<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number: 0-13086
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FNB FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1382275
- ------------------------------ ----------------------
(State or other jurisdiction (I.R.S. Employer
incorporation of organization) Identification Number)
202 South Main Street, Reidsville, N.C. 27320
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
336-342-3346
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
3,423,003 common shares were outstanding as of October 31, 1998, with a par
value of $1.00 per share.
<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Income
Three months and nine months ended September 30, 1998 and 1997 2
Consolidated Statements of Changes in Shareholders' Equity
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Comprehensive Income
September 30, 1998 and December 31, 1997 4
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998 and 1997 5 - 6
Notes to Consolidated Financial Statements 7 - 10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE> 3
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Cash and due from banks 8,221 9,612
Federal funds sold 0 0
------------ ------------
Total cash and cash equivalents 8,221 9,612
Securities available for sale (cost of
$144,184 in 1998, and $77,024 in 1997) 146,251 77,346
Other equity securities 1,110 1,392
Loans 252,340 228,715
Less: Allowance for loan losses (2,532) (2,331)
------------ ------------
Net Loans 249,808 226,384
Property and equipment, net 7,031 6,490
Intangible assets 646 715
Accrued income and other assets 6,498 3,212
------------ ------------
Total Assets 419,565 325,151
============ ============
Liabilities and Shareholders Equity
Deposits
Noninterest bearing 35,183 31,464
Interest bearing:
Savings accounts 16,753 16,889
NOW accounts 20,927 20,445
MMI accounts 28,580 15,439
Other time accounts 243,908 188,037
------------ ------------
Total deposits 345,351 272,274
Federal funds purchased and securities
sold under repurchase agreements 11,364 13,720
Other borrowings 15,000 15,000
Accrued expenses and other liabilities 3,587 1,639
------------ ------------
Total Liabilities 375,302 302,633
------------ ------------
Shareholders Equity
Preferred stock, authorized 10,000,000 shares;
none issued and outstanding 0 0
Common stock, $1.00 par; authorized
40,000,000 shares; 3,422,076 shares
issued in 1998; 2,493,680 shares
issued in 1997 3,422 2,494
Paid in Capital 21,213 3,287
Accumulated other comprehensive income:
Net unrealized gain/(loss) on
securities available for sale 1,261 196
Retained earnings 18,367 16,541
------------ ------------
Total Shareholders Equity 44,263 22,518
------------ ------------
Total liabilities and
shareholders equity 419,565 325,151
============ ============
</TABLE>
1
<PAGE> 4
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans 5,929 4,777 17,455 12,291
Interest on federal funds sold 65 42 161 118
Interest and dividends on investments:
U.S. Treasury securities 24 87 114 447
Federal Agency securities 1,977 509 4,754 1,469
State, County and Municipal securities 68 80 217 282
Other securities 20 14 64 40
------ ------ ------- -------
Total Interest Income 8,083 5,509 22,765 14,647
INTEREST EXPENSE
Interest on savings, NOW and MMI deposits 381 272 987 772
Interest on other time deposits 3,572 2,103 9,818 5,661
Interest on federal funds purchased,
borrowed funds, and securities sold
under agreement to repurchase 384 185 1,164 414
------ ------ ------- -------
Total Interest Expense 4,337 2,560 11,969 6,847
Net Interest Income 3,746 2,949 10,796 7,800
Provision for loan losses 345 230 925 460
------ ------ ------- -------
Net interest income after loan
loss provision 3,401 2,719 9,871 7,340
NONINTEREST INCOME
Deposit service charge 281 233 798 650
Insurance commissions 20 14 58 46
Net securities gains/(losses) 140 4 158 35
Net gain/(loss) on sale of mortgages 20 14 81 16
Other operating income 140 92 389 210
------ ------ ------- -------
Total noninterest income 601 357 1,484 957
NONINTEREST EXPENSE
