FNB
Southeast.
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<PAGE> 25
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 under the symbol "FNBF." The following table shows the high and low sale
prices per share of the Company's common stock on The Nasdaq Stock Market, based
on published financial sources, and the frequency and per share amount of
dividends paid for each of the last two fiscal years.
DIVIDENDS
CALENDAR PERIOD HIGH LOW PAID
- --------------- ---- --- ---------
Quarter ended March 31, 1998 ... $26.00 $23.75 $ 0.07
Quarter ended June 30, 1998 .... 25.50 22.50 0.07
Quarter ended September 30, 1998 25.25 17.75 0.08
Quarter ended December 31, 1998 19.75 16.00 0.08
Quarter ended March 31, 1999 ... $18.50 $16.00 $ 0.08
Quarter ended June 30, 1999 .... 18.00 15.00 0.08
Quarter ended September 30, 1999 16.25 11.56 0.11
Quarter ended December 31, 1999 12.88 10.38 0.19
As of March 10, 2000, there were approximately 2,416
beneficial owners of the Company's common stock, including 1,166 holders of
record of the Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not sell any securities in the fiscal year
ended December 31, 1999 which were not registered under the Securities Act of
1933, as amended, except that during such fiscal year the Company granted
options to employees and directors to acquire an aggregate of 206,850 shares of
its Common Stock at a weighted average exercise price of $13.38 per share
pursuant to the Company's Omnibus Equity Compensation Plan.
ITEM 6. SELECTED FINANCIAL DATA
The annual selected historical financial data presented below
are derived from the audited consolidated financial statements of the Company.
The financial statements of the Company have been restated to reflect the
acquisition of Black Diamond 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 notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
Table 1. Selected Financial Data
(in thousands, except per share, ratio and other data)
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income $ 20,427 $ 18,378 $ 14,598 $ 12,222 $ 10,626
Provision for loan losses 1,401 1,171 686 707 387
Other income 2,977 3,085 2,146 1,722 1,757
Other expenses 15,193 12,872 10,859 (1) 9,454 7,610
Net income 4,248 5,022 3,514 2,656 3,074
Balance Sheet Data:
Assets $ 588,419 $ 549,746 $ 445,990 $ 322,789 $ 292,608
Loans (2) 413,257 361,677 319,046 229,943 200,149
Allowance for loan losses 4,436 3,452 3,185 2,422 2,105
Deposits 484,242 459,595 384,121 284,875 261,757
Other borrowings 31,500 17,500 28,720 8,650 3,152
Shareholders' equity 50,730 53,631 30,404 27,109 25,516
Per Common Share Data (3):
Net income, basic $ 0.95 $ 1.19 $ 0.98 $ 0.74 $ 0.87
Net income, diluted (4) 0.93 1.13 0.93 0.73 0.86
Cash dividends declared 0.46 0.30 0.27 0.24 0.21
Book value 11.30 11.81 8.43 7.59 7.18
Tangible book value 11.20 11.68 8.24 7.37 7.18
Other Data:
Branch offices 15 14 14 10 9
Full-time employees 189 184 169 130 122
Performance Ratios:
Return on average assets 0.76% 0.97% 0.94% 0.85% 1.10%
Return on average equity 8.45 11.21 12.49 10.22 13.47
Net interest margin (tax equivalent) 3.88 3.78 4.25 4.28 4.20
Dividend payout 47.98 25.37 27.29 31.93 23.95
Efficiency (5) 64.50 59.50 64.00 66.00 59.20
Asset Quality Ratios:
Allowance for loan losses to period end loans 1.07% 0.95% 1.00% 1.05% 1.04%
Allowance for loan losses to period end
non-performing loans (6) 338.00 221.00 123.00 104.00 246.00
Net charge-offs to loans 0.11 0.26 -0.03 0.18 0.06
Non-performing assets to period end loans
and foreclosed property (6) 0.45 0.85 0.91 1.11 0.54
Capital and Liquidity Ratios:
Average equity to average assets 9.06% 8.69% 7.50% 8.32% 8.15%
Leverage 9.30 10.30 7.00 8.30 8.60
Tier-1 risk-based 13.20 15.30 8.90 12.70 13.50
Total risk-based 14.30 16.30 9.90 13.80 14.50
Average loans to average deposits 83.49 79.31 81.50 79.22 75.18
Average loans to average deposits
and borrowings 77.34 74.47 78.12 77.58 72.23
</TABLE>
(1) Includes approximately $1.4 million of non-interest expense attributable to
the opening of four new branches in 1997.
(2) Loans net of unearned income, before allowance for losses, and excluding
loans held for sale.
(3) Gives effect of the 1996 stock spilt and the 1997 stock splits.
(4) Assumes the exercise of outstanding options to acquire common stock. See
Note 15 to the Company's consolidated financial statements.
(5) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income.
(6) Non-performing loans and non-performing assets include loans past due 90
days or more that are still accruing interest.
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<PAGE> 27
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 73 of this Annual Report on Form 10-K.
OVERVIEW
The Company continued strong growth in assets and deposits,
with growth in existing markets aided by favorable economic and market
conditions. The Company also acquired Black Diamond Savings Bank, headquartered
in Norton, Virginia, a transaction that added approximately $135 million in
assets at the closing date of August 31, 1999. The acquisition was accounted for
as a pooling of interests, and all financial statements and other data have been
restated to reflect this business combination.
As a result of the Black Diamond merger, FNB Financial
Services Corporation is now a North Carolina bank holding company with
consolidated assets of $588.4 million at December 31, 1999. The Company, through
its two subsidiaries, FNB Southeast, a North Carolina chartered commercial bank,
and Black Diamond Savings Bank, a federally chartered savings bank, currently
operates fifteen banking offices in North Carolina and Virginia. On March 15,
2000 the Company filed an application with the Office of the Commission of Banks
for the State of North Carolina to merge Black Diamond into FNB Southeast. The
effect of the merger, if approved, would be to operate Black Diamond locations
as branches of FNB Southeast.
During the year, both FNB Southeast and Black Diamond (the
"Subsidiary Banks") expanded their banking networks. FNB Southeast opened an
office in Burgaw, North Carolina, and has two offices in Greensboro, North
Carolina under construction. These two offices are expected to open early in the
second quarter of 2000 and complement our existing branch in that market. Black
Diamond opened a second Harrisonburg, Virginia office in the third quarter of
1999 to capitalize on its existing presence in this growing market. Both banks
continue to look at additional markets and sites for future expansion of their
franchises.
RESULTS OF OPERATIONS
Net income for the full year totaled $4.25 million, or $0.93
in diluted earnings per share, and is inclusive of approximately $972,000 in
after-tax merger related expenses and other charges in connection with the
acquisition of Black Diamond. Pro forma annual net income excluding these
one-time charges totaled $5.22 million, or $1.15 in diluted earnings per share,
and represents a 3.9% increase over restated net income of $5.02 million in
1998.
Non-interest expenses of $15.2 million was 18.0% higher than
the prior year and included $675,000 in merger related cost such as fees for
investment bankers, attorneys, accountants, printers and other charges.
Recurring expenses excluding these one-time expense items was $14.5 million, a
12.8% increase from 1998 levels.
The Company's primary source of income is net interest income,
which is the difference between (i) interest income and fees derived from
earning assets (primarily loans and investment securities) and (ii) the cost of
funds (primarily deposits and other borrowings) supporting them.
25
<PAGE> 28
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 was $20.6
million, which represented a 10.9% increase over the previous year. In 1998,
taxable equivalent net interest income increased to approximately $18.6 million
from approximately $14.9 million in 1997, which was an increase of 26.4%. Actual
net interest income was 11.2% higher in 1999, following an improvement of 25.9%
in 1998. Growth in net interest income for 1999 was occasioned by higher loan
balances and improved net interest margins, supported by deposit growth and
increased borrowing from the Federal Home Loan Bank of Atlanta. Average loans
outstanding during the year equaled $387.3 million compared to $347.3 million in
1998, an increase of 11.5%. In the previous year, average loans outstanding were
29.5% higher than 1997. This loan growth is attributed to generally favorable
economic conditions in the Company's lending markets and the addition of
commercial loan officers in selected markets. Average investment securities
during 1999 were $136.5 million, down 1.6% over 1998, following a substantial
increase of 86.3% the previous year. Average total deposits of $463.9 million
were up 5.9% in 1999, which followed a gain of 33.1% the previous year. Average
shareholders' equity balances of $50.3 million represented a 12.2% increase over
1998.
Overall trends in interest rates continued lower for the full
year. Although the earning asset yield declined, the rate paid on
interest-bearing liabilities experienced a steeper decline, allowing for
improved net interest margins for 1999. The weighted average yield on earning
assets fell to 8.05%, from 8.26% in 1998, a decrease of 21 basis points. This is
primarily due to the current yield on loans dropping 29 basis points to 8.87% in
1999, compared to a yield of 9.16% in 1998.
The weighted average rate paid on interest bearing liabilities
decreased to 4.86% in 1999, from 5.17% last year. Consequently, the interest
rate spread rose to 3.19% in 1999, from 3.09% the previous year. The prime rate
on loans was increased from 7.75% to 8.50% during the second half of 1999. The
rate increase came too late in the year to prevent the weighted rate on loans
from falling to 8.87% in 1999 compared to 9.16% in 1998. Investment securities
yields were 6.12% on a taxable equivalent basis in 1999, down from 6.28% last
year. The weighted average rate paid on savings and time deposits decreased from
5.15% in 1998 to 4.83% this year, as depositors renewed maturing certificates at
lower rates and increased balances in relatively lower cost money market
instruments.
Table 2 on page 33 summarizes net interest income and average
yields earned and rates paid for the years indicated, on a tax equivalent basis.
Table 3 on page 34 presents the changes in interest income and interest expense
attributable to volume and rate changes between 1999 and 1998, and between 1998
and 1997.
NON-INTEREST INCOME AND EXPENSE
Non-interest income of $2.98 million in 1999 was $108,000 or
0.04% less than the previous year. Service charges on deposit accounts increased
to $1.79 million, up 25.1% from $1.43 million in 1998. The Company was able to
capitalize on increased fees and increased volume of demand deposits and other
accounts with service charges.
Two categories of non-interest income, gain on sale of
securities and gain on sale of loans, experienced significant declines in 1999
compared to 1998 due to changes in the interest rate environment during the
year. Gains on sale of securities for 1999 totaled $118,000, down $304,000 from
the prior year. Gain on sale of loans for 1999 totaled $174,000, down $160,000
from one year earlier.
26
<PAGE> 29
Both of these categories were negatively impacted by the trend of rising
interest rates over the second half of 1999. In 1999, the Company recorded
$521,000 in bankcard fee revenue. Due to the sale of the credit card portfolio
and the merchant account program, these revenues will decline significantly in
2000.
Recurring non-interest expense, excluding the $675,000 in
merger related costs, increased $1.65 million, or 12.8%, in 1999 to $14.52
million, compared to $12.87 million in 1998. Last year, non-interest expense of
$12.87 million exceeded the previous year by $2.01 million, or 18.5%. The
primary reasons for the increase in expense in 1999 have been the full year
effect of depreciation on the personal computer network installed in 1998, and
fees for internal audit services that were outsourced during 1999.
Personnel expense of $8.17 million in 1999 exceeded the
previous year by $800,000, or 10.8%. Total salaries of officers and staff of
$6.58 million were $454,000 or 7.4% more than 1998. At December 31, 1999, the
Company had approximately 182 full-time and 13 part-time employees, compared
with approximately 177 full-time and 15 part-time employees at December 31,
1998. Occupancy expense followed a 13.4% increase in expense in 1998 with an
additional 10.8% in 1999, or $771,000 for the full year. Furniture and equipment
expense totaled $1.28 million in the current year, up $334,000 or 35.3%,
following a 31.0% increase in 1998 over 1997. Depreciation on equipment of
$764,000 this year was up 28.2% over 1998, while equipment rent and personal
property taxes posted higher numbers in 1999. All other expenses of $3.08
million were up $415,000, or 15.6% over 1998. In 1999, the Company recorded
$412,000 in bankcard processing expense. Due to the sale of the credit card
portfolio and the merchant account program, these expenses will decline
significantly in 2000.
The efficiency ratio, which measures non-interest expense as a
percentage of net interest income plus non-interest income, was 64.5% in 1999,
and compared unfavorably to 59.5% posted the previous year. Excluding $675,000
of merger related cost, the pro forma efficiency ratio for 1999 was 61.6%.
The Company experienced a higher effective tax rate during
1999. The increased effective tax rate for 1999 is primarily attributable to tax
treatment of merger related cost recognized in the third quarter of 1999.
Secondly, the effective tax rate for 1998 was lowered because the Company had
minimum state taxes due to increased investment tax-exempt income as a
percentage of interest income. This had the effect of decreasing the tax rate
for 1998.
FINANCIAL CONDITION
The Company's consolidated assets of $588.4 million at year
end increased 7.0% over the previous year, following an increase of 23.3% in
1998. Growth in earning assets in 1998 occurred in both loans and investment
securities, while 1999 saw a marked increase in outstanding loans. Supporting
that growth this year were increases of 6.6% in non-interest bearing deposits,
5.2% in interest bearing deposits and 80.0% in other borrowings.
Loan growth during 1999 was $51.8 million, with outstanding
loans up 14.3% at year end, following increases of 13.2% in 1998 and 38.6% in
1997. Loans secured by real estate were up 14.7% and represented 67.9% of total
loans, compared with 67.6% at year end 1998. Within the category, commercial
real estate loans increased 21.8%, to a level of $115.4 million. Commercial,
financial and agricultural loans were up 16.4% representing 14.0% of total
loans, compared with 13.8% last year end. Consumer loans advanced 11.1% led
mainly by increases in 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.
27
<PAGE> 30
Investment securities (at amortized cost) of $136.7 million at
year end were down $18.4 million or 11.9% over 1998. U. S. Government agency
securities continue to represent the major share of the total portfolio,
although decreasing from 84.1% of the portfolio at the end of 1998 to 81.6% at
year end 1999. Management believes that the additional risk of owning Agencies
over U. S. Treasury securities is negligible and has capitalized on the
favorable spreads available on the former. For the first time in two years the
Company was able to purchase tax-exempt municipal securities in the latter part
of 1999. The pricing in these securities turned favorable and will serve to
boost total returns in future periods. The Company's investment portfolio goals
are to achieve good total portfolio returns, within the context of remaining
relatively short in maturity to fund loan growth and mitigate the unfavorable
effect of interest rate increases. 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 35 presents the composition of the securities portfolio for the last
three years, as well as information about cost, fair value and weighted average
yield.
