<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 JUNE 30, 1998
Commission File Number: 0-13086
FNB FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1382275
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
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
--- ---
3,405,572 common shares were outstanding as of July 31, 1998, with a par value
per share of $1.00.
<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1 Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Income
Three months and six months ended June 30, 1998 and 1997 2
Consolidated Statements of Changes in Shareholders Equity
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Comprehensive Income
Six months ended June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows
Six months ended June 30, 1998 and 1997 5 - 6
Notes to Consolidated Financial Statements 7 - 11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
<PAGE> 3
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks 9,542 9,612
Federal funds sold 0 0
-------- --------
Total cash and cash equivalents 9,542 9,612
Securities available for sale (cost of
$132,656 in 1998, and $77,024 in 1997) 132,906 77,346
Other equity securities 1,110 1,392
Loans 251,668 228,715
Less: Allowance for loan losses (2,764) (2,331)
-------- --------
Net Loans 248,904 226,384
Property and equipment, net 6,958 6,490
Intangible assets 669 715
Accrued income and other assets 5,936 3,212
-------- --------
Total Assets 406,025 325,151
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Deposits
Noninterest bearing 34,153 31,464
Interest bearing:
Savings accounts 17,331 16,889
NOW accounts 19,569 20,445
MMI accounts 21,238 15,439
Other time accounts 236,958 188,037
-------- --------
Total deposits 329,249 272,274
Federal funds purchased and securities
sold under repurchase agreements 12,424 13,720
Other borrowings 20,000 15,000
Accrued expenses and other liabilities 1,707 1,639
-------- --------
Total Liabilities 363,380 302,633
-------- --------
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; 3,402,628 shares
issued in 1998; 2,465,384 shares
issued in 1997 3,403 2,494
Paid in capital 21,411 3,287
Accumulated other comprehensive income:
Net unrealized gain/(loss) on
securities available for sale 152 196
Retained earnings 17,679 16,541
-------- --------
Total shareholders equity 42,645 22,518
-------- --------
Total liabilities and
shareholders equity 406,025 325,151
======== ========
</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 Six Months Ended
June 30, June 30,
------------------------- ------------------------
INTEREST INCOME 1998 1997 1998 1997
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest and fees on loans 5,979 4,120 11,526 7,514
Interest on federal funds sold 45 29 96 77
Interest and dividends on investments:
U.S. Treasury securities 45 189 90 361
Federal Agency securities 1,691 489 2,777 960
State, County and Municipal securities 74 99 149 202
Other securities 20 13 44 24
--------- ---------- --------- ---------
Total Interest Income 7,854 4,939 14,682 9,138
INTEREST EXPENSE
Interest on savings, NOW and MMI deposits 319 252 606 500
Interest on other time deposits 3,329 1,940 6,246 3,558
Interest on federal funds purchased,
borrowed funds, and securities sold
under agreement to repurchase 422 129 780 229
--------- ---------- --------- ---------
Total Interest Expense 4,070 2,321 7,632 4,287
Net Interest Income 3,784 2,618 7,050 4,851
Provision for loan losses 315 150 580 230
--------- ---------- --------- ---------
Net interest income after loan
loss provision 3,469 2,468 6,470 4,621
NONINTEREST INCOME
Deposit service charge 273 221 517 416
Insurance commissions 19 16 38 32
Net securities gains/(losses) 18 32 18 32
Net gain/(loss) on sale of mortgages 61 3 61 2
Other operating income 77 75 249 119
--------- ---------- --------- ---------
Total noninterest income 448 347 883 601
NONINTEREST EXPENSE
Salaries and employee benefits 1,449 1,122 2,885 2,116
Net occupancy expense 157 129 301 247
Furniture and equipment expense 184 155 359 280
Insurance 15 15 29 24
Printing and supplies 49 67 110 121
Net loss on disposition of asset 24 (7) 24 25
Other operating expense 588 405 1,015 748
--------- ---------- --------- ---------
Total noninterest expense 2,466 1,886 4,723 3,561
Income Before Income Taxes 1,451 929 2,630 1,661
Applicable income taxes 498 312 902 538
--------- ---------- --------- ---------
NET INCOME 953 617 1,728 1,123
