<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, 1999.
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 years,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
4,446,957 common shares were outstanding as of October 31, 1999, with a par
value per share of $1.00.
<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income
Three months and nine months ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 3 - 4
Notes to Consolidated Financial Statements 5 - 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
Part II OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited; in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
----------------- ------------------
<S> <C> <C>
Cash and due from banks $ 13,274 $ 15,740
Securities available for sale 128,558 154,327
Other equity securities, at cost 3,548 1,975
Loans 400,966 362,288
Less: Allowance for loan losses (4,322) (2,606)
----------------- ------------------
Net Loans 396,644 358,690
Property and equipment, net 9,437 9,304
Intangible assets 510 580
Accrued income and other assets 8,072 7,323
----------------- ------------------
Total Assets $ 560,043 $ 548,931
================= ==================
Liabilities and Shareholders Equity
Deposits
Noninterest bearing $ 45,071 $ 44,947
Savings/NOW/MMI 86,931 87,478
Other time accounts 333,988 327,169
----------------- ------------------
Total Deposits 465,990 459,594
Federal funds purchased and retail
repurchase agreements 12,361 13,932
Other borrowings 27,500 17,500
Accrued expenses and other liabilities 3,350 4,274
----------------- ------------------
Total Liabilities 509,201 495,300
----------------- ------------------
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; 4,466,437 shares
issued in 1999; 4,543,561 shares
issued in 1998 4,466 4,544
Paid in capital 28,248 27,139
Retained earnings 20,042 21,247
----------------- ------------------
52,756 52,930
Accumulated other comprehensive income (loss) (1,914) 701
----------------- ------------------
Total shareholders' equity 50,842 53,631
----------------- ------------------
Total Liabilities and Shareholders' Equity $ 560,043 $ 548,931
================= ==================
</TABLE>
1
<PAGE> 4
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 8,877 $ 8,112 $ 25,111 $ 23,801
Interest on federal funds sold and other deposits 52 79 181 277
Interest and dividends on investments:
U.S. Treasury securities 3 47 9 174
Federal Agency securities 1,842 2,142 5,630 5,314
State, County and Municipal securities 79 102 254 322
Other securities 52 39 137 105
----------- ----------- ----------- -----------
Total interest income 10,905 10,521 31,322 29,993
----------- ----------- ----------- -----------
Interest expense
Interest on savings, NOW and MMI deposits 582 457 1,702 1,220
Interest on other time deposits 4,516 4,973 13,231 13,998
Interest on federal funds purchased and other 535 384 1,379 1,164
borrowings
----------- ----------- ----------- -----------
Total interest expense 5,633 5,814 16,312 16,382
----------- ----------- ----------- -----------
Net interest income 5,272 4,707 15,010 13,611
Provision for loan losses 705 378 1,117 1,003
----------- ----------- ----------- -----------
Net interest income after loan loss provision 4,567 4,329 13,893 12,608
Noninterest income
Deposit service charge 478 375 1,280 1,056
Net gain on sale of securities 3 137 98 163
Bankcard fees 136 110 378 300
Net gain/(loss) on sale of loans 20 89 131 247
Other operating income 50 92 175 225
----------- ----------- ----------- -----------
Total noninterest income 687 803 2,062 1,991
Noninterest expense
Salaries and employee benefits 2,113 1,872 6,209 5,453
Net occupancy expense 186 193 565 540
Furniture and equipment expense 260 196 942 604
Insurance, including FDIC assessment 28 34 81 80
Printing and supplies 91 84 264 254
Bankcard processing 110 107 309 285
Net loss on disposition of asset 0 0 58 24
Merger related cost 675 0 675 0
Other operating expense 813 757 2,417 2,034
----------- ----------- ----------- -----------
Total noninterest expense 4,276 3,243 11,520 9,274
Income before income taxes 978 1,889 4,435 5,325
Income tax expense 638 597 1,755 1,730
----------- ----------- ----------- -----------
Net income 340 1,292 2,680 3,595
Other comprehensive income (loss) 312 1,760 (2,614) 1,351
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 652 $ 3,052 $ 66 $ 4,946
=========== =========== =========== ===========
Per share data
