<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 MARCH 31, 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 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
------- ------
3,336,900 common shares were outstanding as of April 30, 1999 with a par value
of $1.00 per share.
<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
INDEX
Part I FINANCIAL INFORMATION PAGE NUMBER
Item 1 Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 1999 and 1998 2
Consolidated Statements of Changes in Shareholder's Equity
March 31, 1999 and December 31, 1998 3
Consolidated Statement of Cash Flows
Three months ended March 31, 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 9-13
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 13
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
<PAGE> 3
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Unaudited; in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 10,765 $ 8,854
Securities available for sale 124,215 144,391
Other equity securities, at cost 2,234 1,335
Loans 265,120 255,827
Less: Allowance for loan losses 2,740 2,606
--------- ---------
Net Loans 262,380 253,221
Property and equipment, net 7,352 7,295
Intangible assets 557 580
Accrued income and other assets 5,817 6,033
--------- ---------
Total Assets $ 413,320 $ 421,709
========= =========
Liabilities and Shareholders Equity
Deposits
Noninterest bearing $ 38,623 $ 38,588
Savings/NOW/MMI 75,301 74,365
Other time account 224,296 232,052
--------- ---------
Total deposits 338,220 345,005
Federal funds purchased and securities
sold under repurchase agreements 10,103 13,932
Other borrowings 20,000 15,000
Accrued expense and other liabilities 2,708 3,206
--------- ---------
Total Liabilities 371,031 377,143
--------- ---------
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; 3,325,355 shares issued
in 1999; 3,429,564 shares issued in 1998 3,325 3,430
Paid in capital 19,576 21,359
Retained earnings 19,610 19,113
--------- ---------
42,511 43,902
Accumulated other comprehensive income (loss) (222) 664
--------- ---------
Total shareholders equity 42,289 44,566
--------- ---------
Total Liabilities and Shareholders equity $ 413,320 $ 421,709
========= =========
</TABLE>
See notes to consolidated financial statements.
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
March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income
Interest and fees on loans $ 5,696 $ 5,547
Interest on federal finds sold and other deposits 21 50
Interest and dividends in investments:
U.S. Treasury securities 0 45
Federal Agency securities 1,834 1,086
State, County and Municipal securities 54 75
Other securities 27 25
---------- ----------
Total Interest Income 7,632 6,828
Interest expense
Interest on savings, NOW and MMI deposits 484 287
Interest on other time deposits 2,986 2,917
Interest on federal funds purchased, borrowed funds, and
securities sold under agreement to repurchase 357 358
---------- ----------
Total Interest Expense 3,827 3,562
Net Interest Income 3,805 3,266
Provision for loan losses 228 265
---------- ----------
Net interest income after loan loss provision 3,577 3,001
Noninterest income
Deposit service charge 300 244
Bankcard fees 110 82
Net securities gains/(losses) 95 10
Net gain/(loss) on sale of mortgages 7 49
Other operating income 54 50
---------- ----------
Total noninterest income 566 435
Noninterest expense
Salaries and employee benefits 1,666 1,436
Net occupancy expense 154 144
Furniture and equipment expense 300 175
Insurance 14 13
Printing and supplies 51 62
Bankcard processing 82 74
Net loss on disposition of asset 58 0
Other operating expense 510 353
---------- ----------
Total noninterest expense 2,835 2,257
Income before income taxes 1,308 1,179
Income tax expense 448 404
---------- ----------
Net income 860 775
Other comprehensive income (loss) (886) (16)
---------- ----------
Comprehensive income $ (26) $ 759
========== ==========
Per share data
Net income, basic $ 0.25 $ 0.31
Net income, diluted $ 0.25 $ 0.29
Cash dividends $ 0.11 $ .10
Weighted average shares outstanding, basic 3,379,727 2,498,034
Weighted average shares outstanding, diluted 3,474,001 2,708,695
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited; in thousands)
<TABLE>
<CAPTION>
Three Months Year
Ended Ended
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Common Stock:
Beginning balance $ 3,430 $ 2,494
Stock issuance 0 897
Stock repurchase (119) 0
Dividend reinvestment plan 3 13
Exercise of stock options 9 19
Employee 401(k) plan 2 6
Employee stock awards 0 1
-------- --------
Ending balance 3,325 3,430
-------- --------
Paid in Capital:
Beginning balance 21,359 3,287
Stock issuance 0 17,546
Stock repurchase (1,881) 0
Dividend reinvestment 51 266
Exercise of stock options 13 52
Employee 401(k) plan 34 202
