<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, 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
--- ---
3,345,527 common shares were outstanding as of July 31, 1999, with a par value
per share of $1.00.
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FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1 Financial Statements
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income
Three months and six months ended June 30, 1999 and 1998 2
Consolidated Statements of Changes in Shareholders Equity
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 4 - 5
Notes to Consolidated Financial Statements 6 - 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 13
Item 2 Changes in Securities and Use of Proceeds 13
Item 3 Defaults Upon Senior Securities 13
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 Subsidiary
Consolidated Balance Sheets
(Unaudited; in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 10,789 $ 8,854
Securities available for sale 123,288 144,391
Other equity securities, at cost 2,234 1,335
Loans 278,082 255,827
Less: Allowance for loan losses (2,882) (2,606)
--------- ---------
Net Loans 275,200 253,221
Property and equipment, net 7,438 7,295
Intangible assets 534 580
Accrued income and other assets 5,361 6,033
--------- ---------
Total Assets $ 424,844 $ 421,709
========= =========
Liabilities and Shareholders Equity
Deposits
Noninterest bearing $ 37,886 $ 38,588
Savings/NOW/MMI 75,803 74,365
Other time accounts 227,378 232,052
--------- ---------
Total Deposits 341,067 345,005
Federal funds purchased and retail
repurchase agreements 21,406 13,932
Other borrowings 20,000 15,000
Accrued expenses and other liabilities 1,234 3,206
--------- ---------
Total Liabilities 383,707 377,143
--------- ---------
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; 3,343,929 shares
issued in 1999; 3,429,564 shares
issued in 1998 3,344 3,430
Paid in capital 19,668 21,359
Retained earnings 20,178 19,113
--------- ---------
43,190 43,902
Accumulated other comprehensive income (loss) (2,053) 664
--------- ---------
Total shareholders' equity 41,137 44,566
--------- ---------
Total Liabilities and Shareholders' Equity $ 424,844 $ 421,709
========= =========
</TABLE>
1
<PAGE> 4
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 5,936 $ 5,979 $ 11,632 $ 11,526
Interest on federal funds sold and other deposits 28 45 48 96
Interest and dividends on investments:
U.S. Treasury securities 0 45 0 90
Federal Agency securities 1,749 1,691 3,583 2,777
State, County and Municipal securities 53 74 107 149
Other securities 38 20 66 44
----------- ----------- ----------- -----------
Total interest income 7,804 7,854 15,436 14,682
----------- ----------- ----------- -----------
Interest expense
Interest on savings, NOW and MMI deposits 490 319 973 606
Interest on other time deposits 2,932 3,329 5,918 6,246
Interest on federal funds purchased and other
borrowings 426 422 784 780
----------- ----------- ----------- -----------
Total interest expense 3,848 4,070 7,675 7,632
----------- ----------- ----------- -----------
Net interest income 3,956 3,784 7,761 7,050
Provision for loan losses 180 315 408 580
----------- ----------- ----------- -----------
Net interest income after loan loss provision 3,776 3,469 7,353 6,470
Noninterest income
Deposit service charge 355 273 656 517
Net gain on sale of securities 8 8 103 18
Bankcard fees 121 107 230 190
Net gain/(loss) on sale of loans (6) 11 1 61
Other operating income 53 49 107 97
----------- ----------- ----------- -----------
Total noninterest income 531 448 1,097 883
Noninterest expense
Salaries and employee benefits 1,699 1,449 3,365 2,885
Net occupancy expense 178 157 332 301
Furniture and equipment expense 274 184 574 359
Insurance, including FDIC assessment 17 15 30 29
Printing and supplies 61 49 112 110
Bankcard processing 114 103 197 177
Net loss on disposition of asset 0 24 58 24
Other operating expense 593 485 1,103 838
----------- ----------- ----------- -----------
Total noninterest expense 2,936 2,466 5,771 4,723
Income before income taxes 1,371 1,451 2,679 2,630
Income tax expense 459 498 907 902
----------- ----------- ----------- -----------
Net income 912 953 1,772 1,728
Other comprehensive income (loss) (1,830) (28) (2,717) (44)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (918) $ 925 $ (945) $ 1,684
=========== =========== =========== ===========
Per share data