During the first half of 1999, deposits rates trended downward
in response to the decreases in interest rates precipitated by the Federal
Reserve Bank reducing short term interest rates in late 1998. This scenario
provided little incentive for customers to choose longer term deposit at a
minimal spread difference from shorter, more liquid products. Accordingly,
retail deposit growth was concentrated in money market investment accounts,
which have superior liquidity compared to a certificate of deposit while
providing a competitive return to depositors. 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. 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 regular
checking accounts, the Company offers a cash management sweep account, with
outstanding balances decreasing from $10.4 million at the end of 1998 to $7.5
million in 1999.
In order to attract longer term deposits, the Company
maintains membership in an electronic network which allows it to post interest
rates and attract deposits nationally. As of December 31, 1999, the Company had
approximately 165 certificates of deposit totaling $16.2 million, with an
overall rate of 5.74% for the total portfolio. This certificate portfolio has
increased by $4.6 million during 1999. Overall, the certificates booked during
1999 were at lower rates than certificates booked during 1998. As a result, the
portfolio rate declined from 5.91% at December 31, 1998 to 5.86% at December 31
1999. The primary focus of this funding source has been to provide longer-term
deposits to offset the demand for short-term retail deposits. However, current
deposit rates in this market are trending upward and this may result in a higher
overall rate on this certificate portfolio in the future if new deposits are
booked.
The Company also utilized a portion of its $88.5 million line
with the FHLB of Atlanta to fund earning assets, with a year end balance
outstanding of $31.5 million. Management continues to believe this is a cost
effective and prudent alternative to deposit balances, since a particular amount
and term may be selected to meet its current needs.
ASSET QUALITY
Management believes that asset quality is of great importance.
The allowance for loan losses, which is utilized to absorb actual losses in the
loan portfolio, is maintained at a level sufficient to provide for estimated
probable charge-offs of non-collectible loans. The loan portfolio is analyzed
periodically in an effort to identify potential problems before they actually
occur. The Company's allowance for loan losses is also analyzed quarterly by
management. This analysis includes a methodology that segments the loan
portfolio by selected loan types and considers the current status of the
portfolio, historical charge-off experience, current levels of delinquent,
impaired and non-performing
28
<PAGE> 31
loans, as well as economic and inherent risk factors. The provision for loan
losses represents a charge against income in an amount necessary to maintain the
allowance at an appropriate level. The monthly provision for loan losses may
fluctuate based on the results of this analysis. Table 6 on page 37 depicts a
summary of the allowance for loan losses and the allocation of the allowance for
loan losses for the years ended December 31, 1995 through 1999. The allocation
is based on management's grading of the loan portfolio with the remaining
portion allocated to the general category, although the entire allowance is
available to be used for write-offs in any category.
The 1999 provision of $1.40 million compares with $1.17
million in 1998 and $686,000 in 1997, which equals a 19.6% increase in 1999. The
1999 total provision includes a one-time increase of $465,000 charged against
income during the third quarter to conform the policies of Black Diamond to
those of FNB Southeast. Credit quality continued strong and the level of
non-performing loans and charge-offs has remained comparatively low. Net
charge-offs decreased in 1999 to a level of $417,000 or 0.11% of average loans
outstanding, compared with $703,000 the prior year and net recoveries of $77,000
in 1997. Approximately 59% of the net charge-offs in 1998 were for two
commercial loans. At December 31, 1999, the allowance for loan losses as a
percentage of year end loans was 1.07%, which represented an increase from 0.95%
at December 31, 1998.
At December 31, 1999 and 1998, the recorded investment in
loans that were considered impaired was approximately $1,747,000 and $1,474,000,
respectively. The related allowance for loan losses on these impaired loans was
approximately $488,000 and $60,000, respectively. The average recorded
investment in impaired loans for the years ended December 31, 1999 and 1998 was
approximately $1,611,000 and $1,987,000 respectively. There were no loans on
nonaccrual status that were not considered impaired at December 31, 1999.
Non-performing assets include non-accrual loans, accruing
loans contractually past due 90 days or more, restructured loans, other real
estate and other real estate under contract for sale. Loans are placed on
non-accrual status when management has concerns relating to the ability to
collect the loan principal and interest and generally when such loans are 90
days or more past due. While non-performing assets represent potential losses to
the Company, management does not anticipate any aggregate material losses, since
most loans are believed to be adequately secured. Management believes the
allowance for loan losses is sufficient to absorb known risks in the portfolio.
No assurance can be given, however, that economic conditions will not adversely
affect borrowers and result in increased losses.
CAPITAL RESOURCES
Banks and bank 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 38, in 1999 and 1998 the Company and both Subsidiary Banks maintained
capital levels exceeding the minimum levels for "well capitalized" banks and
bank holding companies. Because of significant growth realized in 1997, the
levels fell to "adequately capitalized" by the end of 1997. Capital levels were
dramatically increased in 1998 when the Company sold a total of 897,000
additional shares in a public offering during April and May 1998, generating
approximately $18.5 million in new capital. The result of this capital infusion
was to restore the Company and FNB Southeast to "well capitalized" status at the
end of 1998. Effective in March 1999, FNB Southeast converted from a national
bank, regulated by the OCC, to a North Carolina
29
<PAGE> 32
bank, regulated by the North Carolina Commissioner of Banks ("Commissioner").
FNB Southeast will continue to be required to meet certain levels of capital.
INTEREST RATE SENSITIVITY AND LIQUIDITY MANAGEMENT
A primary objective of interest rate sensitivity management is
to ensure the stability and quality of the Company's primary earning component,
net interest income. This process involves monitoring the Company's balance
sheet in order to determine the potential impact that changes in the interest
rate environment would have on net interest income. Rate sensitive assets and
liabilities have interest rates which are subject to change within a specific
time period, due to either maturity or to contractual agreements which allow the
instruments to reprice prior to maturity. Interest rate sensitivity management
seeks to ensure that both assets and liabilities react to changes in interest
rates within a similar time period, thereby minimizing the risk to net interest
income.
The measurement of the Company's interest rate sensitivity, or
"gap" is a technique traditionally used in asset/liability management. The
interest sensitivity gap is the difference between repricing assets and
repricing liabilities for a particular time period. Table 8 on page 39 indicates
a ratio of rate sensitive assets to rate sensitive liabilities within one year
at December 31, 1999 to be 81%. This ratio indicates that net interest income
would decline in a rising interest rate environment, since a greater amount of
liabilities than assets would reprice more quickly over the one-year period.
Included in rate sensitive liabilities are certain deposit accounts (NOW, MMI
and savings) that are subject to immediate withdrawal and repricing, yet have no
stated maturity. These balances are presented in the category that management
believes best identifies their actual repricing patterns. This analysis assumes
60% of NOW and MMI accounts, and 20% of savings accounts reprice within one year
and the remaining balances reprice after one year. Furthermore, the overall risk
to net interest income is further mitigated by the Company's level of variable
rate loans. These are loans with a contractual interest rate tied to an index,
such as the prime rate. A portion of these loans may reprice on multiple
occasions during a one-year period due to changes in the underlying rate index.
Approximately 52% of the total loan portfolio has variable rates, 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 reflects 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 has an established policy to
monitor interest rate risk. The 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.
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/sales of investment
securities, principal and interest payment on loans, access to borrowed funds or
lines of credit, and profits.
The Company's primary source of funds has been from increased
deposit and sweep account balances. Liquidity is further enhanced by an $88.5
million line of credit with the FHLB
30
<PAGE> 33
of Atlanta collateralized by FHLB of Atlanta stock and qualifying 1-4 family
residential mortgage loans. There are unsecured overnight borrowing lines
available through several financial institutions. Internal liquidity analysis
indicates the Company is well positioned to fund earning assets in the twelve
month period analyzed.
Interest rate risk management and liquidity management are
both 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 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.
YEAR 2000 DISCUSSION
Over the past two years, the Company has reported on its activities and
state of readiness for the century date roll over. The Company has experienced
no material or immaterial disruption of business activity related to the century
date roll over, or any other dates such as February 29, 2000. In 1999, the
Company budgeted $35,000 of Year 2000 expense, and had actual Year 2000 expense
of $5,000. These expenditures only reflect the external cost of Year 2000
compliance, and do not include personnel expense based on time devoted to this
effort by employees.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133, as amended, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. This standard establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Based on its operations at December
31, 1999, management does not expect this standard to have a material effect on
the Company's financial statements upon adoption.
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.
31
<PAGE> 34
RECENT EVENTS
In February, 2000, the Company sold its entire credit card portfolio of
$3.4 million to a third party. The Company received approximately a 3% premium
on this sale. The loans were sold without recourse. The Company has entered into
an agreement whereby its customers will be issued credit cards branded for
either FNB Southeast or Black Diamond through this third party and the Company
will receive income based on the level of future transactions generated by these
customers. Related to this sale, the Company has entered into an agreement to
sell the merchant servicing business related to credit card transactions.
Current merchant accounts will be serviced by a third party. The Company expects
to have completed the merger of Black Diamond into FNB Southeast in the
beginning of the third quarter of 2000.
On March 15, 2000 the Company filed an application with the Office of
the Commission of Banks for the State of North Carolina to merge Black Diamond
into FNB Southeast. The effect of the merger, if approved, would be to operate
Black Diamond locations as branches of FNB Southeast.
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.
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 discussed in "Interest Rate Sensitivity and
Liquidity Management" on page 30. 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 40 presents the Company's financial instruments which
are considered to be sensitive to changes in interest rates, categorized by
contractual maturities, average interest rates and estimated fair values at
December 31, 1999.
32
<PAGE> 35
Table 2
Average Balance and Net Interest Income Analysis
Fully Taxable Equivalent Basis
(in thousands, except percentages)
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance(3) Expense Rate Balance(3) Expense Rate Balance(3) Expense Rate
--------- -------- ------- ---------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net (2) $387,335 $34,339 8.87% $347,347 $31,826 9.16% $268,280 $25,665 9.57%
Taxable investment securities 126,666 7,396 5.84% 129,125 7,675 5.94% 63,454 3,737 5.89%
Tax-exempt investment securities 7,041 556 7.90%(1) 7,712 624 8.09%(1) 9,492 767 8.08%(1)
Other securities 2,787 205 7.36% 1,847 135 7.31% 1,482 154 10.39%
Deposits with FHLB 1,717 90 5.24% 2,360 125 5.30% 977 54 5.53%
Federal funds sold and retail
repurchase agreements 5,341 136 2.54% 3,069 223 7.27% 6,181 309 5.00%
-------- ------- -------- ------- -------- -------
Total earning assets 530,887 42,722 8.05% 491,460 40,608 8.26% 349,866 30,686 8.77%
Non-earning assets:
Cash and due from banks 10,506 10,053 13,552
Premises and equipment 9,496 8,753 8,065
Other assets 8,273 8,666 6,288
Less: Allowance for loan loss (3,856) (3,441) (2,701)
-------- -------- --------
Total assets $555,306 $515,491 $375,070
======== ======== ========
Interest bearing liabilities:
Savings and time deposits $418,171 20,191 4.83% $397,533 20,479 5.15% $299,327 15,058 5.03%
Federal funds purchased,
borrowed funds and
securities sold under
agreements to repurchase 36,939 1,915 5.18% 28,474 1,539 5.40% 14,270 769 5.39%
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 455,110 22,106 4.86% 426,007 22,018 5.17% 313,597 15,827 5.05%
Other liabilities and
shareholders' equity
Demand deposits 45,739 40,433 29,837
Other liabilities and
shareholders' equity 4,168 4,238 3,503
Shareholders' equity 50,289 44,813 28,133
-------- -------- --------
Total liabilities and
shareholders' equity $555,306 $515,491 $375,070
======== ======== ========
Net interest income and net yield
on earning assets (3) (4) $20,616 3.88% $18,590 3.78% $14,859 4.25%
======= ===== ======= ===== ======= =====
Interest rate spread (5) 3.19% 3.09% 3.72%
===== ===== =====
</TABLE>
(1) The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2) The average loan balances include non-accruing loans.
(3) The average balances for all years include market adjustments to fair value
for securities and loans available/held for sale, with such adjustments
excluded for purposes of computing average yields.
(4) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5) Earning asset yield minus interest bearing liabilities rate.
33
<PAGE> 36
Table 3
Volume and Rate Variance Analysis
Fully Taxable Equivalent Basis
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Volume (2) Rate (2) Total Volume (2) Rate (2) Total
Variance Variance Variance Variance Variance Variance
----------------------- -------- ---------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans, net $ 3,649 $ (1,136 $ 2,513 $ 7,576 $ (1,415) $ 6,161
Taxable investment securities (149) (130) (279) 3,871 67 3,938
Tax-exempt investment securities (1) (54) (14) (68) (144) 1 (143)
Other earning assets 69 1 70 38 (57) (19)
Federal funds sold and retail
repurchase agreements 131 (253) (122) (80) 65 (15)
-------- -------- -------- -------- -------- --------
Total interest income 3,646 (1,532) 2,114 11,261 (1,339) 9,922
-------- -------- -------- -------- -------- --------
Interest expense:
Savings and time deposits 1,063 (1,351) (288) 4,940 481 5,421
Federal funds purchased, borrowed
funds and securities sold under
agreements to repurchase 458 (82) 376 765 5 770
-------- -------- -------- -------- -------- --------
Total interest expense 1,521 (1,433) 88 5,705 486 6,191
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income $ 2,125 $ (99) $ 2,026 $ 5,556 $ (1,825) $ 3,731
======== ======== ======== ======== ======== ========
</TABLE>
(1) The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2) Changes attributable to both volume and rate have been allocated
proportionately.