Net income, basic $ 0.08 $ 0.29 $ 0.60 $ 0.87
Net income, diluted $ 0.07 $ 0.27 $ 0.58 $ 0.83
Cash dividends $ 0.11 $ 0.08 $ 0.27 $ 0.22
Weighted average shares outstanding, basic 4,467,803 4,520,973 4,465,852 4,132,571
Weighted average shares outstanding, diluted 4,547,866 4,727,643 4,619,847 4,331,731
</TABLE>
2
<PAGE> 5
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Interest received $ 30,023 $ 27,593
Fees and commissioners 2,919 2,520
Interest paid (16,560) (15,956)
Noninterest expense paid (9,897) (8,602)
Income taxes paid (1,938) (1,646)
Proceeds from sale of mortgage loans 7,654 16,646
---------- ----------
Net cash provided by operating activities: 12,201 20,555
---------- ----------
Cash flows from investing activities:
Proceeds from sale of securities 60,402 56,815
Proceeds from call/maturity of securities 19,245 15,179
Purchase of securities (62,860) (134,504)
Capital expenditure (846) (1,125)
(Increase)/Decrease in other real estate 974 (1,498)
(Increase)/ Decrease in net loans (44,317) (47,784)
---------- ----------
Net cash used by investing activities: (27,402) (112,917)
---------- ----------
Cash flows from financing activities:
Increase/(Decrease) in DDA, Savings, NOW, MMI (422) 19,956
Increase/(Decrease) in time deposits 6,819 55,529
Increase/(Decrease) in federal funds and repurchase agreements (946) (3,085)
Increase/(Decrease) in long term debt 10,000 0
Proceeds from stock issuance 422 18,523
Repurchase of common stock (2,084) 0
Dividends paid (1,054) (932)
---------- ----------
Net cash provided by investing activities: 12,735 89,991
---------- ----------
Net Increase/(Decrease) in cash and cash equivalents (2,466) (2,371)
Cash and cash equivalents as of January 1 15,740 18,111
---------- ----------
Cash and cash equivalents as of June 30 $ 13,274 $ 15,740
========== ==========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate $ 192 $ 1,597
</TABLE>
3
<PAGE> 6
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Reconciliation of net income to net cash provided by operating activities:
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Net Income $ 2,680 $ 3,596
Adjustments to reconcile net income to cash:
Provision for loan loss 1,117 1,003
Depreciation 716 541
Accretion and amortization 366 275
(Gain)/Loss on sale of securities (98) (163)
(Gain)/Loss on sale of assets 58 24
(Gain)/Loss on sale of mortgages (131) (247)
Proceeds from mortgage loans 7,654 16,646
(Increase)/Decrease in interest receivable (311) (1,544)
(Increase)/Decrease in prepaid expense (124) (121)
(Increase)/Decrease in accrued interest (19) (11)
(Increase)/Decrease in miscellaneous assets (294) (631)
Increase/(Decrease) in taxes payable (405) 25
Increase/(Decrease) in interest payable (248) 426
Increase/(Decrease) in accrued expenses 992 210
Increase/(Decrease) in prepaid income 2 2
Increase/(Decrease) in miscellaneous liabilities 246 524
----------- -----------
Net cash provided by operating activities $ 12,201 $ 20,555
=========== ===========
</TABLE>
4
<PAGE> 7
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
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, 1999.
2. Significant Activities
On August 31, 1999 the Company completed the acquisition of Black
Diamond Savings Bank, F.S.B., ("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 1,113,997 shares. The
acquisition has been accounted for as a pooling of interests, and
accordingly, all historical financial information has been restated to
include the balances and operations of both entities.
Separate information of the pooled entities for the year ended December
31, 1998 is as follow:
FNB Black Diamond Combined
--------- ------------- ---------
Total assets $ 421,709 $ 127,003 $ 548,931
Total revenues 32,929 10,513 43,442
Net interest income 14,558 4,969 19,527
Net income 3,847 1,037 4,884
3. Comprehensive Income
The Company's other comprehensive income for the three and nine months
period ended September 30, 1999 and 1998 consists of unrealized gains
and losses on available for sale securities, net of related income
taxes.
4. Segment Information
During the year ended December 31, 1998, the Bank adopted SFAS 131,
"Disclosure about Segments of an Enterprises and Related Information."
SFAS 131 establishes standards for determining an entity's operating
segments and the type and level of financial information to be
disclosed in both annual and interim financial statements. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers.