Salaries and employee benefits 1,494 1,233 4,379 3,349
Net occupancy expense 171 144 471 392
Furniture and equipment expense 171 160 531 440
Insurance 24 19 52 43
Printing and supplies 56 61 167 182
Net loss on disposition of asset 0 (1) 24 24
Other operating expense 577 417 1,593 1,163
------ ------ ------- -------
Total noninterest expense 2,493 2,033 7,217 5,593
Income Before Income Taxes 1,509 1,043 4,138 2,704
Applicable income taxes 479 359 1,380 897
------ ------ ------- -------
NET INCOME 1,030 684 2,758 1,807
====== ====== ======= =======
PER SHARE DATA
Net income, basic $ 0.30 $ 0.28 $ 0.91 $ 0.73
Net income, diluted $ 0.29 $ 0.26 $ 0.86 $ 0.69
Cash dividends $ 0.10 $ 0.10 $ 0.30 $ 0.29
Weighted average shares outstanding, basic 3,407,576 2,478,081 3,031,985 2,467,616
Weighted average shares outstanding, diluted 3,576,913 2,689,904 3,226,936 2,617,153
</TABLE>
2
<PAGE> 5
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Common Stock:
Balance at beginning of year 2,494 1,383
Stock issuance 897 0
Stock dividend 0 1,082
Dividend reinvestment plan 10 6
Exercise of stock options 15 11
Employee stock awards 1 0
Employee 401(k) plan 5 12
------- -------
Balance at end of year 3,422 2,494
Paid in Capital:
Balance at beginning of year 3,287 2,728
Stock issuance 17,546 0
Dividend reinvestment plan 208 156
Exercise of stock options 4 92
Employee stock awards 4 3
Employee 401(k) plan 164 308
------- -------
Balance at end of year 21,213 3,287
Retained Earnings:
Balance at beginning of year 16,541 16,119
Net income 2,758 2,477
Cash dividends (932) (959)
Stock dividend 0 (1,082)
Cash paid for fractional shares 0 (14)
------- -------
Balance at end of year 18,367 16,541
Accumulated other comprehensive income:
Net unrealized gains/(loss) on
securities held for sale 1,261 196
------- -------
Total Shareholders Equity 44,263 22,518
======= =======
</TABLE>
3
<PAGE> 6
FNB Financial Services Corporation and Subsidiary
Consolidated Statement of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income 2,758 1,807 1,030 684
Unrealized gains/(losses) on
available for sale securities 1,065 44 1,109 29
Less: reclassification adjustment for gains
included in net income (104) (23) (92) (3)
------ ------ ------ ------
Other comprehensive income 961 21 1,017 26
------ ------ ------ ------
Comprehensive income 3,719 1,828 2,047 710
====== ====== ====== ======
</TABLE>
Disclosure of Taxes Allocated to Each Component of Comprehensive Income
<TABLE>
<CAPTION>
Tax
Expense or
September 30, 1998 (nine months) Pretax Benefit Net of Tax
- -------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising in period 1,746 (681) 1,065
Less: reclassification adjustment for gains
included in net income (158) 54 (104)
------ ---- ------
Net unrealized gains 1,588 (627) 961
------ ---- ------
Other comprehensive income 1,588 (627) 961
====== ==== ======
<CAPTION>
Tax
Expense or
September 30, 1997 (nine months) Pretax Benefit Net of Tax
- -------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising in period 72 (28) 44
Less: reclassification adjustment for gains
included in net income (35) 12 (23)
------ ---- ------
Net unrealized gains 37 (16) 21
------ ---- ------
Other comprehensive income 37 (16) 21
====== ==== ======
<CAPTION>
Tax
Expense or
September 30, 1998 (three months) Pretax Benefit Net of Tax
- --------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising in period 1,818 (709) 1,109
Less: reclassification adjustment for gains
included in net income (140) 48 (92)
------ ---- ------
Net unrealized gains 1,678 (661) 1,017
------ ---- ------
Other comprehensive income 1,678 (661) 1,017
====== ==== ======
<CAPTION>
Tax
Expense or
September 30, 1997 (three months) Pretax Benefit Net of Tax
- --------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising in period 47 (18) 29
Less: reclassification adjustment for gains
included in net income (4) 1 (3)
------ ---- ------
Net unrealized gains 43 (17) 26
------ ---- ------
Other comprehensive income 43 (17) 26
====== ==== ======
</TABLE>
4
<PAGE> 7
FNB Financial Services Corporation and Subsidiary