Employee stock awards 0 6
-------- --------
Ending balance 19,576 21,359
-------- --------
Retained Earnings:
Beginning balance 19,113 16,541
Net income 860 3,847
Cash dividends (363) (1,275)
-------- --------
Ending balance 19,610 19,113
-------- --------
Accumulated other comprehensive income (loss):
Beginning balance 664 196
Other comprehensive income (loss) (886) 468
-------- --------
Ending balance (222) 664
-------- --------
Total Shareholders' Equity $ 42,289 $ 44,566
======== ========
</TABLE>
3
<PAGE> 6
Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Increase/(Decrease) in Cash and Cash Equivalents:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 7,520 $ 6,871
Fees and commissions 636 565
Interest paid (4,001) (3,231)
Noninterest expense paid (2,832) (2,273)
Income taxes paid (200) 15
Proceeds from sale of mortgage loans 1,678 6,849
-------- --------
Net cash provided/(used) by operating activities: 2,801 8,796
-------- --------
Cash flow from investing activities:
Proceeds from sale/call/maturity of securities 41,414 26,266
Purchase of securities (23,719) (42,370)
Capital expenditure (262) (59)
(Increase)/Decrease in other real estate 522 (19)
(Increase)/Decrease in net loans (10,892) (25,603)
-------- --------
Net cash provided/(used) by investing activities: 7,063 (41,785)
-------- --------
Cash flows from financing activities:
Increase/(Decease) in DDA, Savings, NOW, MMI 972 8,120
Increase/(Decrease) in time deposits (7,757) 34,800
Increase/(Decrease) in federal funds and repurchase
agreements (3,830) (3,273)
Increase/(Decrease) in other borrowing 5,000 0
Proceeds from stock issuance, net of repurchase (1,975) 107
Dividends paid (363) (250)
-------- --------
Net cash provided/(used) by investing activities: 7,953 39,504
-------- --------
Net Increase/(Decrease) in cash equivalents 1,911 6,515
Cash and cash equivalents as of January 1 8,854 9,612
-------- --------
Cash and cash equivalents as of March 31 $ 10,765 $ 16,127
======== ========
Supplemental disclosures of non-cash transactions
Non-cash transfer from loans to other real estate $ 157 $ 18
</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>
Three Months Ended
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Net Income $ 860 $ 775
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss 228 265
Depreciation 205 133
Accretion and amortization 136 79
(Gain)/Loss on sales of securities (95) (10)
(Gain)/Loss on sale of assets 58 (1)
(Gain)/Loss on sale of mortgages (7) (49)
Proceeds from sale of mortgage loans 1,678 6,849
(Increase)/Decrease in interest receivable 297 (290)
(Increase)/Decrease in prepaid expense (148) (106)
(Increase)/Decrease in accrued income (22) 1
(Increase)/Decrease in miscellaneous assets (431) (234)
(Increase)/Decrease in income taxes payable 248 419
Increase/(Decrease) in interest payable (174) 332
Increase/(Decrease) in accrued expenses (135) (69)
Increase/(Decrease) in prepaid income 9 12
Increase/(Decrease) in miscellaneous liabilities 94 690
--------- ---------
Net cash provided by operating activities $ 2,801 $ 8,796
========= =========
</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 month period ending March 31, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
2. Comprehensive Income
The Company's other comprehensive income for the three months ended
March 31, 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 Months Ended
March 31, March 31,
1999 1998
--------- ----------
<S> <C> <C>
Weighted average number of shares
used in basis EPS 3,379,727 2,498,034
Effect of dilutive stock options 94,274 210,661
--------- ----------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 3,474,001 2,708,695
========= =========
</TABLE>
4. Segment Reporting
The Company has determined that it has one significant operating
segment, the providing of general commercial financial services to
customers located in Reidsville, Madison, Eden, Ruffin, Greensboro and
Wilmington, North Carolina and surrounding communities.
6
<PAGE> 9
5. Securities Available for Sale
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Agency Securities $120,746 $120,149 $139,488 $140,280
State and Municipal Obligations 3,814 4,066 3,815 4,111
-------- -------- -------- --------
Total Available for Sale $124,560 $124,215 $143,303 $144,391
======== ======== ======== ========
</TABLE>
6. Loans
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------
<S> <C> <C>
Loan category
Real estate - commercial $ 95,701 $ 83,202
Real estate - residential 50,472 50,121
Real estate - construction 21,789 24,976
Commercial, financial and agriculture 42,917 45,141
Consumer - direct 25,218 23,908
Consumer - home equity 24,586 24,122
Consumer - other 4,437 4,357
-------- --------
Total Loans $265,120 $255,827
======== ========
</TABLE>
*The Bank has no foreign loan activity.