Information related to the Company's segments is as follows:
FNB Black Diamond Combined
--------- ------------- ----------
September 30, 1999
Total assets $ 425,448 $ 134,595 $ 560,043
Total revenues 25,322 8,062 33,384
Net income 2,477 203 2,680
September 30, 1998
Total assets $ 419,565 $ 124,112 $ 543,677
Total revenues 24,250 7,734 31,984
Net income 3,245 838 3,595
5
<PAGE> 8
5. Net Income Per Share
Basic and diluted earnings per share amounts have been computed based
upon net income as presented in the accompanying income statements
divided by the weighted average number of common shares outstanding or
assumed to be outstanding as summarized below:
<TABLE>
<CAPTION>
Three Month Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted average number of shares
Used in basic EPS 4,467,803 4,520,973 4,465,852 4,132,571
Effect of dilutive stock options 80,063 206,670 153,995 199,160
---------------- --------------- --------------- ----------------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 4,547,866 4,727,643 4,619,847 4,331,731
================ =============== =============== ================
</TABLE>
6. Investment Securities
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury Securities $ 200 $ 202 $ 199 $ 207
U.S. Agency Securities 123,127 119,952 145,801 146,592
State and Municipal Obligations 7,249 7,329 6,101 6,434
Other Debt Securities 1,120 1,075 1,079 1,094
---------------- --------------- --------------- ----------------
Total Available for Sale $ 131,696 $ 128,558 $ 153,180 $ 154,327
================ =============== =============== ================
</TABLE>
7. Loans
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- --------------------
<S> <C> <C>
Loan Category
Real estate - residential $ 109,717 $ 93,386
Real estate - commercial 126,239 119,760
Real estate - construction 29,151 29,794
Commercial, financial and agricultural 59,651 52,168
Consumer - direct 34,597 32,050
Consumer - home equity 31,892 26,023
Consumer - other 9,719 9,107
--------------------- --------------------
Total Loans * $ 400,966 $ 362,288
===================== ====================
</TABLE>
* The Bank has no foreign loan activity.
6
<PAGE> 9
8. Allocation of Allowance for Loan Loss
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
---------------------------------- ----------------------------------
% 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 7% $ 4 8%
Real estate - mortgage 1,212 31% 28 33%
Commercial 1,869 42% 1,427 40%
Consumer 1,168 20% 1,066 19%
General 0 0% 25 0%
------------- ---------------- ------------- -----------------
Total balance sheet allocation 4,254 100% 2,550 100%
================ =================
Off balance sheet commitments 68 56
------------- -------------
Total allocation $ 4,322 $ 2,606
============= =============
</TABLE>
9. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
Beginning balance $ 3,453 $ 3,183
Charge-offs: 307 873
Recoveries: 59 78
------------------ ------------------
Net Charge-offs 248 795
------------------ ------------------
Allowance charged to operations 1,117 1,007
------------------ ------------------
Balance at end of period $ 4,322 $ 3,395
================== ==================
Ratio of annualized net charge-offs during the
Period to average loans outstanding
during the period 0.09 % 0.30 %
================== ==================
Ratio of allowance for loan loss to
month end loans
1.08 % 0.96 %
================== ==================
</TABLE>
7
<PAGE> 10
10. Nonperforming Assets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- ---------------------
<S> <C> <C>
Nonaccrual (1) $ 2,117 $ 1,629
Past due 90 days or more and still accruing interest 119 103
Other real estate 545 1,523
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.
8
<PAGE> 11
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-4 filed with the Securities
and Exchange Commission (File No. 333-82873).
Summary
Net income for the quarter ended September 30, 1999 of $340,000 was 73.7% less
than the $1,292,000 earned in the third quarter last year, with the decline
primarily due to merger related charges in association with the acquisition of
Black Diamond Savings Bank, FSB headquartered in Norton, Virginia. Approximately
$675,000 in after-tax merger related expenses and other charges were recorded
during the third quarter of 1999 in connection with the merger. The transaction
was accounted for under the pooling of interest method of accounting. For the
nine months to date, net income of $2,680,000 was down 25.4% over the same
period in 1998, with the decrease again attributable to merger charges. Total
assets at September 30, 1999 stood at $560.0 million, an increase of $16.4
million compared to $543.7 million one year earlier. The increase in total
assets is principally due to loan growth over the preceding twelve months. All
financial information has been restated to include results of operations of
Black Diamond Savings Bank, FSB.
Interest Income and Interest Expense
Third quarter total interest income increased 3.6% over the same quarter last
year, with a 4.2% increase in average earning assets. Average loans increased
12.6% during the quarter and income from loans was up 9.4%, as the weighted
average yield of 8.95% this quarter was down from 9.21% one year ago. Average
investment in securities in the second quarter was down 14.3% compared to the
1998 second quarter. For the full nine-month period this year, total interest
income was up 4.4%, on a 9.0% increase in average earning assets.