========= ========== ========= =========
PER SHARE DATA
Net income, basic $ 0.30 $ 0.25 $ 0.61 $ 0.46
Net income, diluted $ 0.28 $ 0.23 $ 0.57 $ 0.42
Cash dividends $ 0.10 $ 0.10 $ 0.20 $ 0.19
Weighted average shares outstanding, basic 3,191,194 2,464,317 2,844,189 2,462,383
Weighted average shares outstanding, diluted 3,396,048 2,638,157 3,051,947 2,654,633
</TABLE>
2
<PAGE> 5
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders Equity
(in thousands)
<TABLE>
<CAPTION>
June 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 5 6
Exercise of stock options 2 11
Employee stock awards 1 0
Employee 401(k) plan 4 12
------- -------
Balance at end of year 3,403 2,494
Paid in Capital:
Balance at beginning of year 3,287 2,728
Stock issuance 17,877
Dividend reinvestment plan 124 156
Exercise of stock options 17 92
Employee stock awards 4 3
Employee 401(k) plan 102 308
------- -------
Balance at end of year 21,411 3,287
Retained Earnings:
Balance at beginning of year 16,541 16,119
Net income for years 1,728 2,477
Cash dividends (590) (959)
Stock dividend 0 (1,082)
Cash paid for fractional shares 0 (14)
------- -------
Balance at end of year 17,679 16,541
Accumulated other comprehensive income:
Net unrealized gains/(loss) on
securities held for sale 152 196
Total shareholders equity 42,645 22,518
======= =======
</TABLE>
3
<PAGE> 6
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1998 1997
------ ------
<S> <C> <C>
Net income 1,728 1,123
Unrealized gains/(losses) on
available for sale securities (44) 15
Less: reclassification adjustment for gains
included in net income (11) (44)
------ ------
Other comprehensive income (55) (29)
------ ------
Comprehensive income 1,673 1,094
====== ======
</TABLE>
Disclosure of Taxes Allocated to Each Component of Comprehensive Income
<TABLE>
<CAPTION>
Tax Expense
June 30, 1998 Pretax or Benefit Net of Tax
- ------------- ------ ----------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising in period (71) 27 (44)
Less: reclassification adjustment for gains
included in net income (18) 7 (11)
--- -- ---
Net unrealized gains (89) 34 (55)
--- -- ---
Other comprehensive income (89) 34 (55)
=== == ===
</TABLE>
<TABLE>
<CAPTION>
Tax Expense
June 30, 1997 Pretax or Benefit Net of Tax
- ------------- ------ ----------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising in period 25 (10) 15
Less: reclassification adjustment for gains
included in net income (32) (12) (44)
--- --- ---
Net unrealized gains (7) (22) (29)
--- --- ---
Other comprehensive income (7) (22) (29)
=== === ===
</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>
Six Months Ended
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received 12,924 9,093
Fees and commissions 1,202 995
Interest paid (7,335) (4,109)
Noninterest expense paid (4,396) (3,356)
Income taxes paid (968) (519)
Proceeds from sale of mortgage loans 12,836 3,371
------- -------
Net cash provided/(used) by operating activities: 14,263 5,475
Cash flows from investing activities:
Proceeds from sale/call/maturity of securities 38,352 35,327
Purchase of securities (92,685) (24,325)
Capital expenditure (733) (1,982)
(Increase)/Decrease in other real estate (1,369) (28)
(Increase)/Decrease in overnight investments 0 (5,370)
(Increase)/Decrease in net loans (37,019) (47,388)
------- -------
Net cash provided/(used) by investing activities: (93,454) (43,766)
Cash flows from financing activities:
Increase/(Decrease) in DDA, Savings, NOW, MMI 8,054 5,821
Increase/(Decrease) in time deposits 48,921 35,536
Increase/(Decrease) in federal funds and repurchase agreements (1,297) (292)
Increase/(Decrease) in long term debt 5,000 0
Proceeds from stock issuance 19,033 84
Dividends paid (590) (462)
Purchase of fractional shares 0 (6)
------- -------
Net cash provided/(used) by investing activities: 79,121 40,681
Net Increase/(Decrease) in cash equivalents (70) 2,390
Cash and cash equivalents as of January 1 9,612 6,467
------- -------
Cash and cash equivalents as of June 30 9,542 8,857
======= =======
Supplemental Disclosures
Noncash transfers from loans to other real estate 1,467 53
Change in unrealized appreciation/(depreciation) of
securities available for sale (net of tax effect) (44) 15
</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>
Six Months Ended
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Net Income 1,728 1,123
Adjustments to reconcile net income to cash:
Provision for loan loss 580 230
Depreciation 265 217