Consolidated Statement of Cash Flows
(in thousands)
Increase/(Decrease) in Cash and Cash Equivalents:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Interest received 21,205 14,340
Fees and commissions 1,798 1,462
Interest paid (11,620) (7,189)
Noninterest expense paid (6,546) (4,974)
Income taxes paid (1,316) (963)
Proceeds from sale of mortgage loans 12,401 8,268
-------- -------
Net cash provided/(used) by operating activities: 15,922 10,944
Cash flows from investing activities:
Proceeds from sale/call/maturity of securities 62,775 52,217
Purchase of securities (129,613) (48,006)
(Purchase)/Sale of asset 0 269
Capital expenditure (987) (2,154)
(Increase)/Decrease in other real estate (1,391) (109)
(Increase)/Decrease in overnight investments 0 (2,515)
(Increase)/Decrease in net loans (36,408) (74,844)
-------- -------
Net cash provided/(used) by investing activities: (105,624) (75,142)
Cash flows from financing activities:
Increase/(Decrease) in DDA, Savings, NOW, MMI 17,205 8,836
Increase/(Decrease) in time deposits 55,871 46,176
Increase/(Decrease) in federal funds and repurchase agreements (2,356) 737
Increase/(Decrease) in long term debt 0 15,000
Proceeds from stock issuance 18,523 366
Dividends paid (932) (710)
Purchase of fractional shares 0 (15)
-------- -------
Net cash provided/(used) by investing activities: 88,311 70,390
Net Increase/(Decrease) in cash equivalents (1,391) 6,192
Cash and cash equivalents as of January 1 9,612 6,467
-------- -------
Cash and cash equivalents as of September 30 8,221 12,659
======== =======
Supplemental Disclosures
Noncash transfers from loans to other real estate 1,467 78
Change in unrealized appreciation/(depreciation) of
securities available for sale (net of tax effect) 1,065 44
</TABLE>
5
<PAGE> 8
FNB Financial Services Corporation and Subsidiary
Consolidated Statement of Cash Flows
(in thousands)
Reconciliation of net income to net
cash provided by operating activities:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net Income 2,758 1,807
Adjustments to reconcile net income to cash:
Provision for loan loss 925 460
Depreciation 445 341
Accretion and amortization 270 196
(Gain)/Loss on sale of securities (158) (36)
(Gain)/Loss on sale of assets 24 24
(Gain)/Loss on sale mortgages (81) (16)
Proceeds from mortgage loans 12,401 8,268
(Increase)/Decrease in interest receivable (1,418) (701)
(Increase)/Decrease in prepaid expense (122) (77)
(Increase)/Decrease in accrued income (11) (14)
(Increase)/Decrease in miscellaneous assets (345) 6
Increase/(Decrease) in taxes payable 74 66
Increase/(Decrease) in interest payable 349 248
Increase/(Decrease) in accrued expenses 254 262
Increase/(Decrease) in prepaid income 2 4
Increase/(Decrease) in miscellaneous liabilities 555 106
------- -------
Net cash provided by operations 15,922 10,944
======= =======
</TABLE>
6
<PAGE> 9
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three and nine month periods are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998.
2. Comprehensive Income
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose statements. In
accordance with the provisions of SFAS No. 130, comparative financial
statements presented for earlier periods have been reclassified to reflect
the provisions of the statements.
The Company's other comprehensive income for the nine months ended
September 30, 1998 and 1997 consists of unrealized gains and losses on
available for sale securities. Comprehensive income for the nine month
period ended September 30, 1998 and 1997 amounted to $3,719,000 and
$1,828,000 respectively.
3. 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 earnings per share of
common stock and diluted earnings per share of common stock. Basic
earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common stock outstanding
during the period. Diluted earnings per share 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 the period plus the number of potential dilutive
common shares. All earnings per share amounts have been restated to comply
with the new accounting standard.