34
<PAGE> 37
Table 4
Investment Securities
(in thousands, except percentages)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
---------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Amortized Fair Average Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield Cost Value Yield
--------- -------- -------- ---------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 200 $ 200 6.70% $ 199 $ 207 6.25% $ 4,022 $ 4,040 5.83%
U. S. government agency 122,604 118,002 5.78% 143,432 144,213 5.86% 79,222 79,169 6.03%
State and municipal
obligations(1) 9,989 9,959 7.85% 6,101 6,434 8.00% 7,776 8,127 7.75%
Other debt securities 1,340 1,284 6.34% 1,093 1,108 6.36% 767 773 6.64%
Other equity 2,573 2,573 7.31% 4,330 4,340 6.89% 3,968 4,000 6.99%
-------- -------- --------- --------- -------- --------
Total investment
securities(1) $136,706 $132,018 5.97% $ 155,155 $ 156,302 5.97% $ 95,755 $ 96,129 6.19%
======== ======== ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------------------------
After One After Five
Within Year to Years to After
One Year Five Years Ten Years Ten Years Weighted
----------------- ----------------- ------------------- ----------------- Average
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield(1)
------ ----- ------ ----- ------- ----- ------ ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ - 0.00% $ 200 6.70% $ - 0.00% $ - 0.00% $ 200 6.70%
U. S. government agency 105 5.64% 80,218 5.86% 33,364 5.58% 8,917 5.88% 122,604 5.78%
State and municipal
obligations(1) 652 6.71% 1,041 5.78% 3,012 8.26% 5,284 8.16% 9,989 7.85%
Other debt securities 102 6.99% 449 6.10% 789 6.39% - 0.00% 1,340 6.34%
------ ------- ------- ------- --------
Total investment
securities(1) $ 859 6.61% $81,908 5.85% $37,165 5.81% $14,201 7.96% $134,133 5.94%
====== ======= ======= ======= ========
</TABLE>
(1) Yields stated on a tax equivalent basis
35
<PAGE> 38
Table 5
Loan Portfolio Composition
(in thousands, except percentages)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Commercial $ 115,434 27.9% $ 94,798 26.2% $ 60,659 19.0% $ 39,746 17.2% $ 35,719 17.7%
Residential 130,676 31.6% 120,143 33.2% 120,257 37.7% 99,835 43.3% 97,375 48.2%
Construction 34,680 8.4% 29,794 8.2% 22,143 6.9% 18,773 8.1% 9,292 4.6%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total real estate $ 280,790 67.9% $ 244,735 67.6% $ 203,059 63.6% $ 158,354 68.7% $ 142,386 70.5%
Commercial, financial and
agricultural 58,002 14.0% 49,822 13.8% 57,453 18.0% 28,784 12.5% 22,837 11.3%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Consumer:
Direct 32,778 7.9% 32,368 8.9% 31,556 9.9% 25,428 11.0% 24,748 12.3%
Home equity 32,836 7.9% 26,723 7.4% 21,425 6.7% 15,109 6.6% 10,806 5.4%
Revolving 9,605 2.3% 8,604 2.3% 5,974 1.8% 2,781 1.2% 1,097 0.5%
--------- ------ --------- ------ ---------- ------ --------- ------ --------- ------
Total consumer 75,219 18.1% 67,695 18.6% 58,955 18.4% 43,318 18.8% 36,651 18.2%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total $ 414,011 100.0% $ 362,252 100.0% $ 319,467 100.0% $ 230,456 100.0% $ 201,874 100.0%
========= ====== ========= ====== ========= ====== ========= ======= ========= ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------------------------------
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
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 31,421 $ 22,852 $ 3,729 $ 58,002 $ 11,256 $ 15,325
Real estate - construction 20,756 11,933 1,991 34,680 5,075 8,849
Real estate - residential 29,470 27,638 73,568 130,676 89,575 11,631
Real estate - commercial 33,114 54,899 27,421 115,434 40,717 41,603
Consumer 16,853 23,909 34,457 75,219 24,442 33,924
----------- ----------- ----------- ----------- ----------- -----------
Total $ 131,614 $ 141,231 $ 141,166 $ 414,011 $ 171,065 $ 111,332
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual $1,195 $1,474 $2,499 $2,251 $ 806
Past due 90 days or more and still accruing interest 117 87 92 68 49
Other real estate 534 1,518 308 251 243
Renegotiated troubled debt -- -- -- -- --
</TABLE>
36
<PAGE> 39
Table 6
Summary of Allowance for Loan Losses
(in thousands, except ratios and percentages)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 3,452 $ 3,185 $ 2,422 $ 2,105 $ 1,828
Charge-offs:
Commercial -- 597 16 -- --
Real estate - construction -- -- -- -- --
Real estate - mortgage -- 4 53 292 --
Consumer 512 407 186 162 189
------- ------- ------- ------- -------
Total charge-offs 512 1,008 255 454 189
Recoveries:
Commercial 5 12 10 -- 2
Real estate - construction -- -- -- -- --
Real estate - mortgage -- -- 233 -- --
Consumer 90 92 89 64 77
------- ------- ------- ------- -------
Total recoveries 95 104 332 64 79
------- ------- ------- ------- -------
Net charge-offs 417 903 (77) 390 110
Provision charged to operation 1,401 1,171 686 707 387
------- ------- ------- ------- -------
Balance, end of period $ 4,436 $ 3,452 $ 3,185 $ 2,422 $ 2,105
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans 0.11% 0.26% (0.03)% 0.18% 0.06%
======= ======= ======= ======= =======
Ratio of allowance to year-end loans 1.07% 0.95% 1.00% 1.05% 1.04%
======= ======= ======= ======= =======
</TABLE>
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------------- ------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to Category to
$ Total Loans $ Total Loans $ Total Loans $ Total Loans $ Total Loans
-------------------- ------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial 2,087 14% 1,549 14% 1,291 18% 1,011 13% 681 11%
Real estate -
construction 50 8% 4 8% 8 7% 49 8% 49 5%
Real estate - mortgage 868 60% 330 59% 514 57% 442 60% 421 66%
Consumer 1,276 18% 1,320 19% 515 18% 657 19% 587 18%
General 155 0% 249 0% 857 0% 263 0% 367 0%
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allocation 4,436 100% 3,452 100% 3,185 100% 2,422 100% 2,105 100%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
37
<PAGE> 40
Table 7
Regulatory Capital
(in thousands, except percentages)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
Consolidated $ 57,327 14.3% $ 55,769 16.3% $ 32,623 9.9%
FNB Southeast 45,796 14.6 44,739 15.8 23,248 9.6
Black Diamond 10,490 11.9 9,841 12.6 8,685 12.9
Tier 1 capital to risk weighted assets
Consolidated 52,891 13.2 52,350 15.3 29,461 8.9
FNB Southeast 42,652 13.6 42,133 14.9 20,917 8.6
Black Diamond 9,198 10.5 9,028 11.6 7,854 6.5
Tier 1 capital to average assets
Consolidated 52,891 9.3 52,350 10.3 29,461 7.0
FNB Southeast 42,652 9.8 42,133 10.1 20,917 6.8
Black Diamond 9,198 6.6 9,028 7.3 7,854 6.5
</TABLE>
38
<PAGE> 41
Table 8
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
(in thousands, except ratios) December 31, 1999
-----------------------------------------------------------------------------------------
Total Total
Sensitive Sensitive
1 - 90 91 - 180 181 - 365 Within Over
Day Day Day One One
Sensitive Sensitive Sensitive Year Year Total
--------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of non-accruals $178,976 $ 30,122 $ 28,437 $ 237,535 $175,281 $412,816
Taxable investment securities 120 347 779 1,246 122,898 124,144
Tax exempt investment securities -- 200 451 651 9,338 9,989
Other investment securities 2,573 -- -- 2,573 -- 2,573
Due from FHLB 760 -- -- 760 -- 760
-------- -------- -------- --------- -------- --------
Total interest earning assets 182,429 30,669 29,667 242,765 307,517 550,282
-------- -------- -------- --------- -------- --------
Interest bearing liabilities:
Savings/NOW/MMI $ 47,829 $ -- $ -- $ 47,829 $ 44,896 $ 92,725
Other time deposits 80,260 63,162 64,639 208,061 135,541 343,602
Overnight borrowings 15,599 -- -- 15,599 -- 15,599
Other borrowings 15,000 5,000 6,500 26,500 5,000 31,500
-------- -------- -------- --------- -------- --------
Total interest bearing liabilities 158,688 68,162 71,139 297,989 185,437 483,426
-------- -------- -------- --------- -------- --------
Interest sensitivity gap $ 23,741 $(37,493) $(41,472) $ (55,224) $122,080 $ 66,856
======== ======== ======== ========= ======== ========
Ratio of interest sensitive assets to
interest sensitive liabilities 1.15 0.45 0.42 0.81 1.66 1.14
</TABLE>
39
<PAGE> 42
Table 9
Market Risk of Financial Instruments
(in thousands, except percentages)
<TABLE>
<CAPTION>
Contractual Maturities at December 31, 1999
------------------------------------------------------------------------------- Average Estimated
Over Interest Fair
2000 2001 2002 2003 2004 Five Years Total Rate Value
-------- -------- -------- -------- -------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial assets:
Debt securities $ 859 $ 4,418 $ 4,159 $ 38,437 $ 34,405 $ 51,855 $134,133 6.24% $129,445
Loans:
Fixed rate 37,049 17,359 12,270 29,908 19,165 84,608 200,359 8.53% 193,751
Variable rate 94,263 21,798 14,273 16,401 10,711 56,206 213,652 8.92% 214,104
-------- -------- -------- -------- -------- -------- -------- --------
Total financial assets $132,171 $ 43,575 $ 30,702 $ 84,746 $ 64,281 $192,669 $548,144 8.12% $537,300
======== ======== ======== ======== ======== ======== ======== ========
Financial liabilities:
NOW $ 26,134 $ -- $ -- $ -- $ -- $ -- $ 26,134 0.82% $ 26,134
MMI 47,077 -- -- -- -- -- 47,077 4.27% 47,077
Savings 19,514 -- -- -- -- -- 19,514 1.78% 19,514
Time deposits 218,372 74,433 23,351 10,058 16,476 912 343,602 5.54% 343,353
Borrowings 11,500 -- 10,000 5,000 5,000 -- 31,500 5.93% 31,423
Federal funds purchased
and retail repurchase 15,599 -- -- -- -- -- -- 4.68% 15,599
-------- -------- -------- -------- -------- -------- -------- --------
Total financial
liabilities $338,196 $ 74,433 $ 33,351 $ 15,058 $ 21,476 $ 912 $483,426 5.01% $483,100
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
40
<PAGE> 43
Table 10
Quarterly Financial Data
(in thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -----------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $11,211 $10,905 $10,353 $10,064 $10,403 $10,521 $10,291 $ 9,181
Interest expense 5,795 5,633 5,378 5,300 5,636 5,814 5,541 5,027
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 5,416 5,272 4,975 4,764 4,767 4,707 4,750 4,154
Provision for loan losses 283 705 184 229 205 341 348 277
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses 5,133 4,567 4,791 4,535 4,562 4,366 4,402 3,877
------- ------- ------- ------- ------- ------- ------- -------
Other income 915 687 661 714 1,094 803 618 570
------- ------- ------- ------- ------- ------- ------- -------
Other expenses 3,673 4,276 3,704 3,540 3,561 3,280 3,144 2,887
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 2,375 978 1,748 1,709 2,095 1,889 1,876 1,560
Income taxes 808 638 566 550 668 597 625 508
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,567 $ 340 $ 1,182 $ 1,159 $ 1,427 $ 1,292 $ 1,251 $ 1,052
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.35 $ 0.08 $ 0.26 $ 0.26 $ 0.32 $ 0.29 $ 0.29 $ 0.29
Diluted $ 0.35 $ 0.07 $ 0.26 $ 0.25 $ 0.30 $ 0.27 $ 0.28 $ 0.28
</TABLE>
41
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
The Board of Directors
FNB Financial Services Corporation and Subsidiaries
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States. 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, 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 the opinion expressed above.
We also audited the combination of the accompanying consolidated statements of
income and comprehensive income, of changes in shareholders' equity and of cash
flows of FNB Financial Services Corporation and subsidiaries for the year ended
December 31, 1997, after restatement for the 1999 pooling of interests; in our
opinion, such consolidated statements have been properly combined on the basis
described in Note 2 to the consolidated financial statements. The separate
financial statements of FNB Financial Services Corporation and Black Diamond
Savings Bank, FSB for the year ended December 31, 1997 were audited by other
auditors whose reports dated February 10, 1998 and January 22, 1999,
respectively, expressed unqualified opinions on those separate financial
statements.