Net income, basic $ 0.28 $ 0.30 $ 0.53 $ 0.61
Net income, diluted $ 0.27 $ 0.28 $ 0.52 $ 0.57
Cash dividends $ 0.11 $ 0.10 $ 0.22 $ 0.20
Weighted average shares outstanding, basic 3,314,097 3,191,194 3,358,378 2,844,189
Weighted average shares outstanding, diluted 3,393,452 3,396,048 3,438,367 3,051,947
</TABLE>
2
<PAGE> 5
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited; in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Common stock:
Beginning balance, January 1 $ 3,430 $ 2,494
Stock issuance 0 897
Stock repurchase (119) 0
Dividend reinvestment plan 10 13
Exercise of stock options 18 19
Employee stock awards 0 1
Employee 401(k) plan 5 6
-------- --------
Ending balance, June 30 3,344 3,430
-------- --------
Paid in capital:
Beginning balance, January 1 21,359 3,287
Stock issuance 0 17,546
Stock repurchase (1,965) 0
Dividend reinvestment plan 117 266
Exercise of stock options 79 52
Employee stock awards 0 6
Employee 401(k) plan 78 202
-------- --------
Ending balance, June 30 19,668 21,359
-------- --------
Retained earnings:
Beginning balance, January 1 19,113 16,541
Net income for years 1,772 3,847
Cash dividends (707) (1,275)
-------- --------
Ending balance, June 30 20,178 19,113
-------- --------
Accumulated other comprehensive income (loss)
Beginning balance, January 1 664 196
Other comprehensive income (loss) (2,717) 468
-------- --------
Ending balance, June 30 (2,053) 664
-------- --------
Total Shareholders' Equity $ 41,137 $ 44,566
======== ========
</TABLE>
3
<PAGE> 6
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Interest received $ 14,882 $ 12,924
Fees and commissioners 1,461 1,202
Interest paid (7,868) (7,335)
Noninterest expense paid (5,190) (4,396)
Income taxes paid (1,180) (968)
Proceeds from sale of mortgage loans 5,044 12,836
-------- --------
Net cash provided by operating activities: 7,149 14,263
-------- --------
Cash flows from investing activities:
Proceeds from sale of securities 55,652 28,832
Proceeds from call/maturity of securities 14,067 9,520
Purchase of securities (54,374) (92,685)
Capital expenditure (549) (733)
(Increase)/Decrease in other real estate 1,113 (1,369)
(Increase)/Decrease in net loans (27,175) (37,019)
-------- --------
Net cash used by investing activities: (11,266) (93,454)
-------- --------
Cash flows from financing activities:
Increase/(Decrease) in DDA, Savings, NOW, MMI 737 8,054
Increase/(Decrease) in time deposits (4,675) 48,921
Increase/(Decrease) in federal funds and repurchase agreements 7,474 (1,297)
Increase/(Decrease) in long term debt 5,000 5,000
Proceeds from stock issuance 307 19,033
Repurchase of common stock (2,084) 0
Dividends paid (707) (590)
-------- --------
Net cash provided by investing activities: 6,052 79,121
-------- --------
Net Increase/(Decrease) in cash and cash equivalents 1,935 (70)
Cash and cash equivalents as of January 1 8,854 9,612
-------- --------
Cash and cash equivalents as of June 30 $ 10,789 $ 9,542
======== ========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate $ 157 $ 1,467
</TABLE>
4
<PAGE> 7
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Reconciliation of net income to net
cash provided by operating activities:
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Net Income $ 1,772 $ 1,728
Adjustments to reconcile net income to cash:
Provision for loan loss 408 580
Depreciation 406 265
Accretion and amortization 248 167
(Gain)/Loss on sale of securities (103) (18)
(Gain)/Loss on sale of assets 58 24
(Gain)/Loss on sale of mortgages (1) (61)
Proceeds from mortgage loans 5,044 12,836
(Increase)/Decrease in interest receivable 8 (879)
(Increase)/Decrease in prepaid expense (134) (61)
(Increase)/Decrease in accrued interest (42) 4
(Increase)/Decrease in miscellaneous assets (274) (391)
Increase/(Decrease) in taxes payable (268) (66)
Increase/(Decrease) in interest payable (193) 297
Increase/(Decrease) in accrued expenses 205 47
Increase/(Decrease) in prepaid income 5 8
Increase/(Decrease) in miscellaneous liabilities 10 (217)
-------- --------
Net cash provided by operating activities $ 7,149 $ 14,263
======== ========
</TABLE>
5
<PAGE> 8
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 six month periods are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
2. Comprehensive Income
The Company's other comprehensive income for the three and six months
period ended June 30, 1999 and 1998 consists of unrealized gains and
losses on available for sale securities.