Basic and diluted earnings per share amounts have been computed based upon
net income as presented in the accompanying income statements divided by
the weighted average number of common shares outstanding or assumed to be
outstanding as summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of shares
used in basic EPS 3,407,576 2,478,081 3,031,985 2,467,616
Effect of dilutive stock options 169,337 211,823 194,951 149,537
--------- --------- --------- ---------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 3,576,913 2,689,904 3,226,936 2,617,153
========= ========= ========= =========
</TABLE>
7
<PAGE> 10
4. Investment Securities
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- ------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury Securities 0 0 3,074 3,092
U.S. Agency Securities 140,369 142,135 68,997 68,973
State and Municipal Obligations 3,815 4,116 4,953 5,281
------- ------- ------ ------
Total Available for Sale 144,184 146,251 77,024 77,346
======= ======= ====== ======
Other equity securities 1,110 1,110 1,392 1,392
======= ======= ====== ======
</TABLE>
5. Loans
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Loan category
Real estate - residential 48,993 58,238
Real estate - commercial 78,732 51,022
Real estate - construction 27,100 19,083
Commercial, financial and agricultural 49,377 54,294
Consumer - direct 21,154 23,237
Consumer - home equity 22,983 19,740
Consumer - other 4,001 3,101
------- -------
Total Loans (*) 252,340 228,715
======= =======
</TABLE>
(*) The Bank has no foreign loan activity.
8
<PAGE> 11
6. Allocation of Allowance for Loan Loss
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
--------------------------- --------------------------
% of Loans in % of Loans in
Each Category Each Category
Allowance to Total Loans Allowance to Total Loans
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real estate - construction 5 11% 0 8%
Real estate- mortgage 32 19% 180 26%
Commercial 1,359 51% 1,222 46%
Consumer 612 19% 221 20%
General 483 0% 408 0%
--------------------------- --------------------------
Total balance sheet allocation 2,491 100% 2,031 100%
========== ==========
Off balance sheet commitments 41 47
---------- ---------
Total allocation 2,532 2,078
========== =========
</TABLE>
7. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997
------ ------
<S> <C> <C>
Balance at beginning of period 2,331 1,638
Charge-offs:
Commercial, financial, agricultural 0 0
Real estate - construction 0 0
Real estate - mortgage 601 0
Consumer 189 92
------ ------
790 92
Recoveries:
Commercial, financial, agricultural 12 0
Real estate - construction 0 0
Real estate - mortgage 0 0
Consumer 54 72
------ ------
66 72
------ ------
Net Charge-Offs 724 20
------ ------
Allowance charged to operations 925 460
------ ------
Balance at end of period 2,532 2,078
====== ======
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.39% 0.02%
====== ======
Ratio of allowance for loan loss to
month end loans 1.00% 0.98%
====== ======
</TABLE>
9
<PAGE> 12
8. Nonperforming Assets
<TABLE>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Nonaccrual (1) 337 1,269
Past due 90 days or more and
still accruing interest 47 0
Other real estate 1,422 143
Renegotiated trouble debt 0 0
</TABLE>
(1) Other than amounts listed above, there are no other loans which:
(a) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (b) represent material credits
about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers
to comply with the loan repayment terms.
10
<PAGE> 13
PART I - ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operation
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof
or comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements, including the factors set forth under "Risk
Factors," in the Company's Registration Statement on Form S-2 filed with the
Securities and Exchange Commission.
Summary
Net income for the quarter ended September 30, 1998 of $1,030,000 was 50.5% more
than the $684,000 earned in the third quarter last year. For the nine months to
date, earnings of $2,758,000 were up 52.6% over $1,807,000 recorded in the same
period in 1997. The increases this year are primarily the result of significant
balance sheet growth in connection with the addition of four new banking offices
last year.
Interest Income and Interest Expense
Total third quarter interest income increased 46.7%, to $8,083,000 over the same
quarter last year, with a 59.0% improvement in average earning assets. Average
loans improved 26.4% during the quarter and income from loans was up 24.1%, as
the weighted average yield of 9.37% this quarter was down from 9.54%. Average
investments securities in the third quarter were up 196.5%, because of
significant growth in deposits and funds borrowed and the receipt of
approximately $18.5 million from a stock issuance in the 1998 second quarter.
For the full nine month period this year, total interest income was up 55.4%, on
a 60.5% increase in average earning assets.