Accretion and amortization 167 132
(Gain)/Loss on sale of securities (18) (32)
(Gain)/Loss on sale of assets 24 24
(Gain)/Loss on sale mortgages (61) (2)
Proceeds from mortgage loans 12,836 3,371
(Increase)/Decrease in interest receivable (879) (259)
(Increase)/Decrease in prepaid expense (61) (135)
(Increase)/Decrease in accrued income 4 (5)
(Increase)/Decrease in miscellaneous assets (391) 204
Increase/(Decrease) in taxes payable (66) (19)
Increase/(Decrease) in interest payable 297 178
Increase/(Decrease) in accrued expenses 47 52
Increase/(Decrease) in prepaid income 8 9
Increase/(Decrease) in miscellaneous liabilities (217) 387
------- ------
Net cash provided by operations 14,263 5,475
======= ======
</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 six
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 six months ended June 30,
1998 and 1997 consists of unrealized gains and losses on available for sale
securities. Comprehensive income for the six month period ended June 30,
1998 and 1997 amounted to $1,673,000 and $1,095,000, 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:
7
<PAGE> 10
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average number of shares
used in basic EPS 3,191,194 2,464,317 2,844,189 2,462,383
Effect of dilutive stock options 204,854 173,840 207,758 192,250
-------------- -------------- -------------- --------------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 3,396,048 2,638,157 3,051,947 2,654,633
============== ============== ============== ==============
</TABLE>
4. Investment Securities
<TABLE>
<CAPTION>
June 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 2,048 2,063 3,074 3,092
U.S. Agency Securities 125,787 125,682 68,997 68,973
State and Municipal Obligations 4,821 5,161 4,953 5,281
------------ ------------ ------------ ------------
Total Available for Sale 132,656 132,906 77,024 77,346
============ ============ ============ ============
Other equity securities 1,110 1,110 1,392 1,392
============ ============ ============ ============
</TABLE>
8
<PAGE> 11
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
5. Loans
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Loan category
Real estate - residential 49,145 58,238
Real estate - commercial 76,367 51,022
Real estate - construction 29,841 19,083
Commercial, financial and agricultural 48,461 54,294
Consumer - direct 22,267 23,237
Consumer - home equity 21,891 19,740
Consumer - other 3,696 3,101
---------------- ----------------
Total Loans * 251,668 228,715
================ ================
</TABLE>
* The Bank has no foreign loan activity.
6. Allocation of Allowance for Loan Loss
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
-------------------------------- --------------------------------
% of Loans in % of Loans in
Balance at end of period Each Category Each Category
applicable to: Allowance to Total Loans Allowance to Total Loans
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Real estate - construction 5 12% 3 9%
Real estate- mortgage 39 20% 176 28%
Commercial 1,424 50% 1,147 43%
Consumer 549 19% 200 20%
General 703 0% 301 0%
-------------------------------- --------------------------------
Total balance sheet allocation 2,720 100% 1,827 100%
=========== ===========
Off balance sheet commitments 44 41
------------- -------------
Total allocation 2,764 1,868
============= =============
</TABLE>
9
<PAGE> 12
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
7. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 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 54 0
Consumer 134 31
------------ ------------
188 31
Recoveries:
Commercial, financial, agricultural 12 0
Real estate - construction 0 0
Real estate - mortgage 0 0
Consumer 29 31
------------ ------------
41 31
------------ ------------
Net Charge-Offs 147 0
------------ ------------
Allowance charged to operations 580 230
------------ ------------
Balance at end of period 2,764 1,868
============ ============
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.16% 0.00%
============ ============
Ratio of allowance for loan loss to
month end loans 1.10% 1.00%
============ ============
</TABLE>
10
<PAGE> 13
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
8. Nonperforming Assets
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C> <C>
Nonaccrual (1) 596 1,236
Past due 90 days or more and
still accruing interest 0 0
Other real estate 1,400 62
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.