3. 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 Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted average number of shares
Used in basic EPS 3,314,097 3,191,194 3,358,378 2,844,189
Effect of dilutive stock options 79,355 204,854 79,989 207,758
---------------- --------------- --------------- ----------------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 3,393,452 3,396,048 3,438,367 3,051,947
================ =============== =============== ================
</TABLE>
4. Investment Securities
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Agency Securities $ 122,899 $ 119,390 $ 139,488 $ 140,280
State and Municipal Obligations 3,754 3,898 3,815 4,111
---------------- --------------- --------------- ----------------
Total Available for Sale $ 126,653 $ 123,288 $ 143,303 $ 144,391
================ =============== =============== ================
</TABLE>
6
<PAGE> 9
5. Loans
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Loan Category
Real estate - residential $ 47,583 $ 50,121
Real estate - commercial 101,627 83,202
Real estate - construction 20,653 24,976
Commercial, financial and agricultural 42,363 45,141
Consumer - direct 33,675 23,908
Consumer - home equity 27,239 24,122
Consumer - other 4,942 4,357
-------- --------
Total Loans * $278,082 $255,827
======== ========
</TABLE>
* The Bank has no foreign loan activity.
6. Allocation of Allowance for Loan Loss
<TABLE>
<CAPTION>
June 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 10%
Real estate - mortgage 25 17% 27 18%
Commercial 1,891 52% 1,427 52%
Consumer 858 24% 1,066 20%
General 40 0% 57 0%
---------------------------------- ----------------------------------
Total balance sheet allocation 2,819 100% 2,581 100%
================= =================
Off balance sheet commitments 63 25
------------- -------------
Total allocation $ 2,882 $ 2,606
============= =============
</TABLE>
7
<PAGE> 10
7. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
------ ------
<S> <C> <C>
Beginning balance $2,606 $2,331
Charge-offs: 162 188
Recoveries: 30 41
------ ------
Net Charge-offs 132 147
------ ------
Allowance charged to operations 408 580
------ ------
Balance at end of period $2,882 $2,764
====== ======
Ratio of annualized net charge-offs during the
Period to average loans outstanding
during the period 0.10% 0.16%
====== ======
Ratio of allowance for loan loss to
month end loans 1.04% 1.10%
====== ======
</TABLE>
8. Nonperforming Assets
June 30, December 31,
1999 1998
-------- ------------
Nonaccrual (1) $ 793 $ 355
Past due 90 days or more and still accruing interest 0 0
Other real estate 338 1,451
Renegotiated trouble debt $ 0 $ 0
(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 June 30, 1999 of $912,000 was 4.3% less than
the $953,000 earned in the second quarter last year, with the decline primarily
due to higher noninterest expense for the quarter. For the six months to date,
earnings of $1,772,000 were up 2.5% over the same period in 1998, with the
increase primarily due to increase in noninterest income for the six-month
period. Total assets at June 30, 1999 stood at $424.8 million, an increase of
$18.8 million compared to $406.0 million one year earlier. The increase in total
assets is due to loan growth over the preceding twelve months.
Interest Income and Interest Expense
Total second quarter interest income decreased 0.6% over the same quarter last
year, with a 5.7% improvement in average earning assets. Average loans increased
6.6% during the quarter and income from loans was down 0.7%, as the weighted
average yield of 8.90% this quarter was down from 9.55% one year ago. Average
investment in securities in the second quarter was up 4.8% compared to the 1998
second quarter. For the full six-month period this year, total interest income
was up 5.1%, on a 12.9% increase in average earning assets.