Total interest expense in the third quarter this year was 69.4% more than the
1997 third quarter, with average interest bearing liabilities up 56.9%. Our
growth in deposits continues to occur primarily in relatively higher paying
certificates of deposit, with the weighted average rate on time deposits
increasing to 5.13% this quarter, compared with 4.74% in the same quarter last
year, as a result of this continuing change in the mix of deposits. For the full
nine months in 1998, interest expense increased 74.8%, on a 60.2% gain in
average interest bearing liabilities.
Comparable net interest margins were as follows:
Third Quarter, 1998 8.17% - 4.67% = 3.50%
Third Quarter, 1997 8.87% - 4.23% = 4.64%
Year to Date, 1998 8.38% - 4.63% = 3.75%
Year to Date, 1997 8.70% - 4.18% = 4.52%
The Company has experienced downward pressure on net interest margins over the
past four quarters. This is primarily due to the mix of earning assets and the
growth in relatively more expensive certificates of deposit. The earning asset
mix has been affected due to the relative increase in investment securities,
compared to growth in the loan portfolio. The investment portfolio has a lower
yield than the loan portfolio, and has had the effect of lowering the overall
earning asset yield. Due to the growth and liquidity in the investment
portfolio, management is currently modifying the portfolio to place greater
emphasis on yield. Additionally, the Company also has the opportunity to reprice
maturing certificates of deposit over the upcoming months.
Noninterest Income and Expense
Noninterest income in the third quarter this year was up 68.3%, which included
increases of 20.5% in deposit service charges and 51.3% in other operating
income because of higher fees from our credit card operation. Gains on sale of
securities totaled $140,000 for the current quarter, compared to $4,000 in the
third quarter of 1997. Year to date gains on sale of securities totaled $158,000
and $36,000 for 1998 and 1997 respectively. Nine months total noninterest income
was 55.2% higher, including 22.8% more from deposit service charges, 410.9% more
in gains from the sale of mortgages and investments and 74.7% more from other
operating income.
11
<PAGE> 14
Noninterest expense was up 22.7% in the 1998 third quarter, primarily because of
costs associated with our office expansion in 1997. Personnel expense increased
21.2%, occupancy and equipment expense 12.5% and other operating expenses 38.5%.
The nine month comparison mirrored the quarter, with personnel expense 30.8
higher, occupancy and equipment up 20.5% and other operating expense up 37.0%.
The provision for loan losses was funded 50.0% higher in the third quarter and
101.1% for the nine months, which was necessary to maintain reserves on the loan
portfolio and the charge-offs as discussed in "Asset Quality" below.
Financial Condition
The Company's total assets at September 30, 1998 and 1997, were $419.6 million
and $282.1 million respectively, and $325.2 million at December 31, 1997.
Average earning assets for the third quarter was $395.3 million, or 59.0% higher
than the $248.7 million during the same quarter last year. Loans at September
30, 1998 totaled $252.3 million versus $212.3 million one year earlier, an
increase of 18.9%. Year to date, loans have increased 10.3% from $228.7 million
at December 31, 1997. Investment securities of $147.4 million represents a
200.4% increase over $49.1 million one year ago, and a 90.5% over $77.3 million
at December 31, 1997.
Average interest bearing liabilities for the third quarter was $333.8 million,
or 56.9% higher than the $212.7 million for the same quarter last year. Total
deposits increased to $345.4 million at September 30, 1998, a 47.9% increase
versus one year ago, and a 26.8% increase over the $272.3 recorded at December
31, 1997. During the third quarter, borrowings at the Federal Home Loan Bank of
Atlanta decreased by $5.0 million to a total of $15.0 million. The Company has a
$40.0 million line of credit, and management believes this is a cost effective
funding source.
Total equity was $44.3 million and $21.9 million, at September 30 1998 and 1997,
respectively. This represents a 102.4% increase over the third quarter last
year. The increase from December 31, 1997 equals $21.7 million, or an increase
of 96.6%. The increase is primarily attributable to the stock offering
completed in the second quarter of 1998. Proceeds from the stock offering
netted the Company $18.5 million in additional capital.