PRICEWATERHOUSECOOPERS LLP
February 4, 2000
Raleigh, North Carolina
42
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FNB Financial Services Corporation
and Subsidiary
Reidsville, North Carolina
We have audited the consolidated statements of income, changes in shareholders'
equity, and cash flows of FNB Financial Services Corporation and Subsidiary for
the year ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of the operations and
the cash flows of FNB Financial Services Corporation and Subsidiary for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Reidsville, North Carolina
February 10, 1998
43
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Black Diamond Savings Bank, FSB
Norton, Virginia
We have audited accompanying statements of income and comprehensive income,
shareholders' equity, and cash flows of Black Diamond Savings Bank, FSB for the
year ended December 31, 1997. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations and the cash flows of Black
Diamond Savings Bank for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
Charlotte, North Carolina
January 22, 1999
44
<PAGE> 47
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Cash and due from banks ...................................................... $ 24,391 $ 15,728
Investment securities:
Available for sale ...................................................... 129,445 154,327
Federal Home Loan Bank and Federal Reserve Bank Stock ................... 2,573 1,975
Loans, net of allowance for credit losses of $4,436 in 1999 and $3,452 in 1998 408,821 358,225
Loans held for sale .......................................................... 754 575
Property and equipment, net .................................................. 9,807 9,304
Accrued income and other assets .............................................. 12,628 9,612
--------- --------
Total assets ....................................................... $ 588,419 $549,746
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ..................................................... $ 47,915 $ 44,947
Interest-bearing ........................................................ 436,327 414,648
--------- --------
Total deposits ..................................................... 484,242 459,595
Federal funds purchased and retail repurchase agreements ..................... 15,599 13,932
Other borrowings ............................................................. 31,500 17,500
Accrued expenses and other liabilities ....................................... 6,348 5,088
--------- --------
Total liabilities .................................................. 537,689 496,115
--------- --------
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 -
4,478,545 in 1999 and 4,542,961 in 1998 ................................. 4,479 4,544
Paid-in capital .............................................................. 25,653 27,140
Retained earnings ............................................................ 23,458 21,247
Accumulated other comprehensive income (loss) ................................ (2,860) 700
--------- --------
Total shareholders' equity ......................................... 50,730 53,631
--------- --------
Total liabilities and shareholders' equity ......................... $ 588,419 $549,746
========= ========
</TABLE>
See notes to consolidated financial statements
45
<PAGE> 48
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Interest income
Loans .......................................... $ 34,339 $31,826 $25,665
Federal funds sold ............................. 226 348 363
Investment securities
Taxable ................................... 7,396 7,675 3,737
Tax exempt ................................ 367 412 506
Other .......................................... 205 135 154
-------- ------- -------
Total interest income ................ 42,533 40,396 30,425
-------- ------- -------
Interest expense
Deposits ....................................... 20,191 20,479 15,058
Federal funds purchased and other borrowings ... 1,915 1,539 769
-------- ------- -------
Total interest expense ............... 22,106 22,018 15,827
-------- ------- -------
Net interest income ................................. 20,427 18,378 14,598
Provision for credit losses ......................... 1,401 1,171 686
-------- ------- -------
Net interest income after provision for credit losses 19,026 17,207 13,912
-------- ------- -------
Other income
Service charges on deposit accounts ............ 1,793 1,433 1,162
Other service charges and fees ................. 371 469 654
Bankcard fees .................................. 521 427 213
Net gain on sales of loans ..................... 174 334 79
Net gain on securities available for sale ...... 118 422 38
-------- ------- -------
Total other operating income ......... 2,977 3,085 2,146
-------- ------- -------
Other expenses
Salaries and employee benefits ................. 8,174 7,374 6,131
Occupancy expense .............................. 771 696 614
Furniture and equipment expense ................ 1,280 946 722
Insurance expense, including FDIC assessment ... 108 139 89
Marketing expense .............................. 352 338 326
Printing and supply expense .................... 346 317 361
Bankcard processing ............................ 412 402 185
Merger related costs ........................... 675 -- --
Other expenses ................................. 3,075 2,660 2,431
-------- ------- -------
Total other expenses ................. 15,193 12,872 10,859
-------- ------- -------
Income before income taxes .......................... 6,810 7,420 5,199
Income tax expense .................................. 2,562 2,398 1,685
-------- ------- -------
Net income .......................................... 4,248 5,022 3,514
Other comprehensive income (loss) ................... (3,560) 472 165
-------- ------- -------
Comprehensive income ................................ $ 688 $ 5,494 $ 3,679
======== ======= =======
Net income per share, basic ......................... $ 0.95 $ 1.19 $ 0.98
======== ======= =======
Net income per share, diluted ....................... $ 0.93 $ 1.13 $ 0.93
======== ======= =======
</TABLE>
See notes to consolidated financial statements
46
<PAGE> 49
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Common stock
Balance at beginning of year ......................... $ 4,544 $ 3,506 $ 2,395
Stock split effected in the form of a stock dividend . -- 101 --
Stock repurchase ..................................... (119) -- --
Stock issuance ....................................... -- 897 1,082
Dividend reinvestment plan ........................... 23 13 6
Exercise of stock options ............................ 17 20 11
Employee 401(k) plan ................................. 14 6 12
Employee stock awards ................................ -- 1 --
-------- -------- --------
Balance at end of year ............................... 4,479 4,544 3,506
-------- -------- --------
Paid-in capital
Balance at beginning of year ......................... 27,140 7,840 7,280
Stock split effected in the form of a stock dividend . -- 1,228 --
Stock issuance ....................................... -- 17,546 --
Stock repurchase ..................................... (1,965) -- --
Dividend reinvestment plan ........................... 224 266 157
Exercise of stock options ............................ 79 52 92
Employee 401(k) plan ................................. 175 202 308
Employee stock awards ................................ -- 6 3
-------- -------- --------
Balance at end of year ............................... 25,653 27,140 7,840
-------- -------- --------
Retained earnings
Balance at beginning of year ......................... 21,247 18,830 17,371
Net income ........................................... 4,248 5,022 3,514
Cash paid for fractional shares ...................... -- -- (14)
Cash dividends paid ($0.46 per share in 1999, $0.30 in
1998, and $0.27 in 1997) ........................ (2,037) (1,275) (959)
Stock split effect in the form of a stock dividend ... -- (1,330) (1,082)
-------- -------- --------
Balance at end of year ............................... 23,458 21,247 18,830
-------- -------- --------
Accumulated other comprehensive income
Balance at beginning of year ......................... 700 228 63
Other comprehensive income (loss) .................... (3,560) 472 165
-------- -------- --------
Balance at end of year ............................... (2,860) 700 228
======== ======== ========
Total shareholders' equity ................. $ 50,730 $ 53,631 $ 30,404
======== ======== ========
</TABLE>
See notes to consolidated financial statements
47
<PAGE> 50
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received ...................................................... $ 42,215 $ 37,903 $ 28,379
Fees and commission received ........................................... 3,807 3,230 2,474
Interest paid .......................................................... (22,208) (21,846) (15,249)
Noninterest expense paid ............................................... (14,614) (11,744) (9,138)
Income taxes paid ...................................................... (2,862) (2,472) (1,850)
Proceeds from mortgage loans ........................................... 3,831 15,062 17,134
-------- --------- ---------
Net cash provided by operating activities .................... 10,169 20,133 21,750
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale ................... 61,611 94,915 56,581
Proceeds from maturities of securities available for sale .............. 19,245 20,110 22,010
Purchase of securities ................................................. (62,691) (173,876) (104,302)
Capital expenditures ................................................... (1,481) (1,736) (2,374)
Sales of assets ........................................................ -- -- 269
(Increase) decrease in other real estate owned ......................... 1,110 (1,333) (39)
Net increase in loans .................................................. (56,025) (55,669) (106,501)
-------- --------- ---------
Net cash used in investing activities ........................ (38,231) (117,589) (134,356)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest checking accounts ......... 8,214 32,179 13,869
Net increase in time deposits .......................................... 16,433 44,173 85,366
Net increase in other borrowings ....................................... 14,000 2,500 15,000
Net increase in federal funds purchased and retail repurchase agreements 1,667 (1,512) 5,070
Purchase of fractional shares .......................................... -- -- (14)
Proceeds from issuance of common stock ................................. 532 -- (959)
Repurchase of Common Stock ............................................. (2,084) -- --
Dividends paid ......................................................... (2,037) (1,275) (959)
-------- --------- ---------
Net cash provided by financing activities .................... 36,725 95,073 118,920
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................... 8,663 (2,383) 6,314
Cash and cash equivalents, beginning of year ........................... 15,728 18,111 11,797
======== ========= =========
Cash and cash equivalents, end of year ................................. $ 24,391 $ 15,728 $ 18,111
======== ========= =========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate ..................... $ 192 $ 1,975 $ 436
======== ========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income ............................................................. $ 4,248 $ 5,022 $ 3,514
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses ....................................... 1,401 1,171 686
Depreciation ...................................................... 978 790 579
Accretion and amortization ........................................ 494 394 274
(Gain) loss on sale of securities available for sale .............. (118) (422) (38)
(Gain) loss on sale of mortgage loans ............................. (174) (334) (79)
Proceeds from mortgage loans ...................................... 3,831 15,062 17,134
(Gain) loss on other assets ....................................... 66 6 31
Deferred tax benefit .............................................. (458) (94) (462)
Increase in accrued income and other assets ....................... (1,359) (2,162) (914)
Increase in accrued expenses and other liabilities ................ 1,260 700 1,025
-------- --------- ---------
Net cash provided by operating activities .................... $ 10,169 $ 20,133 $ 21,750
======== ========= =========
</TABLE>
See notes to consolidated financial statements
48
<PAGE> 51
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
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
subsidiaries FNB Southeast and Black Diamond Savings Bank (the "Subsidiary
Banks"). 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 ten full-service branches in Reidsville,
Madison, Eden, Ruffin, Greensboro, Burgaw, and Wilmington, North Carolina. A
majority of the Bank's customers are located in Rockingham, Guilford, and New
Hanover 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.
Black Diamond Savings Bank provides a variety of financial services to
individual and corporate customers through its five full-service branches in
Norton, Harrisonburg, Richlands, and Pennington Gap, Virginia. A majority of the
Bank's customers are located in Wise, Tazewell, Russell, Lee, Rockingham, and
Augusta Counties. Black Diamond'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 Banks' loan portfolio consists of loans in the
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 Banks' loan portfolio would
be affected by changes in local economic conditions.
Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks".
49
<PAGE> 52
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
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.
Other securities, which are carried at cost, include stock in the
Federal Reserve Bank and the Federal Home Loan Bank of Atlanta ("FHLB").
Gains and losses on sales of securities are recognized when realized on
a specific identification basis. Premiums and discounts are amortized into
interest income using the level yield method.
Loans
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
Mortgage loans held for sale are valued at the lower of cost or market
as determined by outstanding commitments from investors or current investor
yield requirements, calculated on the aggregate loan basis.
Loan origination fees and costs
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
Allowance for credit losses
The allowance for credit losses is maintained at a level believed
adequate by management to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based upon
reviews of individual credits, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant risk factors. Losses are charged and recoveries are credited to the
allowance for credit losses at the time the loss or recovery is incurred.
While management uses the best available information to evaluate the
adequacy of the allowance for credit losses, future additions to the allowance
may be necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Subsidiary Banks' allowance for credit losses on loans
and foreclosed real estate. Such agencies may require the Subsidiary Banks to
recognize changes to the allowance based on their judgments about information
available to them at the time of their examination.
50
<PAGE> 53
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
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 loan losses. Subsequent
write downs are charged to expense in the period they are incurred.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. The provision for depreciation and amortization is computed
principally by the straight-line method over the estimated useful lives of the
assets.
Expenditures for maintenance and repairs are charged to operations, and
the expenditures for major replacements and betterments are added to the
property and equipment accounts. The cost and accumulated depreciation of the
property and equipment retired or sold are eliminated from the property 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 financial statements at currently enacted income tax
rates applicable to the period in which the deferred tax asset 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
At December 31, 1997, the Company adopted 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 issuance of dilutive potential common shares by the weighted
average number of shares of common stock outstanding during each year plus the
number of dilutive potential common shares.
Sales of mortgage loans
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
The Statement superseded SFAS No. 122 and requires that mortgage servicing
assets be amortized in proportion to and over the period of estimated net
servicing income, and the assessment for asset impairment be based upon the
servicing rights' fair value. The adoption of the statement had an immaterial
effect on the financial statements of the Company.
51
<PAGE> 54
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Off balance sheet financial instruments
In the ordinary course of business the Subsidiary Banks enter into off
balance sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
Segment Information
During the year ended December 31, 1998, the Subsidiary Banks adopted
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 the 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,
versus the individual branches or products.
New accounting pronouncements
In June of 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133, as amended, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Based on
its operations at December 31, 1999, management does not expect this standard to
have a material effect on the Company's financial statements.
Reclassification
Certain items for 1997 and 1998 have been reclassified to conform with
the 1999 presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
52
<PAGE> 55
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - MERGERS AND ACQUISITIONS
On August 31, 1999, the Company completed the acquisition of Black
Diamond Savings Bank, FSB ("Black Diamond") through the issuance of 1.3333
shares of the Company's common stock for each share of Black Diamond's
outstanding common stock, or 1,113,397 shares. The merger was accounted for as a
pooling of interests.
Separate results of the pooled entities for the years ended December
31, 1998 and 1997 are as follows:
Company (1) Black Diamond Combined
----------- ------------- --------
1998: (In thousands)
Total income ...... $32,929 $10,552 $43,481
Net interest income 14,558 3,820 18,378
Net income ........ 3,847 1,175 5,022
1997:
Total income ...... 22,371 10,200 32,571
Net interest income 10,961 3,637 14,598
Net income ........ 2,477 1,037 3,514
(1) Prior to Black Diamond merger
Black Diamond, prior to the merger with the Company, reported total income of
$7,134,000, net interest income of $2,584,000, and net income of $753,000 for
the eight months ended August 31, 1999.
NOTE 3 - RESTRICTION ON CASH AND DUE FROM BANKS
The Subsidiary Banks maintain average reserve balances with the Federal
Reserve Bank. The average amounts of these reserve balances for the years ended
December 31, 1999 and 1998 were $688,000 and $373,000, respectively.
53
<PAGE> 56
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - INVESTMENT SECURITIES
Investment securities at December 31, consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999 (In thousands)
Available for sale:
U.S. Treasury ................... $ 200 $ -- $ -- $ 200
U.S. government agency securities 111,543 -- 4,238 107,305
Mortgage backed securities ...... 11,061 1 365 10,697
State and municipal obligations . 9,989 62 92 9,959
Other ........................... 1,340 -- 56 1,284
-------- -------- -------- --------
Total available for sale ........ 134,133 63 4,751 129,445
Federal Home Loan Bank and Federal
Reserve Bank stock .............. 2,573 -- -- 2,573
-------- -------- -------- --------
Total investment securities $136,706 $ 63 $ 4,751 $132,018
======== ======== ======== ========
1998
Available for sale:
U.S. Treasury ................... $ 199 $ 8 $ -- $ 207
U.S. government agency securities 130,543 860 36 131,367
Mortgage backed securities ...... 15,244 6 38 15,212
State and municipal obligations . 6,101 332 -- 6,433
Other ........................... 1,093 15 -- 1,108
-------- -------- -------- --------
Total available for sale ........ 153,180 1,221 74 154,327
Federal Home Loan Bank and Federal
Reserve Bank stock .............. 1,975 -- -- 1,975
-------- -------- -------- --------
Total investment securities $155,155 $ 1,221 $ 74 $156,302
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1999, by contractual maturities, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Securities available for sale
-----------------------------
Amortized Estimated
Cost Fair Value
-------- ----------
(In thousands)
Due in one year or less ................ $ 859 $ 856
Due after one through five years ....... 81,908 79,336
Due after five through ten years ....... 37,165 35,430
Due after ten years .................... 14,201 13,823
-------- --------
Total securities available for sale $134,133 $129,445
======== ========
Proceeds from the sale of investment securities available for sale,
gross realized gains and gross realized losses were as follows:
Year ended December 31
-----------------------------------------------
1999 1998 1997
------------- -------------- ------------
(In thousands)
Proceeds from sales.......... $ 60,805 $ 79,075 $ 60,094
Gross realized gains......... 178 424 231
Gross realized losses........ 60 2 193
54
<PAGE> 57
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1999, and 1998, investment securities with a carrying
value of approximately $44,211,000 and $28,363,000, respectively, were pledged
as collateral to secure public deposits and for other purposes.
NOTE 5 - LOANS
Major classifications of loans at December 31, are as follows:
1999 1998
-------- --------
(In thousands)
Commercial, financial and agricultural $ 58,002 $ 49,822
Consumer ............................. 75,219 67,695
Real estate:
Residential mortgage ............ 130,676 120,143
Commercial mortgage ............. 115,434 94,798
Construction .................... 34,680 29,794
-------- --------
Total loans ........... $414,011 $362,252
======== ========
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 due according to the contractual terms of the
loan agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while collateral dependent loans are measured for
impairment based on the fair value of the collateral.
The Company uses several factors in determining if a loan is impaired.
The internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation of
related data. This data includes loan payment status, borrowers' financial data
and borrowers' operating factors such as cash flow, operating income or loss,
etc.
At December 31, 1999 and 1998, the recorded investment in loans that
were considered impaired was approximately $1,747,000 and $1,474,000,
respectively. The related allowance for loan losses on these impaired loans was
approximately $488,000 and $60,000, respectively. The average recorded
investment in impaired loans for the years ended December 31, 1999 and 1998 was
approximately $1,611,000 and $1,987,000, respectively. There were no loans on
nonaccrual status that were not considered impaired at December 31, 1999.
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, 1999 and 1998 were $24,385,000
and $23,770,000, respectively. Mortgage loans serviced for other investors at
December 31, 1999 and 1998 were $2,551,000 and $2,831,000, respectively.
Certain 1-4 family residential mortgage loans are pledged as collateral
under a blanket floating lien to secure a portion of the Subsidiary Banks'
borrowings (see Note 9).
55
<PAGE> 58
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for the three years ended December 31
were as follows:
1999 1998 1997
------- ------- -------
(In thousands)
Balance at beginning of year $ 3,452 $ 3,185 $ 2,422
Provision for credit losses 1,401 1,171 686
Recoveries ................. 95 104 332
Losses charged off ......... (512) (1,008) (255)
------- ------- -------
Balance at end of year ..... $ 4,436 $ 3,452 $ 3,185
======= ======= =======
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Land ......................................... $ 2,784 $ 2,335
Building and leasehold improvements .......... 6,188 6,332
Equipment .................................... 7,067 6,467
Construction in progress ..................... 335 28
------- -------
Property and equipment ....................... 16,374 15,162
Less accumulated depreciation and amortization 6,567 5,858
------- -------
Total property and equipment, net ....... $ 9,807 $ 9,304
======= =======
</TABLE>
NOTE 8 - DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $131,413,000 and
$113,039,000 in 1999 and 1998, respectively.
At December 31, 1999 the scheduled maturities of time deposits are as
follows:
Year ending December 31, Amount
------------------------ --------------
(In thousands)
2000 ................... $218,372
2001 ................... 74,433
2002 ................... 23,351
2003 ................... 10,058
2004 ................... 16,476
Thereafter ............. 912
--------
Total time deposits $343,602
========
56
<PAGE> 59
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - FEDERAL FUNDS PURCHASED, RETAIL REPURCHASE AGREEMENTS AND OTHER
BORROWINGS
The following is a schedule of federal funds purchased, securities sold
under repurchase agreements and FHLB borrowings:
<TABLE>
<CAPTION>
Balance Interest Maximum
as of Rate Average Outstanding
December as of Average Interest at Any
31 December 31 Balance Rate Month-end
-------- ----------- ------- -------- -----------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C>
1999
Federal funds purchased and securities
sold under agreements to repurchase $15,599 5.08% $12,706 4.68% $21,406
FHLB borrowings......................... 31,500 5.86% 22,278 5.93% 31,500
------- ------- -------
Total......................... $47,099 $34,984 $52,906
======= ======= =======
1998
Federal funds purchased and securities
sold under agreements to repurchase $13,932 4.21% $13,008 4.92% $17,366
FHLB borrowings......................... 17,500 5.51% 15,460 4.74% 17,500
------- ------- -------
Total......................... $31,432 $28,468 $34,866
======= ======= =======
</TABLE>
At December 31, 1999 the Subsidiary Banks had a $88.5 million line of
credit with the FHLB under which $31.5 million was outstanding. This line of
credit is secured with FHLB stock and a blanket floating lien on qualifying 1-4
family residential mortgage loans. The outstanding amounts consist of $11.5
million maturing in 2000, $10 million maturing in 2002, $5 million maturing in
2003, and $5 million maturing in 2004. The borrowing maturing in 2002 had a
one-time call feature in 1999 whereby if called the interest rate converted to a
floating rate based on the three month LIBOR. The borrowing maturing in 2003 has
an identical call feature in 2000.
Federal funds purchased represent unsecured overnight borrowings from
other financial institutions by the Subsidiary Banks. Securities sold under
agreement to repurchase represent short-term borrowings by the Subsidiary Banks,
with overnight maturities collateralized by securities of the United State
government or its agencies.
NOTE 10 - INCOME TAXES
The components of income tax expense for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(In thousands)
Current tax expense
Federal .......................... $ 2,928 $ 2,452 $ 1,998
State ............................ 92 40 149
------- ------- -------
Total current .......... 3,020 2,492 2,147
------- ------- -------
Deferred tax expense (benefit)
Federal .......................... (399) (94) (381)
State ............................ (59) -- (81)
------- ------- -------
Total deferred ......... (458) (94) (462)
------- ------- -------
Total income tax expense $ 2,562 $ 2,398 $ 1,685
======= ======= =======
</TABLE>
57
<PAGE> 60
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The sources of deferred tax assets and liabilities and the tax effect
of each are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
(In thousands)
Deferred tax assets:
Allowance for credit losses ........................ $1,115 $ 834 $1,069
Net unrealized loss on securities available for sale 1,828 -- --
Non-qualified deferred compensation plans .......... 1,016 925 621
Other .............................................. 81 57 52
------ ------ ------
Total ................................. 4,040 1,816 1,742
Deferred tax liabilities:
Depreciable basis of property and equipment ........ 396 399 333
Net unrealized gain on securities available for sale -- 447 146
Deferred loan fees ................................. 245 217 171
Other .............................................. 83 125 256
------ ------ ------
Total ................................. 724 1,188 906
------ ------ ------
Net deferred tax assets .............................. $3,316 $ 628 $ 836
====== ====== ======
</TABLE>
The provision for income taxes is less than that computed by applying
the federal statutory rate of 34% as indicated in the following analysis:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(In thousands)
Tax based on statutory rates .................. $ 2,315 $ 2,523 $ 1,768
Increase (decrease) resulting from:
Effect of tax-exempt income .............. (136) (98) (106)
State income taxes, net of federal benefit 22 (37) 114
Disallowed merger cost ................... 230 -- --
Other, net ............................... 131 10 (91)
------- ------- -------
Total provision for income taxes ......... $ 2,562 $ 2,398 $ 1,685
======= ======= =======
</TABLE>
NOTE 11 - LEASE COMMITMENTS
The minimum annual lease commitments under noncancelable operating
leases in effect at December 31, 1999 are as follows:
Year Ending December 31 Amount
----------------------- --------------
(In thousands)
2000 ....................... $ 257
2001 ....................... 256
2002 ....................... 246
2003 ....................... 250
2004 ....................... 240
Thereafter ................. 1,023
------
Total lease commitments $2,272
======
Rental expense was $271,000 in 1999, $206,000 in 1998, and $131,000 in
1997.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Subsidiary Banks had loans outstanding to principal officers and
directors and their affiliated companies of approximately $4,451,000 and
$3,723,000 at December 31, 1999 and 1998, respectively. During 1999, additions
to such loans were $1,995,000 and repayments were $1,267,000. Such loans were
made substantially on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other borrowers
and do not involve more than the normal risks of collectibility.
58
<PAGE> 61
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - SHAREHOLDERS' EQUITY
Stock Splits
In April and September, 1997, the Company paid a four-for-three split
of the common stock in the form of a 33 1/3% stock dividend. In March, 1996, the
Company paid a five-for-four split of the common stock in the form of a 25%
stock dividend. All per share data in the financial statements has been adjusted
to reflect these three splits.
Stock grants
The Company did not issue stock grants during 1999. During 1998 and
1997, stock grants to employees were 95 and 75 common shares, respectively.
Stock option plans
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFA 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 has 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:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
Beginning of year ...... 633,215 $ 14.55 574,766 $ 12.55 384,864 $ 10.66
Granted ................ 206,850 13.38 95,100 24.87 212,178 15.55
Exercised ............. (27,220) 9.44 (26,378) 8.39 (13,001) 7.99
Forfeited ............. (14,184) 15.40 (10,273) 12.04 (9,275) 12.03
------- ------- -------
Outstanding - End of year .. 798,661 $ 14.33 633,215 $ 14.55 574,766 $ 12.55
======= ======= =======
Exercisable - End of year .. 422,006 $ 12.56 340,339 $ 10.97 277,226 $ 9.54
Weighted average fair value
of options granted
during the year ....... $ 4.05 $ 7.09 $ 5.67
</TABLE>
59
<PAGE> 62
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of information on outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------ -------------------------------
Weighted Average Weighted
Range of Number Remaining Weighted Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise
(Years) Price
- -------------------- -------------- -------------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.75 - 12.52 438,651 7.47 $ 10.47 256,220 $ 9.53
12.94 - 25.50 360,010 7.76 19.05 165,786 17.25
-------------- -------------
798,661 422,006
============== =============
</TABLE>
Because the Company has adopted the disclosure-only provisions of SFAS
No. 123, no compensation cost has been recognized for the stock option plans.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date of the awards consistent with the provisions
of SFAS No. 123, the Company's net income and basic net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income - as reported ............... $ 4,248,000 $ 5,022,000 $ 3,514,000
Net income - pro forma ................. 3,462,000 4,445,000 2,944,000
Basic net income per share - as reported 0.95 1.19 0.98
Basic net income per share - pro forma . 0.78 1.05 0.82
</TABLE>
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 for grants in 1999, 1998, and 1997: dividend yield of 3.20%;
expected volatility of 29.0% for 1999, 29.0% for 1998, and 34.0% for 1997;
risk-free interest rates of 6.25% for 1999, 5.55% for 1998, and 5.70% for 1997;
and expected lives of 7 years for 1999 and 1998 options, and 4 years for 1997
options.
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 1996,
1997, 1998, and 1999 vest ratably over a four year period. No option will be
exercisable after ten years from the date granted.
NOTE 14 - OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted 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.
60
<PAGE> 63
Other comprehensive income is defined as comprehensive income exclusive
of net income. Unrealized gains (losses) on available for sale investment
securities represent the sole component of the Company's other comprehensive
income. Other comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year .......... $(5,717) $ 1,195 $ 308
Reclassification adjustment for gains included in net income ....... 118 422 38
------- ------- -------
Other comprehensive income (loss) before tax ....................... (5,835) 773 270
Income tax expense (benefit) related to other comprehensive income . (2,275) 301 105
------- ------- -------
Other comprehensive income (loss) .................................. $(3,560) $ 472 $ 165
======= ======= =======
</TABLE>
61
<PAGE> 64
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15 - NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of
basic and diluted net income per share of common stock as required by SFAS No.
128:
<TABLE>
<CAPTION>
For the year ended December 31, 1999
-------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders ... $4,248,000 4,464,138 $0.95
=====
Effect of Dilutive Securities:
Stock options ............................. -- 87,379
---------- ----------
Net income per share of common stock - assuming
dilution:
Income available to common shareholders and
assumed conversion ................... $4,248,000 4,551,517 $0.93
========== ========== =====
For the year ended December 31, 1998
-------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income per share of common stock:
Income available to common shareholders ........ $5,022,000 4,238,923 $1.19
=====
Effect of Dilutive Securities:
Stock options .................................. -- 208,047
---------- ----------
Net income per share of common stock - assuming
dilution:
Income available to common shareholders and
assumed conversion ................... $5,022,000 4,446,970 $1.13
========== ========== =====
For the year ended December 31, 1997
-------------------------------------------
Weighted
Average
Income Common Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income per share of common stock:
Income available to common shareholders ........ $3,514,000 3,586,157 $0.98
=====
Effect of Dilutive Securities:
Stock options .................................. -- 182,744
---------- ----------
Net income per share of common stock - assuming
dilution:
Income available to common shareholders and
assumed conversion ................... $3,514,000 3,768,901 $0.93
========== ========== =====
</TABLE>
62
<PAGE> 65
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16 - FNB FINANCIAL SERVICES CORPORATION (PARENT COMPANY)
The parent company's principal asset is its investment in its
subsidiaries, FNB Southeast and Black Diamond Savings Bank. The significant
source of income of the parent company is dividends received from its
subsidiaries.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Assets
Cash and due from banks ........................................ $ 982 $ 1,058 $ 653
Securities ..................................................... 12 12 12
Investment in wholly-owned subsidiaries ........................ 49,630 52,472 29,715
Other assets ................................................... 106 89 --
-------- -------- --------
Total assets ................................................... $ 50,730 $ 53,631 $ 30,380
======== ======== ========
Shareholders' equity and other liabilities .......................... $ 50,730 $ 53,631 $ 30,380
======== ======== ========
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiaries ......................................... $ 1,808 $ 1,271 $ 698
Management fees ..................................................... 85 -- --
Amortization and other expenses ..................................... (540) (92) (74)
-------- -------- --------
Income before tax benefit ........................................... 1,353 1,179 624
Income tax benefit .................................................. 14 30 25
-------- -------- --------
Income before equity in undistributed net income of subsidiaries .... 1,367 1,209 649
Equity in undistributed net income of subsidiaries .................. 2,881 3,813 2,865
-------- -------- --------
Net income .......................................................... $ 4,248 $ 5,022 $ 3,514
======== ======== ========
1999 1998 1997
-------- -------- --------
(in thousands)
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received from subsidiaries ........................... $ 1,808 $ 1,271 $ 698
Management fees received ....................................... 10 -- --
Cash paid for franchise tax, registration cost, acquisition cost
and other expenses ............................................. (451) (92) (74)
(Increase) decrease in other assets ............................ (17) (89) 12
Refundable income taxes ........................................ -- 30 25
-------- -------- --------
Net cash provided by operating activities ................. 1,350 1,120 661
-------- -------- --------
CASH USED IN INVESTING ACTIVITIES
Investment in subsidiaries ..................................... 2,163 (18,449) (1,080)
Purchase of real estate ........................................ -- -- --
-------- -------- --------
Net cash provided by (used in) investing activities ........ 2,163 (18,449) (1,080)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance ................................... -- 18,443 1,082
Repurchase of common stock ..................................... (2,084) -- --
Dividends paid, net of DRIP .................................... (1,790) (996) (796)
Proceeds from employee 401(k) .................................. 189 208 320
Proceeds from employee stock awards ............................ -- 7 3
Exercise of stock options ...................................... 96 72 103
Purchase of fractional shares .................................. -- -- (14)
-------- -------- --------
Net cash provided by (used in) financing activities ....... (3,589) 17,734 698
-------- -------- --------
Net increase in cash ................................................ (76) 405 279
Cash at beginning of year ........................................... 1,058 653 374
-------- -------- --------
Cash at end of year ................................................. $ 982 $ 1,058 $ 653
======== ======== ========
RECONCILIATION OF NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES
Net income .......................................................... $ 4,248 $ 5,022 $ 3,514
Adjustment to reconcile net income to net cash provided
by operating activities
(Increase) decrease in other assets ....................... (17) (89) 12
Equity in undistributed net income of subsidiaries ........ (2,881) (3,813) (2,865)
-------- -------- --------
Net cash provided by operating activities ........................... $ 1,350 $ 1,120 $ 661
======== ======== ========
</TABLE>
63
<PAGE> 66
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit.