Total interest expense in the second quarter this year was 5.5% less than the
1998 second quarter, with average interest bearing liabilities up 4.4%. Interest
expense on certificates of deposits decreased by $397,000 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
- ----------- ----------- ---- ------
Second Quarter, 1999 7.90 % - 4.64 % = 3.26 %
Second Quarter, 1998 8.44 % - 4.63 % = 3.81 %
Year to Date, 1999 7.84 % - 4.64 % = 3.20 %
Year to Date, 1998 8.50 % - 4.61 % = 3.89 %
Noninterest Income and Expense
Noninterest income in the second quarter this year was up 18.4%, which included
gains of 30.3% in deposit service charges and 12.5% increase in bankcard fees
from the Company's credit card operation. Six months noninterest income was
24.2% higher, including 26.9% more from deposit service charges and 21.5% more
9
<PAGE> 12
in bankcard fees. Net securities gains increased by $85,000, but were largely
offset by a decline of $60,000 in gains on the sale of mortgage loans.
Noninterest expense was up 19.0% in the 1999 second quarter, primarily because
of increased personnel expense associated with increased staffing levels
necessary to manage to Company's growth. Personnel expense increased 17.3%,
occupancy increased 13.6%, and furniture and fixture expense increased 48.7%.
The six-month comparison mirrored the quarter, with personnel expense 16.7%
higher, occupancy up 10.9% and furniture and fixture up 59.8%. Furniture and
fixture expense was up sharply at June 30, 1999 primarily due to higher
depreciation expense on the Company's computer network installed in 1998.
The provision for loan losses was funded at a lower level due to more moderate
loan growth in 1999 compared to 1998. The provision was $180,000 for the second
quarter 1999, compared to $315,000 in 1998. For the 1999 six months, the
provision totaled $408,000, compared to $580,000 in the 1998 six-month period.
Financial Condition
The Company's total assets at June 30, 1999 and 1998, were $424.8 million and
$406.0 million, respectively, and $421.7 million at December 31, 1998. Average
earning assets for the second quarter were $396.3 million, or 5.7% higher than
the $374.8 million during the same quarter last year. Loans at June 30, 1999,
totaled $278.1 million versus $251.7 million one year earlier, an increase of
10.5%. Year to date, loans have increased 8.7% from $255.8 million at December
31, 1998. Investment securities of $125.5 million represent a 6.3% decrease from
$134.0 million one year ago, and a 13.9% decrease from $145.7 million at
December 31, 1998.
Average interest bearing liabilities for the second quarter were $332.0 million,
or 4.4% higher than the $318.1 million for the same quarter last year. Deposits
totaled $341.1 million at June 30, 1999, a 3.6% increase versus one year ago,
and a 1.1% decrease over the $345.0 million recorded at December 31, 1998. The
Bank experienced a decrease in deposits for the first half of the year when
maturing certificates of deposit were repriced downward in response to a sharp
decline in interest rates in the latter portion of 1998. For the second quarter,
borrowings at the Federal Home Loan Bank of Atlanta remained at $20.0 million.
The Company has a $40.0 million line of credit at the Federal Home Loan Bank of
Atlanta, and management believes this is a cost effective funding source.
Shareholders' equity decreased to $41.1 million, from $44.6 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 in the first
quarter of 1999.
Asset Quality
The allowance ratio at June 30, 1999, stood at 1.04% compared to 1.03% at
December 31, 1998 and 1.10% at June 30, 1998. The decrease in the allowance
ratio from 1.10% one-year earlier is attributable to net charge-offs of $577,000
in the third quarter of 1998. For the first six months of 1999, the provision
for loan losses was $408,000 compared to $580,000 for the same period earlier.
The decreased level of provision is attributable to more moderate growth in the
loan portfolio in 1999. During 1999, the Company has experienced charge-offs of
$162,000 and recoveries of $30,000, or $132,000 in net charge-offs. This
compares favorably to the same period last year when net charge-offs were
$147,000.
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. 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.
10
<PAGE> 13
Other real estate owned decreased to $338,000 at June 30, 1999 compared to $1.4
million at December 31, 1998. The decline resulted from the sale of other real
estate during the first six months. 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
June 30, 1999.