Asset Quality
The allowance ratio at September 30,1998 stood at 1.00% compared to 1.02% at
December 31, 1997, and 0.98% at September 30, 1997. Most of the increase in the
allowance ration is due to higher levels of provision being charged against
earnings. For the first nine months of 1998, the provision for loan losses was
$925,000 compared to $460,000 for the same period earlier. Increased levels of
provision are primarily attributable to growth in the loan portfolio and
charge-offs based on recommendations by the Office of the Comptroller of the
Currency from their regularly scheduled examination of the Bank. During 1998,
the Company has experienced charge-offs of $790,000 and recoveries of $66,000,
or $724,000 in net charge-offs. This equates to an annualized net charge-off
ratio of 0.39% based on average loans outstanding during the nine month period.
This compares to $20,000 net charge-offs in the same period last year.
12
<PAGE> 15
The Company's allowance for loan loss is analyzed quarterly by management. This
analysis includes a methodology that segments the loan portfolio by selected
types and considers the current status of the portfolio, historical charge-off
experience, current levels of delinquent, impaired and non-performing loans, as
well as economic and inherent risk factors. It is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology employed and other analytical measures in comparison
to a group of peer banks. Management believes the allowance for loan losses is
sufficient to absorb known risk in the portfolio. No assurances can be given
that economic conditions will not adversely affect borrowers and result in
increased losses.
Other real estate owned stood at $1.4 million at September 30, 1998, compared to
$143,000 one year earlier. The increase is attributable to foreclosing on loans
secured by real estate. The Company is undertaking reasonable steps to liquidate
the balances in the category.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The OCC and the Federal Reserve, the primary regulators for
the Bank and the Company, respectively, have adopted minimum capital regulations
or guidelines that categorize components and the level of risk associated with
various types of assets. Financial institutions are expected to maintain a level
of capital commensurate with the risk profile assigned to its assets in
accordance with the guidelines. As shown in the table below, the Company and the
Bank have capital levels exceeding the minimum levels for "well capitalized"
banks and bank holding companies as of September 30, 1998.
<TABLE>
<CAPTION>
Regulatory Guidelines Actual
---------------------------- ------------------------
Well Adequately Bank Holding
Ratio Capitalized Capitalized Company Bank
- ----- ----------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Total Capital 10.0% 8.0% 16.0% 15.7%
Tier 1 Capital 6.0% 4.0% 15.1% 14.8%
Leverage Capital 5.0% 4.0% 10.8% 10.0%
</TABLE>
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawal, loan funding, dividends to
shareholders, and general corporate activities 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 payments
on loans, access to borrowed funds or lines of credit, and profits. The Company
believes that it has the ability to generate sufficient amounts of cash to cover
day-to-day activity and fund earning assets growth over the twelve month period
analyzed.
Year 2000
As the Year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Many application software products were designed to accommodate
a two-digit year. As the Year 2000 approaches, the Company has taken, and
continues to take, steps to address the Year 2000 issue.
The Company primarily utilizes a third party vendor for processing its primary
banking applications. In addition, the Company also utilizes third party vendor
application software for all ancillary computer applications. The third party
vendor for the Company's banking applications is in the process of modifying,
upgrading or replacing its
13
<PAGE> 16
computer applications to ensure Year 2000 compliance. The vendor has advised the
Company that the vendor has hired the services of a consultant to review the
plan and assist such vendor in achieving Year 2000 compliance.
The Federal Financial Institutions Examination Council recognizes five phases
that banks must complete to achieve Year 2000 readiness: 1) Awareness of the
potential risks associated with Year 2000; 2) Assessment of all information and
environmental systems needing enhancements; 3) Renovation of the systems that
are not Year 2000 ready; 4) Validation of the renovated systems to assure Year
2000 readiness; and 5) Implementation of the renovated product into the ongoing
operations. The Company has completed the Awareness, Assessment and
Renovation phases and is currently in the process of validating its core
processing systems for Year 2000 readiness. The Company plans to complete the
implementation for core processing applications, and all other mission critical
applications, by December 31, 1998. The implementation phase for non-mission
critical is expected to be completed by March 31, 1999. The Company also uses
non-computer systems, such as ATMs, security systems, telecommunications systems
and alarm systems that may contain embedded technology. The Company expects to
complete the implementation phase for non-computer systems by March 31, 1999.