A summary of the Subsidiary Banks' commitments and contingent
liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
----------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Commitments to extend credit .................... $79,425 $70,310
Standby letters of credit ....................... 93 328
------- -------
Total commitments and contingent liabilities $79,518 $70,638
======= =======
</TABLE>
The Subsidiary Banks' 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 Banks use the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
NOTE 18 - EMPLOYEE BENEFIT PLANS
The Company's non-contributory defined benefit pension plan covers
substantially all of its employees. The plan calls for benefits to be paid to
eligible employees at retirement based primarily upon years of service with the
Company and a percentage of qualifying compensation during final years of
employment. Contributions to the plan are based upon the projected unit credited
actuarial funding method and comply with the funding requirements of the
Employee Retirement Income Security Act. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future. Plan assets consist primarily of cash and cash
equivalents, U.S. government securities, and common stocks.
64
<PAGE> 67
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table outlines the changes in the Company's pension
obligations, assets and funded status for the years ended December 31, 1999 and
1998 and the assumptions and components of net periodic pension cost for the two
years in the period ended December 31, 1999 (in thousands).
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year .......... $ 3,067 $ 2,761
Service cost ..................................... 192 123
Interest cost .................................... 224 196
Actuarial loss ................................... 131 101
Benefits paid .................................... (34) (114)
------- -------
Benefit obligation at end of year ................ 3,580 3,067
------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year ... 2,669 2,412
Actual return on plan assets ..................... 356 248
Employer contribution ............................ 147 123
Benefits paid .................................... (33) (114)
------- -------
Fair value of plan assets at end of year ......... 3,139 2,669
------- -------
Plan assets less than projected benefit obligation (441) (398)
FUNDED STATUS
Unrecognized net actual gain ..................... 107 132
Unrecognized prior service charge ................ 98 110
------- -------
Pension liability ................................ $ (236) $ (156)
======= =======
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate .................................... 7.00% 7.00%
Expected return on plan assets ................... 7.00% 7.00%
Rate of compensation increase .................... 5.00% 5.00%
COMPONENTS OF NET PERIODIC PENSION COST
Service cost ..................................... $ 193 $ 123
Interest cost .................................... 223 196
Expected return on plan assets ................... (200) (173)
Amortization of prior service cost ............... 11 11
------- -------
Net periodic pension cost ........................ $ 227 $ 157
======= =======
</TABLE>
In 1994 the Company adopted a Supplemental Executive Retirement Plan
("SERP"). The SERP allows the Company to supplement the level of certain
executives' retirement income over that which is obtainable through the
tax-qualified retirement plan. Contributions to the SERP totaled $229,000 for
1999, $170,000 for 1998 and $64,000 for 1997.
The Subsidiary Banks also have separate contributory 401(k) savings
plans covering substantially all employees. The plans allow eligible employees
to contribute up to a fixed percentage of their compensation, with the
Subsidiary Banks matching a portion of each employee's contribution. The
Subsidiary Banks' contributions were $171,000, $162,000 and $128,000 for 1999,
1998 and 1997, respectively.
A deferred compensation plan allows the directors and certain senior
officers of the Company and the Subsidiary Banks to defer the compensation they
earn for performance of their appointed duties for the Company and the
Subsidiary Banks. Each director elects annually to either receive that year's
compensation currently or to defer receipt until their death, disability or
retirement as a director. Each officer elects annually to either receive that
year's compensation currently or to defer receipt of a portion
65
<PAGE> 68
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of their compensation until their death, disability or retirement as an officer.
The total liability for deferred compensation under the plan was $398,000 and
$304,000 at December 31, 1998 and 1997, respectively. Effective November 1,
1999, the deferred compensation balances were transferred to a Rabbi trust. No
liability exists as of December 31, 1999.
NOTE 19 - REGULATORY MATTERS
On November 13, 1997, the Company and the Office of the Comptroller of
the Currency ("OCC") entered into a Memorandum of Understanding ("MOU"), under
which the Company agreed to take certain actions to improve its infrastructure,
primarily necessitated by its rapid growth. In general, the OCC requested that
the Company improve its internal procedures and policies, such as revising its
written loan policy, developing a program to strengthen its loan administration,
and taking steps to increase its liquidity commensurate with its past, and
expected future, growth. Management believes that the actions taken by the
Company to address the concerns identified by the OCC in the MOU have not had a
material adverse effect on the business, results of operations, or financial
condition of the Company. In March 1999, FNB Southeast converted to a state
charter and is no longer under the supervision and regulation of the OCC.
Accordingly, the MOU is no longer binding on the Company.
The primary source of funds for the dividends paid by the Company to
its shareholders is dividends received from its banking subsidiaries. The
Subsidiary Banks are 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, 1999, the Subsidiary Banks had
undivided profits of approximately $20.6 million.
The Subsidiary Banks are 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 Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Subsidiary Banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Subsidiary Banks'
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 Banks 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, 1999, that
the Subsidiary Banks meet all capital adequacy requirements to which they are
subject.
The most recent notification from the OCC categorized the Subsidiary
Banks as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Subsidiary Banks 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 Banks have continued
to experience asset growth.
66
<PAGE> 69
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company's actual capital amounts and ratios are presented in the
table, on a consolidated basis, for FNB Southeast and for Black Diamond.
<TABLE>
<CAPTION>
To Be Well
(In thousands, except percentages) For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ -----
(in thousands, except for percentages)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999:
- -----------------
Total Capital (To Risk Weighted Assets)
Consolidated ........................ $57,327 14.3% $32,055 >8.0% $ N/A
-
FNB Southeast ....................... 45,796 14.6 25,113 >8.0 31,391 >10.0%
- -
Black Diamond ....................... 10,490 11.9 7,040 >8.0 8,800 >10.0
- -
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................ 52,891 13.2 16,027 >4.0 N/A
-
FNB Southeast ....................... 42,652 13.6 12,556 >4.0 18,835 >6.0
- -
Black Diamond ....................... 9,198 10.5 3,520 >4.0 5,280 >6.0
- -
Tier 1 Capital (To Average Assets)
Consolidated ........................ 52,891 9.3 22,813 >4.0 N/A
-
FNB Southeast ....................... 42,652 9.8 17,425 >4.0 21,781 >5.0
- -
Black Diamond ....................... 9,198 6.6 5,566 >4.0 6,958 >5.0
- -
DECEMBER 31, 1998:
- -----------------
Total Capital (To Risk Weighted Assets)
Consolidated ........................ 55,769 16.3 28,851 >8.0 N/A
-
FNB Southeast ....................... 44,739 15.8 22,614 >8.0 28,268 >10.0
- -
Black Diamond ....................... 9,841 12.6 6,234 >8.0 7,793 >10.0
- -
Tier 1 Capital (To Risk Weighted Assets)
Consolidated ........................ 52,350 15.3 14,426 >4.0 N/A
-
FNB Southeast ....................... 42,133 14.9 11,307 >4.0 16,961 >6.0
- -
Black Diamond ....................... 9,028 11.6 3,117 >4.0 4,676 >6.0
- -
Tier 1 Capital (To Average Assets)
Consolidated ........................ 52,350 10.3 21,753 >4.0 N/A
-
FNB Southeast ....................... 42,133 10.1 16,771 >4.0 20,964 >5.0
- -
Black Diamond ....................... 9,028 7.3 4,935 >4.0 6,169 >5.0
- -
</TABLE>
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value for each class of the Company's financial instruments.
Cash and cash equivalents. For cash on hand and amounts due from banks
the carrying value is considered to be a reasonable estimate of fair value.
Investment securities. The fair value of investment securities is based
on quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities. The fair value of equity investments in the restricted stock of the
Federal Reserve Bank and Federal Home Loan Bank equals the carrying value.
Loans. The fair value of fixed rate loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of residential mortgage loans held for sale is based
on quoted market prices. The fair value of variable rate loans with frequent
repricing and negligible credit risk approximates book value.
Deposits. The fair value of noninterest-bearing demand deposits and
NOW, savings, and money market deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
67
<PAGE> 70
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Federal Funds Purchased and Retail Repurchase Agreements. The carrying
value of federal funds purchased and retail repurchase agreements is considered
to be a reasonable estimate of fair value.
Other borrowings. Other borrowings consists of FHLB borrowings with
varying maturities. The fair values of these liabilities are estimated using the
discounted values of the contractual cash flows. The discount rate is estimated
using the rates currently in effect for similar borrowings.
Commitments. The fair value of commitments to extend credit is
considered to approximate carrying value, since the large majority of these
commitments would result in loans that have variable rates and/or relatively
short terms to maturity. For other commitments, generally of a short-term
nature, the carrying value is considered to be a reasonable estimate of fair
value. The various commitment items were disclosed in Note 17.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents ................... $ 24,391 $ 24,391 $ 15,728 $ 15,728
Investment securities
Available for sale ...................... 129,445 129,445 154,327 154,327
Other equity securities ................. 2,573 2,573 1,975 1,975
Loans held for sale ......................... 754 754 575 575
Loans ....................................... 413,257 407,855 361,677 364,086
FINANCIAL LIABILITIES:
Deposits .................................... 484,242 483,993 459,595 461,541
Federal funds purchased and retail repurchase
agreements ............................. 15,599 15,599 13,932 13,932
Other borrowings ............................ 31,500 31,423 17,500 17,566
</TABLE>
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.
68
<PAGE> 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As previously reported by the Company on a Current Report on Form 8-K,
on August 21, 1998 the Board of Directors of the Company and the Audit Committee
thereof approved the engagement of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the year ended December 31, 1998, to replace
Cherry, Bekaert & Holland, L.L.P. Cherry, Bekaert & Holland, L.L.P. was notified
on August 21, 1998 that the Company was changing independent public accountants.
The audit reports of Cherry, Bekaert & Holland, L.L.P. on the
consolidated financial statements of the Company for the years ended December
31, 1996 and 1997 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1997 and in the subsequent
interim period through August 21, 1998, there were no disagreements with Cherry,
Bekaert & Holland, L.L.P. on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Cherry, Bekaert & Holland, L.L.P. would have
caused Cherry, Bekaert & Holland, L.L.P. to make reference to the matter in
their report. Cherry, Bekaert & Holland, L.L.P. furnished a letter to the
Securities and Exchange Commission, a copy of which was filed as an exhibit to
Form 8-K, dated August 27, 1998, stating that it agreed with these statements.
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 18, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's definitive proxy
statement, to be filed with the Securities and Exchange Commission, with respect
to the Annual Meeting of Shareholders to be held on May 18, 2000.
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 18, 2000.
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 18, 2000.
69
<PAGE> 72
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) Financial Statements. The following financial statements and
supplementary data are included in Item 8 of this report.
<TABLE>
<CAPTION>
Financial Statements Form 10-K Page
-------------------- --------------
<S> <C>
Report of Independent Public Accountants....................................................... 42
Report of Independent Auditors................................................................. 43
Report of Independent Auditors................................................................. 44
Consolidated Balance Sheets as of December 31, 1999 and 1998................................... 45
Consolidated Statements of Income and Comprehensive Income for the years ended December 31,
1999, 1998 and 1997............................................................................ 46
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997............................................................................ 47
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1998 and 1997..... 48
Notes to Consolidated Financial Statements..................................................... 49-68
</TABLE>
(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.
70
<PAGE> 73
Exhibit No. Description
- ----------- -----------
3.01(1) Amended and Restated Articles of Incorporation.
3.02(1) Bylaws of Company, as amended.
4.01(2) 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 Policy 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).
10.06(7) Equipment Sale Agreement and related agreements dated
September 24, 1992 by and among the Registrant and Information
Technology, Inc.
10.07(8) Benefit Equivalency Plan effective January 1, 1994.
10.08(8) Annual Management Incentive Plan.
10.09(8) Long Term Incentive Plan.
10.10(8) Employment Agreement dated May 18, 1995 between the Registrant
and First National Bank of Reidsville, jointly, as employer,
and Ernest J. Sewell, President and Chief Executive Officer of
the Registrant and the Company.
10.11(9) Split-Dollar Agreement dated January 27, 1995 between the
Registrant and Ernest J. Sewell.
10.12(9) Split-Dollar Agreement dated September 26, 1994 between the
Registrant and Robert F. Albright.
10.13(9) Split-Dollar Agreement dated January 27, 1995 between the
Registrant and C. Melvin Gantt.
10.14(9) Split-Dollar Agreement dated December 8, 1995 between the
Registrant and Richard L. Powell.
10.15(10) Lease, dated January 31, 1997, between the Registrant and
Landmark Commercial, Inc., relating to the Wilmington branch
office.
10.16(2) Amendment to Benefit Equivalency Plan effective January 1,
1998
10.17 Amended and Restated Employment Agreement dated August 10,
1999 between Black Diamond Savings Bank, F.S.B. and Don M.
Green
16.01(11) Letter of Cherry, Bekaert & Holland, L.L.P.
21.01 Schedule of Subsidiaries
23.01 Consent of PricewaterhouseCoopers LLP
23.02 Consent of Cherry Bekaert & Holland, L.L.P.
23.03 Consent of McGladrey & Pullen, LLP
27.01 Financial Data Schedule.
99.01 Risk Factors relating to the Registrant.
71
<PAGE> 74
- -----------------
(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
Registration 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 Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1992, filed with the Securities and Exchange Commission.
(8) 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.
(9) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-2 (File No. 333-47203) filed
with the Securities and Exchange Commission on March 3, 1998.
(10) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1997.
(11) Incorporated herein by reference to Registrant's Current
Report on Form 8-K dated August 21, 1998, filed with the
Securities and Exchange Commission.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated May 17, 1999,
reporting the resolution by the Company's Board of Directors to terminate its
share repurchase program, originally adopted in December 1998.
The Company filed a Current Report on Form 8-K dated May 28, 1999,
reporting the execution of an Agreement and Plan of Reorganization and Merger
with Black Diamond, under which the Company agreed to acquire Black Diamond in a
transaction structured as a merger.
The Company filed (1) a Current Report on Form 8-K dated August 31,
1999, announcing the acquisition of Black Diamond and attaching appropriate
financial information for Black Diamond, and (2) a Current Report on Form 8-K/A,
amending the August 31, 1999 Current Report, providing pro-forma financial
information for Black Diamond.