Regulatory Guidelines Actual
---------------------------- -------------------------
Well Adequately FNB
Ratio Capitalized Capitalized Company Southeast
- ----- ----------- ----------- ------- ---------
Total Capital 10.0 % 8.0 % 15.2 % 14.7 %
Tier 1 Capital 6.0 % 4.0 % 14.2 % 13.7 %
Leverage Capital 5.0 % 4.0 % 10.3 % 9.9 %
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
As the Year 2000 approaches, the Company has taken, and continues to take, 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. (See discussion of contingency
plans in a following paragraph.)
11
<PAGE> 14
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 second quarter $1,000 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. During the second
quarter, the Company 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 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.
Recent Events
On May 28, 1999 The Company announced the signing of a definitive merger
agreement with Black Diamond Savings Bank, F.S.B., a savings bank headquartered
in Norton, Virginia. Black Diamond is a federally chartered savings bank
operating a main office and three branch offices. Black Diamond has total assets
of approximately $131 million at March 31, 1999.
Under terms of the agreement, the Company will acquire Black Diamond by
exchanging 1.3333 shares of the Company's stock for each share of Black Diamond
stock, or a total of 1,113,397 shares of FNB stock. The transaction is valued at
approximately $17.9 million.
On July 14, 1999, the Company filed a registration statement with the SEC in
connection with the Black Diamond transaction and mailed to its shareholders on
July 30, 1999 a joint proxy statement-prospectus seeking shareholder approval of
the shares to be issued at a special meeting of shareholders scheduled for
August 31, 1999.
In April 1999, the Bank received regulatory approval from the Commissioner and
the Federal Reserve to close a branch located in Eden, North Carolina. The Bank
will continue to serve these customers through two other branches in the same
city located less than three miles from the closing branch. The branch was
closed on July 30, 1999.
12
<PAGE> 15
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.
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.
13
<PAGE> 16
ITEM 4.
Submission of Matters to a Vote of Security Holders.
On April 13, 1999, 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 III
Directors, each to serve a three-year term until the
Annual Meeting of Shareholders in 2002.
Directors elected were Joseph H. Kinnarney, Elton H.
Trent, Jr., and Kenan C. Wright. Votes for each
nominee were as follows:
NOMINEE FOR WITHHELD
------------------- --------- --------
Joseph H. Kinnarney 2,532,898 69,598
Elton H. Trent, Jr. 2,523,881 78,615
Kenan C. Wright 2,534,443 68,053
The following directors continue in office after the
meeting: Ernest J. Sewell, Charles A. Britt, Barry Z.
Dodson, Willard B. Apple, Jr., O. Eddie Green and
Clifton G. Payne.
Proposal Two
To ratify the selection by the Board of Directors of
PricewaterhouseCoopers LLP as the Company's
independent auditors for the 1999 fiscal year.
For - 2,594,190
Against - 3,309
Abstain - 4,997
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.
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 8/12/99 /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 SIX MONTHS
ENDED JUNE 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,688
<INT-BEARING-DEPOSITS> 1,101
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,288
<INVESTMENTS-CARRYING> 2,234
<INVESTMENTS-MARKET> 0
<LOANS> 276,082
<ALLOWANCE> (2,882)
<TOTAL-ASSETS> 424,844
<DEPOSITS> 341,067
<SHORT-TERM> 21,406
<LIABILITIES-OTHER> 1,234
<LONG-TERM> 20,000
0
0
<COMMON> 3,344
<OTHER-SE> 37,793
<TOTAL-LIABILITIES-AND-EQUITY> 424,844
<INTEREST-LOAN> 11,632
<INTEREST-INVEST> 1,888
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 3,756
<INTEREST-DEPOSIT> 6,891
<INTEREST-EXPENSE> 7,675
<INTEREST-INCOME-NET> 7,761
<LOAN-LOSSES> (408)
<SECURITIES-GAINS> 103
<EXPENSE-OTHER> 5,771
<INCOME-PRETAX> 2,679
<INCOME-PRE-EXTRAORDINARY> 2,679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,172
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 7.90
<LOANS-NON> 793
<LOANS-PAST> 561
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 2,606
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</TABLE>