11
<PAGE> 14
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Summary
Net income for the quarter ended June 30, 1998 of $953,000 was 54.5% more than
the $617,000 earned in the second quarter last year. For the six months to date,
earnings of $1,728,000 was up 53.8% over 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. As used
herein, the "Company" refers to FNB Financial Services Corporation and its
subsidiary. The "Bank" refers to the company's wholly-owned subsidiary First
National Bank Southeast.
Interest Income and Interest Expense
Total second quarter interest income increased 59.0% over the same quarter last
year, with a 63.2% improvement in average earning assets. Average loans improved
43.8% during the quarter and income from loans was up 45.2%, as the weighted
average yield of 9.58% this quarter was up from 9.49%. Average investment in
securities in the second quarter were up 127.2%, 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 six month period
this year, interest income was up 60.7%, on a 61.3% increase in average earning
assets.
Total interest expense in the second quarter this year was 75.4% more than the
1997 second quarter, with average interest bearing liabilities up 61.4%. The
Company's growth in deposits continues to occur primarily in relatively higher
paying certificates of deposit, with the weighted average rate on time deposits
increasing to 5.09% this quarter, compared with 4.70% in the same quarter last
year, as a result of this continuing change in the mix of deposits. For the full
six months in 1998, interest expense increased 78.0%, on a 62.1% gain in
interest bearing liabilities.
Comparable net interest margins were as follows:
First Quarter, 1998 8.44 % - 4.63 % = 3.81 %
First Quarter, 1997 8.72 % - 4.21 % = 4.51 %
Year to Date, 1998 8.50 % - 4.61 % = 3.89 %
Year to Date, 1997 8.60 % - 4.16 % = 4.44 %
Noninterest Income and Expense
Noninterest income in the second quarter this year was up 29.1%, which included
gains of 23.4% in deposit service charges and 71.8% in other operating income
because of higher fees from the Company's credit card operation. Six months
noninterest income was 47.1% higher, including 24.1% more from deposit service
charges, 135% more in gains from the sale of mortgages and investments and 90.9%
more from other operating income.
Noninterest expense was up 30.8% in the 1998 second quarter, primarily because
of costs associated with our office expansion in 1997. Personnel expense
increased 29.1%, occupancy and equipment expense 20.0% and other operating
expenses 45.9%. The six month comparison mirrored the quarter, with personnel
expense 36.3% higher, occupancy and equipment up 25.0% and other operating
expense up 36.1%.
12
<PAGE> 15
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
The provision for loan losses was funded 110.0% higher in the second quarter and
152.2% for the six months, which was necessary to maintain reserves on a greatly
increased loan portfolio.
Financial Condition
The Company's total assets at June 30, 1998 and 1997, were $406.0 million and
$325.2 million respectively, and $367.8 million at December 31, 1997. Average
earning assets for the second quarter was $374.8 million, or 63.2% higher than
the $229.6 million during the same quarter last year. Loans at June 30, 1998
totaled $251.7 million versus $186.9 million one year earlier, an increase of
34.7%. Year to date, loans have increased 10.0% from $228.7 million at December
31, 1997. Investment securities of $134.0 million represents a 214.6% increase
over $42.6 million one year ago, and a 73.3% over $77.3 million at December 31,
1997.