Total interest expense in the third quarter this year was 3.1% less than the
1998 third quarter, with average interest bearing liabilities up 4.4%. Interest
expense on certificates of deposits decreased by $457,000 and the certificate
portfolio repriced in response to the interest rates cuts in the latter portion
of 1998. Increased interest expense on savings, NOW and MMI accounts is
primarily due to interest expense on MMI accounts, as these balances have
increased substantially over the past quarters. MMI accounts typically have a
lower rate than certificates of deposit and have served to maintain deposit
customers during a period of decreasing rates on certificates.
Comparable net interest margins were as follows:
Liability Interest Rate
Time Period Asset Yield Rate Spread
- ----------- ----------- --------- ------
Third Quarter, 1999 8.18 % - 4.89 % = 3.29 %
Third Quarter, 1998 8.23 % - 5.27 % = 2.96 %
Year to Date, 1999 7.97 % - 4.85 % = 3.12 %
Year to Date, 1998 8.34 % - 5.18 % = 3.16 %
9
<PAGE> 12
Noninterest Income and Expense
Noninterest income in the third quarter this year was down 14.4%, due to
decreases on net securities gains and net gain on sale of mortgages. For the
current quarter, net securities gains were $3,000 compared to $137,000 recorded
one year earlier, a decrease of $134,000. For the current quarter, net gains on
sales of mortgages were $20,000 compared to $89,000 recorded one year earlier, a
decrease of $69,000. Increases in noninterest income also resulted from deposit
service charges and bankcard fees. Deposit service charges increased 27.2% to
$478,000 for the 1999 third quarter compared to $375,000 in the same period last
year. Bankcard fees also increased for the 1999 third quarter to $136,000, up
23.6% over the $110,000 recorded last year.
Nine months noninterest income was 3.6% higher, including 21.2% more from
deposit service charges and 26.2% more in bankcard fees. These increases were
offset by decreases in net securities gains of $66,000, and decreases of
$116,000 for the nine months in 1999 compared to 1998.
Noninterest expense was $4,276,000, or up 31.8% in the 1999 third quarter,
primarily due to $675,000 of merger related cost recognized in the period.
Excluding these one-time charges, noninterest expense would have increased 11.0%
over the $3,243,000 recorded during the third quarter of 1998. For the current
quarter, furniture and fixture expense of $260,000 increased 32.6% primarily due
to increased depreciation expense on computer networks installed during 1998.
Personnel expense of $2,113,000 was up 12.9% due to merit salary increases and
higher benefits costs. These increases were partially offset by a 3.7% decrease
in occupancy expense attributable in part to the closing of one branch during
the quarter.
Total noninterest expense for the nine months in 1999 equaled $11,520,000, up
24.2% over the $9,274,000 recorded one year earlier. The nine-month comparison
mirrored the quarter, with furniture and fixture expense of $942,000 up 56.0%,
and personnel expense of $6,209,000 up 13.9%. For 1999 year to date, losses on
disposition of assets of $58,000 is up $34,000 due to losses resulting from the
sale of other real estate in the first half of the year. Excluding the merger
related costs of $675,000, noninterest expense increased 16.9% from $9,274,000
in the same period in 1998.
The provision for loan losses was funded at a higher level due to overall loan
growth and reserves for Black Diamond Savings Bank to conform their policies
with that of the Company's subsidiary, FNB Southeast. Consolidated provision
expense for the third quarter was $705,000 compared to $378,000 in the third
quarter of 1998.
For the nine-month period ended September 30, the provision totaled $1,117,000
in 1999 compared to $1,003,000 in 1998. The allowance ratio at quarter end stood
at 1.08% for 1999, compared to 0.96% in 1998.
The Company has 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. This
had the effect of increasing the tax rate for 1999. Secondly, the effective tax
rate for 1998 was lowered because the Company had minimum state taxes due to
increased investment income as a percentage of interest income. This had the
effect of decreasing the tax rate for 1998.
Financial Condition
The Company's total assets at September 30, 1999 and 1998, were $560.0 million
and $543.7 million, respectively, and $548.9 million at December 31, 1998.
Average earning assets for the 1999 third quarter were $535.3 million, or 4.2%
higher than the $513.7 million during the same quarter last year. Loans at
September 30, 1999, totaled $401.0 million versus $355.0 million one year
earlier, an increase of 12.9%. Year to date, loans have increased 11.0% from
$361.3 million at December 31, 1998. Investment securities of $132.1 million
represent a 18.0% decrease from $161.0 million one year ago, and a 15.5%
decrease from $156.3 million at December 31, 1998.