72
<PAGE> 75
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 loan losses, the low trading volume of the Company's
Common Stock, other considerations described in connection with specific
forward-looking statements and the other Risk Factors described in Exhibit
99.01 attached to this report.
73
<PAGE> 76
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 16, 2000
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.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Ernest J. Sewell President, Chief Executive Officer and Director March 16, 2000
- --------------------------- (Principal Executive Officer)
Ernest J. Sewell
/s/ Michael W. Shelton Senior Vice President and Chief Financial Officer March 16, 2000
- --------------------------- (Principal Financial and Accounting Officer)
Michael W. Shelton
/s/ Don M. Green Director, President and Chief Executive Officer of March 16, 2000
- --------------------------- Black Diamond Savings Bank, FSB
Don M. Green
/s/ Willard B. Apple, Jr. Chairman of the Board March 16, 2000
- ---------------------------
Willard B. Apple, Jr.
/s/ Gary G. Blosser Director March 16, 2000
- ---------------------------
Gary G. Blosser
/s/ Charles A. Britt Director March 16, 2000
- ---------------------------
Charles A. Britt
/s/ Barry Z. Dodson Director March 16, 2000
- ---------------------------
Barry Z. Dodson
/s/ O. Eddie Green Director March 16, 2000
- ---------------------------
O. Eddie Green
/s/ Joseph H. Kinnarney Director March 16, 2000
- ---------------------------
Joseph H. Kinnarney
/s/ Clifton G. Payne Director March 16, 2000
- ---------------------------
Clifton G. Payne
/s/ Elton H. Trent, Jr. Director March 16, 2000
- ---------------------------
Elton H. Trent, Jr.
/s/ Kenan C. Wright Director March 16, 2000
- ---------------------------
Kenan C. Wright
</TABLE>
74
<PAGE> 77
EXHIBIT INDEX
Exhibit Description
------- -----------
10.17 Amended and Restated Employment Agreement, dated
August 10, 1999 between Black Diamond Savings Bank,
F.S.B. and Don M. Green
21.01 Schedule of Subsidiaries
23.01 Consent of PricewaterhouseCoopers LLP
23.02 Consent of Cherry Bekaert & Holland, L.L.P.
23.03 Consent of McGladrey & Pullen, LLP
27.01 Financial Data Schedule
99.01 Risk Factors relating to the Registrant.
<PAGE> 1
EXHIBIT 10.17
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
DATED AUGUST 10, 1999
BETWEEN BLACK DIAMOND SAVINGS BANK, F.S.B. AND DON M. GREEN
<PAGE> 2
EXHIBIT 10.17
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Agreement, made and entered into as of the 10th day of August, 1999,
by and between BLACK DIAMOND SAVINGS BANK, F.S.B. (the "Bank"), and DON M. GREEN
(the "Employee").
W I T N E S S E T H:
WHEREAS, pursuant to an Agreement and Plan of Reorganization and Merger
dated as of May 28, 1999 by and among FNB Financial Services Corporation
("FNB"), FNB Acquisition Sub, F.S.B., and the Bank (the "Merger Agreement"), FNB
has agreed to acquire the Bank on the terms and conditions set forth in the
Merger Agreement;
WHEREAS, Employee is an executive of the Bank; owns shares of capital
stock of the Bank; holds options to purchase 55,000 shares of the common stock
of the Bank at $13.27 per share (which options, pursuant to the terms of the
Merger Agreement, are being converted into options to purchase 73,332 shares of
the common stock of FNB at $9.95 per share); and is intended to receive
substantial value in the transactions contemplated by the Merger Agreement;
WHEREAS, Employee's agreement to be bound by the terms and
considerations of this Agreement (and in particular its non-competition
provisions) was a material inducement for FNB to enter into, and is a condition
to FNB obligations under the Merger Agreement;
WHEREAS, in connection with the consummation of the transactions
contemplated by the Merger Agreement, the Bank desires to employ Employee and
Employee desires to accept such employment on the terms set forth below; and
WHEREAS, Employee and the Bank originally entered into this Agreement
on May 28, 1999, and are now amending and restating this Agreement at the
request of the Office of Thrift Supervision.
<PAGE> 3
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
1. Employment. The Bank hereby employs the Employee, and the Employee
hereby accepts employment with the Bank, for the term set forth in Section 2
below, in the position and with the duties and responsibilities set forth in
Section 3 below, and upon the other terms and conditions hereinafter stated.
2. Term. Unless sooner or otherwise terminated as provided in this
Agreement, the initial term of this Agreement and Employee's employment with the
Bank hereunder shall be for a period commencing on the Effective Time of the
Merger (as defined in the Merger Agreement) and continuing for a period of three
(3) years. This Agreement shall be renewed for a period of one (1) year after
the initial term, and after each renewal term thereafter, subject to the
approval of the Bank's Board of Directors after completion of a satisfactory
review of the Employee's performance during the initial term or the preceding
renewal term, as applicable.
3. Duties; Position. The Employee is engaged as President and Chief
Executive Officer of the Bank. The Employee shall be responsible for such duties
as are commensurate with his office that may from time to time be assigned to
the Employee by the Bank's Board of Directors.
4. Compensation. In consideration of the services to be rendered by the
Employee to the Bank and in consideration of the Employee's other covenants
hereunder, the Employee will receive an initial annual base salary of $164,500
(such salary as it may be increased from time to time hereafter referred to as
"Base Salary"), payable at such intervals as may be established by the Bank from
time to time for salary payments to its senior management employees. The
Employee shall receive such increases in his Base Salary as the Board of
Directors of the Bank
2
<PAGE> 4
may from time to time approve in its discretion, provided, however, that the
Employee's Base Salary will be reviewed not less often than annually. The
Employee shall also be eligible to receive such bonuses as the Board of
Directors may, in its discretion, deem appropriate from time to time.
5. Annual Management Incentive Compensation. The Employee shall be
entitled to participate in the annual management incentive plans maintained by
the Bank as they exist from time to time. The Board of Directors of the Bank
will undertake to review Black Diamond's current plans in consultation with the
Employee with a view to establishing meaningful and realistic goals and
objectives.
6. Employee Benefits. The Employee will be entitled to participate, in
accordance with the provisions thereof, in any employee benefit plans and
programs made available by the Bank to its employees generally in accordance
with the terms of such plans and programs.
7. Additional Benefits. In addition to normal employee benefits, the
Bank will provide to the Employee the following:
(a) An automobile for the Employee's exclusive use for
business purposes. The Bank will maintain the automobile in good condition at
Bank expense, subject to the normal wear and tear inflicted by the normal use
and operation thereof by the Employee.
(b) The Employee will be eligible to participate and receive
tax favored incentive stock options under the FNB "Omnibus Equity Compensation
Plan," with options to be granted at such time or times as determined by the
Board of Directors.
8. Business Expense Reimbursements. During the period of his employment
under this Agreement, the Employee will be entitled to reimbursement for all
reasonable out-of-pocket expenses incurred by him in performing his duties
hereunder upon presentation by the Employee,
3
<PAGE> 5
from time to time, of an itemized account of such expenses and appropriate
documentation therefor.
9. Termination of Employment.
(a) Death or Disability. In the event of the death or
disability of the Employee during his employment under this Agreement, the
Employee's employment and his compensation hereunder shall terminate
immediately. Any other rights and benefits the Employee, his estate or any other
person may have under employee benefit plans and programs of the Bank in the
event of the Employee's death or disability shall be determined in accordance
with the terms of such plans and programs. For purposes of this Agreement,
"disability" shall mean the inability, by reason of bodily injury or physical or
mental disease, or any combination thereof, of the Employee to perform his
customary or other comparable duties with the Bank for a period of more than 90
consecutive days. In the event the parties are unable to agree as to whether the
Employee is suffering a disability, the Employee and the Bank shall each select
a physician and the two physicians so chosen shall make the determination or, if
they are unable to agree, they shall select a third physician, and the
determination as to whether the Employee is suffering a disability shall be
based upon the determination of a majority of the three physicians.
(b) Termination for Cause. Nothing herein shall prevent the
Bank from terminating the Employee's employment at any time for Cause (as
hereinafter defined). Upon termination for Cause, the Employee shall receive his
Base Salary only through the date of termination, and neither the Employee nor
any other person shall be entitled to any further payments from the Bank, for
salary, unpaid bonuses or any other amounts. Any rights and benefits the
Employee may have under employee benefit plans and programs of the Bank
generally following a termination of the Employee's employment for Cause shall
be determined
4
<PAGE> 6
in accordance with the terms of such plans and programs. For purposes of this
Agreement, termination for Cause shall mean termination due to (i) incompetence;
(ii) willful misconduct; (iii) breach of fiduciary duty involving personal
profit; (iv) a willful and intentional act of the Employee which constitutes a
breach of the Employee's fiduciary duty to the Bank and which is also intended
to injure the reputation, business or business relationship of the Bank, its
officers, directors, shareholders, employees or customers; (v) any material
breach of any provision contained in this Agreement by the Employee; (vi)
repeated failure, neglect or refusal by the Employee to perform his duties
hereunder after the Employee has received express, written notice from the Bank
identifying duties that he has failed, neglected or refused to perform; (vii)
continued insubordination after receipt of a written warning with respect
thereto; or (viii) commission by the Employee of any act, or any failure by the
Employee to act involving, serious criminal conduct, or personal dishonesty,
moral turpitude or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order
applicable to, or reflecting negatively upon, business or affairs of the Bank.
(c) Termination Other Than For Cause. The Bank may terminate
the Employee's employment under this Agreement at any time upon written notice
to the Employee for whatever reason it deems appropriate, or for no reason. The
Employee may terminate his employment under this Agreement at any time upon
written notice to FNB if the Employee is required to change his residence or
principal place of business more than 25 miles from his principal place of
business as of the Effective Time of the Merger (as defined in the Merger
Agreement). In the event such termination by the Bank is not due to disability
as provided in Section 9 (a) above or for Cause as provided in Section 9 (b)
above, or in the event of termination by the Employee as provided in this
Section 9(c), the Employee shall be entitled to
5
<PAGE> 7
be paid as severance pay the amount equal to his one year (annual) salary at the
time of such termination, the cost of his hospital-medical insurance for one
year and his 401(k) contribution for one year if any 401(k) contributions are
made for that year for other employees. The Bank shall pay the amount of the
annual salary to the Employee in equal semi-monthly installments, commencing
upon the Employee's termination or dismissal.
(d) Termination Other Than for Cause Following a Change in
Control. The Employee may terminate his employment immediately upon written
notice to FNB upon the occurrence, within twelve (12) months following a "change
in control" of FNB, of any one of the following events: (i) he is not offered a
position with the Bank, its successor or the person or entity effecting the
change of control at not less than his then Base Salary and with generally
comparable benefits, or (ii) the Employee is required to change his residence or
principal place of business more than 25 miles from his principal place of
business immediately prior to the change in control. If the Employee's
employment is terminated pursuant to this Section 9(d) or if the Employee's
employment is terminated by the Bank pursuant to Section 9(c) following a change
in control, the Employee shall be entitled to receive his Base Salary, payable
in accordance with Section 4 hereof, for a two-year period.
For purposes of this Section 9(d), a "change in control" shall be
deemed to have occurred upon the occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") but excluding any employee benefit plan of FNB) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of FNB representing 50% or more of
6
<PAGE> 8
the combined voting power of FNB's outstanding securities then entitled
ordinarily (and apart from rights accruing under special circumstances) to vote
for the election of directors; or
(ii) Individuals who are "Continuing Directors" (as
hereinafter defined) cease for any reason to constitute at least a majority of
the Board of Directors; or
(iii) The Board of Directors shall approve a sale of
all or substantially all of the assets of FNB; or
(iv) The Board of Directors shall approve the merger,
consolidation, or like business combination or reorganization of FNB, the
consummation of which would result in the occurrence of any event described in
clause (i) or (ii) above.
For purposes of the foregoing, "Continuing Directors" shall mean (i)
the directors of FNB in office on the date hereof and (ii) any successor to any
such director (and any additional director) who after the date hereof (y) was
nominated or selected by a majority of the Continuing Directors in office at the
time of his nomination or selection and (z) who is not an "affiliate" or
"associate" (as defined in Regulation 12B under the Exchange Act) or any person
who is the beneficial owner, directly or indirectly, of securities representing
50% or more of the combined voting power of FNB's outstanding securities then
entitled ordinarily to vote for the election of directors.
10. Covenants Not To Compete.
(a) The Employee hereby promises and agrees that during the
term of this Agreement and for a period of one year following the termination of
his employment with the Bank:
(i) He will not, directly or indirectly, own any
interest in, manage, operate, control, be employed by, render
consulting or advisory services to, or participate
7
<PAGE> 9
in or be connected with the management or control of any business that
is then engaged in the operation of a banking institution (or any
competitive institution then competing with the Bank) in the Territory
(as hereafter defined);
(ii) He will not, directly or indirectly, influence
or attempt to influence any customer of the Bank to discontinue its use
of the Bank's services or to divert such business to any other person,
firm or corporation; and
(iii) He will not, directly or indirectly, solicit
any employee of the Bank, whose base annual salary at the time of the
Employee's termination was $30,000 or more, to work for any other
person, firm or corporation.
(b) It is the desire and intent of the parties that the
provisions of Section 10 (a) shall be enforced to the fullest extent permitted
under the laws and public policies of each jurisdiction in which enforcement is
sought. Accordingly, if any particular portion of Section 10 (a) shall be
adjudicated to be invalid or unenforceable, such adjudication shall apply only
with respect to the operation of that portion in the particular jurisdiction in
which such adjudication is made, and all other portions shall continue in full
force and effect.
(c) It is expressly agreed that the provisions and covenants
in this Section 10 shall not apply and shall be of no force or effect in the
event that the Bank fails to honor its obligations hereunder.
(d) For purposes of this Section 10, the "Territory" shall
mean a radius of 25 miles from any location in which the Bank or any subsidiary
of the Bank is operating a financial institution.
11. Injunctive Relief. The Employee and the Bank acknowledge and agree
that either party would suffer irreparable injury in the event of a breach of
any of the provisions of Section
8
<PAGE> 10
10 of this Agreement and that either party shall be entitled to an injunction
restraining from any breach or threatened breach thereof. Nothing herein shall
be construed, however, as prohibiting either party from pursuing any other
remedies at law or in equity which it may have for any such breach or threatened
breach of any provisions of Section 10 hereof, including the recovery of damages
to either party.
12. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Employee and his personal representatives,
estate and heirs and to the Bank and its successors and assigns, including
without limitation any corporation or other entity to which the Bank may
transfer all or substantially all of its assets and business (by operation of
law or otherwise) and to which the Bank may assign this Agreement (Subject to
the provisions of Section 9 and any additional provisions of this contract as
applicable). The Employee may not assign this Agreement or any part hereof
without the prior written consent of the Bank, which consent may be withheld by
the Bank for any reason it deems appropriate.
13. Entire Agreement. This Agreement, together with any agreements and
similar documents entered into between the Bank and the Employee under any stock
option, stock compensation or similar employee benefit plans maintained by the
Bank, and together with that certain Amended Deferred Compensation Agreement
between the Bank and the Employee dated June 1, 1995 (the "Deferred Compensation
Agreement"), contains the entire agreement of the parties with respect to the
employment of the Employee by the Bank and supersedes and replaces all other
understandings and agreements, whether oral or in writing, if any, previously
entered into by the parties with respect to such employment. This Agreement
shall not be deemed to terminate or otherwise modify or amend the Deferred
Compensation Agreement, and the
9
<PAGE> 11
Deferred Compensation Agreement shall not be amended or terminated without
Employee's consent.
14. Amendment; Waiver. No provision of this Agreement may be amended,
modified or waived unless such amendment, modification or waiver is agreed to in
writing and signed by the Employee, by a duly authorized officer of the Bank,
and by a duly authorized officer of FNB. No waiver by either party of any breach
by the other party of any provision of this Agreement shall be deemed a waiver
of any other breach.
15. Notices. All notices or other communications given pursuant to this
Agreement shall be in writing and either delivered personally or by prepaid
registered or certified mail, return receipt requested. Notices and other
communications mailed to the Employee shall be addressed to his last address as
shown on the personnel records of the Bank, and notices and other communications
to the Bank shall be addressed to FNB Financial Services Corporation, P. O. Box
2037, Reidsville, North Carolina 27323-2037, Attn: President. Either party may
change the address to which notices are to be mailed pursuant to this Section
15, by written notice given in accordance herewith. Any notice pursuant to this
Section 15 shall be effective for all purposes on the date delivered or mailed
as herein provided.
16. Severability. If any one or more of the provisions contained in
this Agreement shall be invalid, illegal, or unenforceable in any respect under
any applicable law, the validity, legality and enforceability of the remaining
provision shall not in any way be affected or impaired thereby.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws and judicial decisions of the State of North Carolina.
10
<PAGE> 12
18. Compliance with Applicable Banking Laws.
(a) If any of the provisions of this Agreement conflict with
12 C.F.R. ss. 563.39, the latter shall prevail.
(b) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818 (e)(3) and (g)(1)) the Bank's obligations under this Agreement shall
be suspended as of the date of service unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while its contract
obligations were suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default (as defined in section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this Section 18(d) shall not affect any vested rights of
the contracting parties.
(e) All obligations under this Agreement shall be terminated,
except to the extent it is determined that continuation of this Agreement is
necessary to the continued operation of the Bank:
11
<PAGE> 13
(i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in 13(c) of the FDIA; or
(ii) by the Director or his or her designee, at the
time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by such action.
(f) Any payments made to Employee pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. ss. 1828(k) and any regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
BLACK DIAMOND SAVINGS BANK, F.S.B.
By: /s/ Harold Armsey
-------------------------------------
/s/ Don M. Green
----------------------------------------
Don M. Green
12
<PAGE> 1
EXHIBIT 21.01
FNB FINANCIAL SERVICES CORPORATION
SCHEDULE OF SUBSIDIARIES
Name Jurisdiction of Organization
---- ----------------------------
FNB Southeast North Carolina
Black Diamond Savings Bank, FSB Virginia
<PAGE> 1
EXHIBIT 23.01
CONSENT OF PRICEWATERHOUSECOOPERS LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
FNB Financial Services Corporation on Form S-3D (File No. 333-02437) and Forms
S-8 (File Nos. 333-24755, 333-29679 and 333-67365) of our report dated February
4, 2000, on our audits of the consolidated financial statements of FNB Financial
Services Corporation as of December 31, 1999 and 1998 and for the years then
ended, which report has been included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 27, 2000
<PAGE> 1
EXHIBIT 23.02
CONSENT OF CHERRY, BEKAERT & HOLLAND, L.L.P.
INDEPENDENT AUDITORS' CONSENT
Board of Directors
FNB Financial Services Corporation
We consent to the inclusion in the Form 10-K of FNB Financial Services
Corporation and the incorporation by reference in the registration statements of
FNB Financial Services Corporation on Form S-8, Commission File Nos. 333-24755,
333-29679 and 333-67365, and on Form S-3, Commission File No. 333-02437, of our
report dated February 10, 1998, relating to FNB Financial Services Corporation
and Subsidiary's consolidated statements of income, changes in shareholders'
equity, and cash flows for the year ended December 31, 1997, which report
appears in the December 31, 1999 annual report on Form 10-K of FNB Financial
Services Corporation. Our report on the Corporation's consolidated financial
statements was issued prior to their restatement for the acquisition of Black
Diamond Savings Bank, FSB which was accounted for as a pooling of interest.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
Greensboro, North Carolina
March 29, 2000
<PAGE> 1
EXHIBIT 23.03
CONSENT OF MCGLADREY & PULLEN, LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report, dated January 22, 1999,
relating to the financial statements of Black Diamond Savings Bank, F.S.B. for
the year ended December 31, 1997, in the December 31, 1999 annual report on Form
10-K of FNB Financial Services Corporation.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FNB FINANCIAL SERVICES CORPORATION FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,391
<INT-BEARING-DEPOSITS> 760
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,445
<INVESTMENTS-CARRYING> 2,573
<INVESTMENTS-MARKET> 0
<LOANS> 413,257
<ALLOWANCE> (4,436)
<TOTAL-ASSETS> 585,103
<DEPOSITS> 484,242
<SHORT-TERM> 11,500
<LIABILITIES-OTHER> 3,032
<LONG-TERM> 20,000
0
0
<COMMON> 4,479
<OTHER-SE> 46,251
<TOTAL-LIABILITIES-AND-EQUITY> 585,103
<INTEREST-LOAN> 34,339
<INTEREST-INVEST> 7,989
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 42,533
<INTEREST-DEPOSIT> 20,191
<INTEREST-EXPENSE> 22,106
<INTEREST-INCOME-NET> 20,427
<LOAN-LOSSES> 1,401
<SECURITIES-GAINS> 118
<EXPENSE-OTHER> 15,193
<INCOME-PRETAX> 6,810
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,248
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 8.05
<LOANS-NON> 1,195
<LOANS-PAST> 1,595
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,452
<CHARGE-OFFS> (512)
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 4,436
<ALLOWANCE-DOMESTIC> 4,436
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 155
</TABLE>
<PAGE> 1
EXHIBIT 99.01
RISK FACTORS RELATING TO THE COMPANY
OUR RAPID AND ACCELERATING GROWTH IS LIKELY TO CONTINUE STRAINING OUR RESOURCES
We have experienced rapid growth over the past several years. The
growth and expansion of our business have placed, and we believe will continue
to place, a strain on our operational, human and financial resources. In order
to manage our growth, we must continue to attract, retain and reward qualified
and experienced management, loan and clerical personnel who possess both the
personal affiliations and leadership traits the Company seeks. In particular, we
rely on a number of key executives, including Ernest J. Sewell, our President
and Chief Executive Officer. We maintain key man life insurance on Mr. Sewell in
the amount of $1 million.
The loss of the services of any key executive could have a material
adverse effect on us. Failure to manage growth effectively or to attract and
retain qualified personnel could have a material adverse effect on our business
and could restrain our ability to successfully implement our business strategy.
IF WE EXPAND INTO NEW MARKETS, OUR BUSINESS COULD BE IMPACTED IN WAYS WE DID NOT
ANTICIPATE
In pursuing our growth strategy, we may expand our presence into new
geographic markets, including markets outside the States of North Carolina and
Virginia. We cannot be sure of our ability to establish local affiliations,
realize management and operating efficiencies or otherwise establish a presence
in those new geographic markets. When entering new geographic markets, we will
need to establish, or have in place, relationships with new or additional
well-trained local managers and will be reliant on such managers who have the
local affiliations that we seek. Therefore, it will be necessary for us to give
significant autonomy to our managers in any new branches. We may also be
required to comply with laws and regulations that differ from those that
currently apply to us, and may face competitors with greater knowledge of such
local markets.
OUR CONTINUED EXPANSION PLANS COULD DISRUPT OUR BUSINESS IN SIGNIFICANT WAYS
We intend to expand our business through selective de novo branch
openings and possible acquisitions. We may not be able to consummate, or if
consummated, successfully integrate, any future de novo branch opening or
acquisition, and we could incur disruption and unexpected expenses in
integrating such transactions. Although we currently have no agreements or
understandings, either written or oral, in place, in the normal course of
business, we evaluate potential transactions that would complement or expand our
business. In doing so, we compete with other potential bidders, many of which
have greater financial and operational resources.
There can be no assurance that we will be able to successfully
negotiate, finance or integrate any such transactions. Furthermore, the process
of evaluating, negotiating and integrating transactions may divert our
management time and resources.
<PAGE> 2
We cannot assure you that any given de novo branch opening or acquisition, when
consummated, will not have a material adverse effect on our business.
ECONOMIC CONDITIONS OF OUR VIRGINIA MARKET AREA COULD AFFECT PROFITABILITY
Loans and deposits from our Virginia market are primarily generated
from the areas where our offices are located. With the exception of Rockingham
County, where our Harrisonburg branch is located, the Virginia counties that we
serve are largely rural, and the economy is diversified among the coal mining,
manufacturing, trade and service industries. Over the past several years, the
local economy has weakened as a result of layoffs and closings by local
employers. Population and household growth and per capita income levels for the
Virginia counties that we serve are generally lower than comparable levels for
Virginia, with the exception of Rockingham County, while unemployment levels are
generally higher. While management regards our market area as a moderate growth
area, there can be no assurance that the profitability of our Virginia market
will not be adversely affected if economic conditions remain at their current
levels.
OUR LOAN PORTFOLIO IS HEAVILY WEIGHTED TOWARD REAL ESTATE LOANS, SO OUR
PERFORMANCE MAY SHIFT WITH FLUCTUATIONS IN REAL ESTATE CONDITIONS
At December 31, 1999, real estate loans comprised 67.9% of our total
loan portfolio, which includes residential mortgages and construction and
commercial loans secured by real estate. We generate a substantial portion of
our real estate mortgage loans in North Carolina and Virginia. Therefore,
conditions of the real estate markets in North Carolina and Virginia could
strongly influence the level of our non-performing mortgage loans and our
results of operations and financial condition. Real estate values and the demand
for mortgages and construction loans are affected by, among other things,
changes in general or local economic conditions, changes in governmental rules
or policies, the availability of loans to potential purchasers, and acts of
nature. Although our underwriting standards are intended to protect us against
adverse general and local real estate trends, declines in real estate markets
could adversely impact the demand for new real estate loans, the value of the
collateral securing our loans and our business.
WE FACE STRONG COMPETITION FROM COMPETITORS WITH GREATER RESOURCES
Commercial banking in the Southeast is extremely competitive, due in
large part to interstate branching. Currently, many of our competitors in
certain markets are significantly larger and have greater resources than we do.
We encounter significant competition from a number of sources, including other
bank holding companies, commercial banks, thrift institutions, credit unions and
other financial institutions and financial intermediaries. Among commercial
banks, our bank competes in its market areas with some of the largest banking
organizations in the country.
More than that, competition is not just 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 our competitors. Consequently, many of
our competitors have substantially higher lending
<PAGE> 3
limits due to their greater total capitalization, and many perform functions for
their customers that our bank does not offer. As a result, we are likely to meet
increased competition, especially as we expand into new markets, that may limit
our ability to maintain or increase our market share or otherwise materially and
adversely affect our business.
GOVERNMENT AGENCIES ACTIVELY REGULATE BANKS; WE NEED TO REACT QUICKLY AND
POSITIVELY TO SHIFTS IN THE REGULATORY ENVIRONMENT
Our profitability depends to a large extent upon our net interest income, which
is the difference between interest income on interest-earning assets, such as
loans and investments, and interest expense on interest-bearing liabilities,
such as deposits and borrowings. Our net interest income would be adversely
affected if changes in market interest rates caused by governmental fiscal
policies or otherwise resulted in the cost of interest-bearing liabilities
increasing faster than the increase in the yield on our interest-earning assets.
Our operating results are also affected by credit policies of monetary
authorities, particularly the Board of Governors of the Federal Reserve. The
instruments of monetary policy include open market operations in U.S. Government
securities, changes in the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. In view of changing conditions in
the national economy and in the money markets, as well as the effect of action
by monetary and fiscal authorities, including the Federal Reserve Board, we
cannot predict possible future changes in interest rates, deposit levels and
loan demand on our business.
In addition, we are subject to extensive supervision, regulation and
control by several federal and state governmental agencies, including the
Federal Reserve Board, the Commissioner of Banks in North Carolina, and the
Federal Deposit Insurance Corporation. Certain recently enacted or proposed
legislation or regulations, and future legislation or regulations, could have an
adverse effect on both the costs of doing business and the competitive factors
facing our industry. Although we cannot predict the impact of such legislation
and regulation, future changes may alter the structure of and competitive
relationships among financial institutions and the cost of doing business. The
addition of Black Diamond, which is regulated by OTS, adds another layer of
oversight to our business.
WE MUST EFFECTIVELY RESPOND TO THE PACE OF TECHNOLOGICAL CHANGE AND RESULTING
CUSTOMER DEMANDS WITHOUT STRAYING FROM OUR BUSINESS PHILOSOPHY
The Banking industry is undergoing, and we believe will continue to
undergo, technological changes with frequent introductions of new
technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. Our future success will depend, in part,
on our ability to address your needs by using technology to provide products and
services that will satisfy customer demands for convenience as well as to
enhance efficiencies in our operations.
We believe that keeping pace with technological advances is important,
as long as our emphasis on personalized services is not adversely impacted. As a
result, we have
<PAGE> 4
been upgrading our internal systems, both through the efficient use of
technology (including software applications) and by strengthening our policies
and procedures. Many of our competitors will have substantially greater
resources to invest in technological and infrastructure improvements. We cannot
assure you that we will be able to effectively implement new technology-driven
products and services consistent with our emphasis on individualized attention
to customers' needs.