Average interest bearing liabilities for the second quarter was $287.3 million,
or 61.4% higher than the $187.2 million for the same quarter last year. Total
deposits increased to $329.2 million at June 30, 1998, a 49.8% increase versus
one year ago, and a 20.9% increase over the $272.3 recorded at December 31,
1997. During the second quarter, borrowings at the Federal Home Loan Bank of
Atlanta increased by $5.0 million to a total of $20.0 million. The Company has a
$40.0 million line of credit, and management believes this is a cost effective
funding source.
Shareholders' equity increased substantially due to the issuance of 897,000
shares of common stock during the quarter. The Company received $18.8 million,
before expenses of $ 329,000 from the offering. Total equity was $42.6 million
and $21.1 million, at June 30 1998 and 1997, respectively. This represents a
101.7% increase over the second quarter last year. The increase from December
31, 1997 equals $20.1 million, or an increase of 89.4%.
Asset Quality
The allowance ratio at June 30,1998 stood at 1.10% compared to 1.02% at December
31, 1997, and 1.00% at June 30, 1997. Most of the increase in the allowance
ratio is due to higher levels of provision being charged against earnings. For
the first six months of 1998, the provision for loan losses was $580,000
compared to $230,000 for the same period earlier. Increased levels of provision
are primarily attributable to the significant growth in the loan portfolio.
During 1998, the Company has experienced charge-offs of $188,000 and recoveries
of $41,000, or $147,000 in net charge-offs. This equates to an annualized net
charge-off ratio of 0.16% based on average loans outstanding during the period.
This compares to $0 net charge-offs in the same period last year when both
charge-off and recoveries totaled $31,000.
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.
Other real estate owned increased to $1.4 million at June 30, 1998. This is a
result of foreclosing on loans secured by real estate that was previously
classified as non-accrual loans. This is not an increase in non-performing
assets, rather a reclassification from non-accrual status. The Company is
undertaking reasonable steps to liquidate the balances in the category.
13
<PAGE> 16
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
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.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The Office of the United States Comptroller of the Currency
and the Federal Reserve Board, 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 June 30, 1998.
Well Adequately Bank Holding
Ratio Capitalized Capitalized Company Bank
- ----- ----------- ----------- ------- ----
Total Capital 10.0 % 8.0 % 16.3 % 15.9 %
Tier 1 Capital 6.0 % 4.0 % 15.3 % 14.9 %
Leverage Capital 5.0 % 4.0 % 10.7 % 10.4 %
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 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 payments
on loans, access to borrowed funds or lines of credit, and profits. Internal
liquidity analysis indicates the Company 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, 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 computer applications to
ensure Year 2000 compliance. The Company has been advised by the vendor that the
vendor has hired the services of a consultant to review the plan and assist such
vendor in achieving Year 2000 compliance by December 31, 1998. Also, the Company
has instituted an internal Year 2000 compliance program whereby the Company is
reviewing the Year 2000 issue on a comprehensive, company-wide basis.
This multi-phase program will assess all hardware and software to determine the
need for modification or replacement. The cost of be incurred in achieving full
Year 2000 compliance has not been determined; however, management believes it
will not be material to the Company's results of operation, liquidity or capital
resources.
As a lending institution, the Bank is also exposed to potential risk if
borrowers suffer year 2000-related difficulties and are unable to repay their
loans. The Bank is discussing the year 2000 issue with borrowers as part of the
loan granting or renewal process. At this time, it is impossible to
14
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FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
determine what impact, if any the year 2000 will have on the loan payment
performance of the Bank's borrowers. Thus far, however, none of the Bank's
borrowers have reported the expectation of material adverse impacts as a result
of the year 2000.
Effects of Inflation
Inflation affects financial institutions in ways that are different from most
commercial and industrial companies, which have significant investments in fixed
assets and inventories. The effect of inflation on interest rates can materially
impact bank operations, which rely on net interest margins as a major source of
earnings. Non-interest expenses, such as salaries and wages, occupancy and
equipment cost are also negatively impacted by inflation.
Recent Events
On April 20, 1998 and May 5, 1998, the Company sold an aggregate of 897,000
shares of its common stock to the public for aggregate proceeds to the Company
of approximately $18.8 million, less expenses.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
None.