Average interest-bearing liabilities for the third quarter were $460.9 million,
or 4.4% higher than the $441.3 million for the same quarter last year. Deposits
totaled $466.0 million at September 30, 1999, a 1.4% increase versus one year
ago, and a 1.4% increase over the $459.6 million recorded at December 31, 1998.
For the third quarter, borrowings at the Federal Home Loan Bank of Atlanta
totaled $27.5 million. The Company has access to a combined $85 million line of
credit at the Federal Home Loan Bank of Atlanta through it's subsidiaries, and
management believes this is a cost effective funding source.
10
<PAGE> 13
Shareholders' equity decreased to $50.8 million, from $53.6 million at December
31, 1998. The decrease is due to the unrealized loss on available for sale
securities and the repurchase of 119,000 shares of common stock for an
aggregate of $2.1 million in the first quarter of 1999.
Asset Quality
The allowance ratio at September 30, 1999, stood at 1.08% compared to 0.96% at
December 31, 1998 and 0.96% at September 30, 1998. For the third quarter 1999,
provisions charged against earnings totaled $705,000 compared to $378,000 in the
third quarter one year earlier. Much of the increase in the quarter is
attributable to approximately $450,000 recorded on the books of Black Diamond
Savings Bank, to conform their policies to those of FNB Southeast. Net loan
losses for the quarter totaled $94,000, or a 0.09% annualized loss ratio based
on average loans outstanding.
For the first nine months of 1999, the provision for loan losses was $1,117,000
compared to $1,007,000 for the same period one year earlier. During 1999, the
Company has experienced charge-offs of $307,000 and recoveries of $59,000 or
$248,000 in net charge-offs.
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 future economic conditions will not adversely affect borrowers and result
in increased losses.
Other real estate owned decreased to $545,000 at September 30, 1999 compared to
$1.5 million at December 31, 1998. The decline resulted from the sale of other
real estate during the year. A loss of $58,000 was recorded in conjunction with
the sale of approximately $1.2 million of such property.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The Office of the Commissioner of Banks in North Carolina and
the Federal Reserve, who are the primary regulators for FNB Southeast and the
Company, respectively, have adopted minimum capital regulations or guidelines
that categorize components and the level of risk associated with various types
of assets. Financial institutions are required to maintain a level of capital
commensurate with the risk profile assigned to its assets in accordance with the
guidelines. As shown in the table below, the Company and FNB Southeast, which is
the wholly-owned subsidiary of the Company, have capital levels exceeding the
minimum levels for "well capitalized" banks and bank holding companies as of
September 30, 1999.
<TABLE>
<CAPTION>
Regulatory Guidelines Actual
Black
Well Adequately FNB Diamond
Ratio Capitalized Capitalized Company Southeast Savings Bank
- ----- ----------- ----------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Total Capital 10.0 % 8.0 % 14.6 % 14.8 % 13.5 %
Tier 1 Capital 6.0 % 4.0 % 13.4 % 13.8 % 12.0 %
Leverage Capital 5.0 % 4.0 % 9.3 % 9.8 % 7.5 %
</TABLE>
11
<PAGE> 14
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. 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
Over the past several quarters, the Company has taken steps to become Year 2000
compliant. 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 has completed a review
of all processing systems in addition to third party software applications.
Furthermore, they have completed all phases of Year 2000 review and implemented
any renovation necessary to achieve Year 2000 readiness.
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. By the end of September 1998, the Company had completed the
awareness, assessment, and renovation phases for its core processing systems.
The Company completed the validation and implementation phase for its core
processing applications, and other mission critical applications during the
forth quarter of 1998. Also by the end of 1998, the Company had completed the
awareness, assessment and renovation phases for non-mission critical
applications. By March 31, 1999 the Company had substantially completed the
validation and implementation phases for non-mission critical applications. By
June 30, 1999 the Company had tested contingency plans developed to process
transactions in a non-computerized environment. By September 30, 1999, all
phases of the Year 2000 readiness as described above had been completed by the
Company. (See discussion of contingency plans in a following paragraph.)
The Company also uses non-computer systems, such as ATMs, security systems,
telecommunications systems and alarm systems that may contain embedded
technology. The Company completed the implementation phase for non-computer
systems during the first quarter 1999.
Cost of Year 2000 compliance is not expected to be material to the result of
operations. Year 2000 costs are budgeted at $35,000 for 1999, and at the end of
the third quarter $3,000 of Year 2000 expenses have been incurred. These costs
only reflect external costs 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 costs 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 has developed and tested
contingency plans in the event one or more systems would fail. By June 30, 1999,
the Company had tested these back-up procedures and determined these plans to be
an effective method of processing transactions in the event of a system failure.