Cost of Year 2000 compliance is not expected to be material to the result of
operations. Year to date Year 2000 expenses total $5,000 compared to $25,000
budgeted for the full year. These cost only reflect external cost of Year 2000
compliance, and do not include personnel expense based on time devoted to this
effort by employees since the company does not track these internal cost
separately.
As a lending institution, The Company is also exposed to potential risk if
borrowers suffer Year 2000 related difficulties and are unable to repay their
loans. The Company is discussing the Year 2000 with borrowers as part of the
loan granting or renewal process. At this time, it is impossible to determine
what impact, if any the Year 2000 will have on the loan payment performance of
the Company's borrowers. No single borrower is significant enough to materially
impact the financial position of the Company. Thus far, however, none of the
Company's borrowers have reported the expectation of material adverse impacts as
a result of the Year 2000.
In addition to the above noted efforts, the Company is also developing
contingency plans in the event one or more systems would fail. A Year 2000
Contingency Planning Team is developing procedures for key areas that does not
involve computer processing. By utilizing these procedures, management feels the
Company would be able to operate until the problems are resolved.
Recent Events
On November 13, 1997, the Company and the Office of the Comptroller of the
Currency ("OCC") entered into a Memorandum of Understanding ("MOU") in which
the Company agreed to take certain actions to improve its infrastructure. After
the Company complied with the OCC's request, in February 1998, the OCC informed
the Company no further action was being requested, although the MOU was not
formally terminated and remained outstanding. In August 1998, the OCC conducted
a regular examination of the Company in accordance with regulatory procedures
and issued a report requesting the Company to modify certain of its internal
policies and procedures, as well as to increase the Company's provision for
loan losses and charge-off certain delinquent loans. As explained above, the
Company has increased its provision for loan losses and taken loan charge-offs
in the amounts requested by the OCC. As the pace of the Company's growth has
accelerated, it continues to examine and modify, as necessary, its policies and
procedures to meet its changing needs and the needs of its customers. The
Company believes that none of the issues raised by the OCC in its most recent
examination have had or will have a material adverse effect on the Company's
business, financial condition or results of operations. While the MOU remains
outstanding, the Company does not expect the OCC to request that the Company
take additional steps under it.
PART 1 - ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
None.
14
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1
Legal proceedings.
None.
ITEM 2
Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3
Defaults Upon Senior Securities.
Not applicable.
ITEM 4
Submission of Matters to a Vote of Security Holders.
None.
ITEM 5
Other Information.
Not applicable.
ITEM 6
Exhibits and Reports on Form 8-K.
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K.
None.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FNB FINANCIAL SERVICES CORPORATION
----------------------------------
(Registrant)
Date 11/12/98 /s/ Robert F. Albright
-----------------------------------
Robert F. Albright
(Executive Vice President &
Chief Financial Officer)
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FNB FINANCIAL SERVICES CORPORATION FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,221
<INT-BEARING-DEPOSITS> 310,168
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 147,361
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 252,340
<ALLOWANCE> (2,532)
<TOTAL-ASSETS> 419,565
<DEPOSITS> 345,351
<SHORT-TERM> 11,364
<LIABILITIES-OTHER> 3,587
<LONG-TERM> 15,000
0
0
<COMMON> 3,422
<OTHER-SE> 40,841
<TOTAL-LIABILITIES-AND-EQUITY> 419,565
<INTEREST-LOAN> 17,455
<INTEREST-INVEST> 5,149
<INTEREST-OTHER> 161
<INTEREST-TOTAL> 22,765
<INTEREST-DEPOSIT> 10,805
<INTEREST-EXPENSE> 11,969
<INTEREST-INCOME-NET> 10,796
<LOAN-LOSSES> 925
<SECURITIES-GAINS> 158
<EXPENSE-OTHER> 7,217
<INCOME-PRETAX> 4,138
<INCOME-PRE-EXTRAORDINARY> 4,138
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,758
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 8.57
<LOANS-NON> 1,422
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,331
<CHARGE-OFFS> 790
<RECOVERIES> 66
<ALLOWANCE-CLOSE> 2,532
<ALLOWANCE-DOMESTIC> 2,049
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 483
</TABLE>