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FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings.
None.
ITEM 2. Changes in Securities and Use of Proceeds.
Not applicable.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On April 14, 1998 at the annual meeting of the company's shareholders,
the following proposals were voted on by shareholders.
Proposal One
To elect three nominees to serve as Class II Directors, each to serve a
three-year term until the Annual Meeting of Shareholders in 2001.
FOR - 1,987,436 AUTHORITY WITHHELD - 15,602
BROKER NONVOTE - 380,095
Directors elected were Willard B. Apple, Jr., O. Eddie Green and
Clifton G. Payne, each of whom received the same number of votes. The
following directors continued in office after the meeting: Ernest J.
Sewell, Charles A. Britt, Barry Z. Dodson, Joseph H. Kinnarney, Elton
H. Trent, Jr., and Kenan C. Wright.
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FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Proposal Two
To approve an amendment to the Company's Articles of Incorporation
which would (i) increase the amount of authorized shares of Common
Stock from 3,000,000 to 40,000,000 and (ii) authorize the issuance of
up to 10,000,000 shares of Preferred Stock which may be issued by the
Company from time to time in one or more classes or series.
FOR - 1,382,242 AGAINST - 206,956 ABSTAIN - 33,745 BROKER NONVOTES - 0
ITEM 5. Other Information.
As discussed in more detail in the Company's proxy statement in
connection with its 1998 annual meeting, as filed with the Securities
and Exchange Commission on March 13, 1998, any proposals which
shareholders intend to present for a vote at the Company's 1999 annual
meeting of shareholders, and which such shareholders desire to have
included in the Company's proxy materials relating to that meeting,
must be received by the Company on or before December 7, 1998.
Proposals received after that date will not be considered for inclusion
in such proxy materials.
In addition, if a shareholder intends to present a matter for a vote at
the 1999 annual meeting of shareholders, other than by submitting a
proposal for inclusion in the Company's proxy statement for that
meeting, the shareholder must give timely notice in accordance with SEC
rules. To be timely, a shareholder's notice must be received by the
Company's Corporate Secretary at its principal office, 202 South Main
Street, Reidsville, North Carolina 27320, on or before January 31,
1999. Such notice should set forth (a) as to each matter the
shareholder proposes to bring before the meeting, a brief description
of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, and (b) the name
and record address of the shareholder, the class and number of shares
of capital stock of the Company that are beneficially owned by the
shareholder, and any material interest of the shareholder in such
business.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on April 6, 1998 which
included the text of its press release relating to the Company's first
quarter fiscal 1998 financial results.
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FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
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)
/s/ Robert F. Albright
Date 8/12/98 ----------------------------------------------------
Robert F. Albright
(Executive Vice President & Chief Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FNB FINANCIAL SERVICES CORPORATION FOR THE THREE MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,542
<INT-BEARING-DEPOSITS> 295,096
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,016
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 251,668
<ALLOWANCE> (2,764)
<TOTAL-ASSETS> 406,025
<DEPOSITS> 329,249
<SHORT-TERM> 12,424
<LIABILITIES-OTHER> 1,707
<LONG-TERM> 20,000
0
0
<COMMON> 3,403
<OTHER-SE> 39,242
<TOTAL-LIABILITIES-AND-EQUITY> 406,025
<INTEREST-LOAN> 11,526
<INTEREST-INVEST> 3,060
<INTEREST-OTHER> 96
<INTEREST-TOTAL> 14,682
<INTEREST-DEPOSIT> 6,852
<INTEREST-EXPENSE> 7,632
<INTEREST-INCOME-NET> 7,050
<LOAN-LOSSES> 780
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 4,723
<INCOME-PRETAX> 2,630
<INCOME-PRE-EXTRAORDINARY> 2,630
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,728
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 8.50
<LOANS-NON> 1,400
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,331
<CHARGE-OFFS> 188
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 2,764
<ALLOWANCE-DOMESTIC> 2,061
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 703
</TABLE>