The most
12
<PAGE> 15
reasonably likely worst case scenario is that the Company's core banking
applications fail to function properly at or near the century date change. In
this scenario, the Company would not be able to process daily transactions as
normal. A Year 2000 Contingency Planning Team developed procedures for key areas
in the event that one or more computer systems fail. These contingency plans and
procedures do not involve standard and ordinary computer processing. By
utilizing these procedures, management feels the Company would be able to
operate until the problems are resolved. However, this may result in delays of
updating records and the Company may incur additional expenses operating under
such conditions.
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.
PART 1 - ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of
spread 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 part of the Company's
overall asset/liability management process. The primary oversight of
asset/liability management rests with the Company's Asset and Liability
Committee. The committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established
policies.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1.
Legal proceedings
None.
ITEM 2.
Changes in Securities and Use of Proceeds
None.
ITEM 3.
Defaults Upon Senior Securities
Not applicable.
ITEM 4.
Submission of Matters to a Vote of Security Holders.
On August 31, 1999, at a special meeting of the Company's
shareholders, the shareholders approved the Company's issuance
of up to 1,113,397 shares of the Company's common stock to the
shareholders of Black Diamond Savings Bank, F.S.B., in
connection with the merger of Black Diamond with the Company.
The merger is described in the Joint Proxy
Statement/Prospectus mailed to Company shareholders on July
30, 1999. The shareholder votes were as follows:
FOR AGAINST ABSTAIN
- ------------------------ ------------------------- -------------------------
2,074,519 82,518 13,647
ITEM 5.
Other Information.
None.
ITEM 6.
Exhibits and Reports on Form 8-K.
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K.
On September 30, 1999, as amended on November 15, 1999, the Company
filed a Current Report on Form 8-K reporting the Company's merger with
Black Diamond Savings Bank. The financial statements filed with such
report, as amended, were as follows: historical balance sheet as of
June 30, 1999 and 1998, Statements of Income and Comprehensive Income
for the six months ended June 30, 1999 and 1998, Statements of Cash
Flows for the six months ended June 30, 1999 and 1998 and related
notes. Financial statements for FNB Financial Services Corporation
included pro forma Balance Sheet as of June 30, 1999, pro forma Income
Statement as of June 30, 1999 and 1998 and related notes.
The Statements of Financial Condition of Black Diamond as of December
31, 1998 and 1997, the Statements of Income and Comprehensive Income
for the years ended December 31, 1998 and 1997 of Black Diamond, the
Statements of Stockholders' Equity for the years ended December 31,
1998 and 1997 of Black Diamond, the Statements of Cash Flows for the
years ended December 31, 1998 and 1997 of Black Diamond, and the Notes
to Financial Statements thereto, were previously filed, within the
meaning of Rule 12b-2 promulgated under the Securities and Exchange Act
of 1934, as amended, in the Registrant's Registration Statement.
14
<PAGE> 17
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 11/12/99 /s/ Robert F. Albright
----------------------------------------------------
Robert F. Albright
(Executive Vice President & Chief Financial Officer)
15
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,274
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,558
<INVESTMENTS-CARRYING> 3,548
<INVESTMENTS-MARKET> 0
<LOANS> 400,966
<ALLOWANCE> (4,322)
<TOTAL-ASSETS> 560,043
<DEPOSITS> 465,990
<SHORT-TERM> 12,361
<LIABILITIES-OTHER> 3,550
<LONG-TERM> 2,750
0
0
<COMMON> 4,466
<OTHER-SE> 46,376
<TOTAL-LIABILITIES-AND-EQUITY> 460,043
<INTEREST-LOAN> 25,111
<INTEREST-INVEST> 6,030
<INTEREST-OTHER> 181
<INTEREST-TOTAL> 31,322
<INTEREST-DEPOSIT> 14,933
<INTEREST-EXPENSE> 16,312
<INTEREST-INCOME-NET> 15,010
<LOAN-LOSSES> 1,117
<SECURITIES-GAINS> 98
<EXPENSE-OTHER> 11,520
<INCOME-PRETAX> 4,435
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,680
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 7.97
<LOANS-NON> 2,117
<LOANS-PAST> 2,171
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,453
<CHARGE-OFFS> 307
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 4,322
<ALLOWANCE-DOMESTIC> 4,322
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