7
<PAGE> 10
7. Allocation of Allowance for Loan Loss
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------- ----------------------------
% of Loans in % of Loans in
Each Category Each Category
Balance at end of period Allowance to Totals Loans Allowance to Total Loans
applicable to: --------- --------------- --------- --------------
<S> <C> <C> <C> <C>
Real estate - construction $ 5 8% $ 4 10%
Real estate - mortgage 24 55% 27 52%
Commercial 1,798 16% 1,427 18%
Consumer 729 21% 1,066 20%
General 134 0% 57 0%
------ ------ ------ ------
Total balance sheet for allocation 2,690 100% 2,581 100%
------ ====== ------ ======
Off balance sheet commitments 50 25
------ ------
Total allocation $2,740 $2,606
====== ======
</TABLE>
8. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
Balance at beginning of period $2,606 $2,331
Charge-offs 111 73
Recoveries 17 27
------ ------
Net charge-offs 94 46
------ ------
Allowance charged to operations 228 265
------ ------
Balance at end of period $2,740 $2,550
====== ======
Annualized net charge-offs during
the period to average loans
outstanding during the period 0.15% 0.08%
====== ======
Allowance for loan loss to
month end loans 1.03% 1.03%
====== ======
</TABLE>
9. Nonperforming Assets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ----------------
<S> <C> <C>
Nonaccrual (1) $ 727 $ 355
Past due 90 days or more and
still accruing interest 0 0
Other real estate 929 1,451
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
PART I - ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operation
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements, including the factors set forth under "Risk Factors"
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Summary
Net income for the quarter ended March 31, 1999 of $860,000 was 11.0% more than
the $775,000 earned in the first quarter last year. The Company experienced a
reduction in deposits and assets due to lower volumes of certificates of
deposits and the sale of investment securities to fund the repurchase of common
stock. Certificates of deposit declined due to the repricing in this portfolio
designed to lower the overall cost of funds to the Company. During the quarter,
securities available for sale were sold to provide cash for the repurchase of
common stock. The Company funded the repurchase of 119,000 shares of common
stock during the most recent quarter.
Interest Income and Interest Expense
Total first quarter interest income increased 11.8%, to $7,632,000 over the same
quarter last year, with a 21.4% improvement in average earning assets. Average
loans improved 8.2% during the quarter and income from loans was up 2.7%, as the
weighted average yield of 8.79% this quarter was down from 9.27% in 1988.
Average investment securities in the first quarter were up 64.1%, 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.
Total interest expense in the first quarter this year was 7.4% more than the
1998 first quarter, with average interest bearing liabilities up 16.5%.
Increases in interest expense are due to increased interest expense on money
market instruments (MMI). In the past year, the Company introduced a new MMI
product that has been well received in our markets. This product typically has a
lower rate than a certificate of deposit and has served to maintain deposit
customers.
Comparable net interest margins were as follows:
First Quarter, 1999 7.78% - 4.64% = 3.14%
First Quarter, 1998 8.57% - 4.59% = 3.98%
The Company has experienced downward pressure on net interest margins over the
past year. This is primarily due to the mix of earning assets and the growth in
relatively more expensive certificates of deposit. The earning asset mix has
been affected due to the relative increase in investment securities, compared to
growth in the loan portfolio. The investment portfolio has a lower yield than
the loan portfolio, and has had the effect of lowering the overall earning asset
yield. Due to the growth and liquidity in the investment portfolio, management
restructured the investment portfolio during the second half of 1998. This
involved the sale of U.S. Government agency securities and the purchase of
mortgage-backed securities. Also, the Company has repriced downward maturing
certificates of deposits over the last several months. As a result of actively
managing the certificate of deposit portfolio, overall certificates of deposits
at March 31, 1999 have increased less than 1.0% compared to one year earlier.
9
<PAGE> 12
Noninterest Income and Expense
Noninterest income in the first quarter this year increased 30.1%, to $566,000
compared to $435,000 in the first three months last year. The increase in 1999
is primarily attributed to increases in deposit service charges, up $56,000 or
23.0% and bankcard fees, up $28,000 or 34.1%. Gains on sale of securities
increased to $95,000 in 1999 compared to $10,000 in 1998. The increase in
securities gains was partially offset by a $42,000 decrease in gains on sale of
mortgage loans to $7,000 for the 1999 quarter.
Noninterest expense was up 25.6% in the 1999 first quarter to $2,835,000 versus
$2,257,000 for the comparable quarter last year. Personnel expense increased by
16.0% to $1,666,000 due to increases in staffing levels, merit compensation
increases and increased cost of associated benefits. Furniture and fixture
expenses increases of $125,000 to $300,000 for the quarter is primarily
attributable to higher depreciation expenses associated with a company wide
personal computer network installed in 1998. Noninterest expense also included a
$58,000 loss on the sale of other real estate owned during the quarter.
The provision for loan losses was funded at $228,000 for the first quarter of
1999, compared to $265,000 in the first quarter of 1998. The amount of provision
charged to operations in the 1999 quarter was lower than the 1998 quarter,
primarily due to lower loan growth.
Financial Condition
The Company's total assets at March 31, 1999 and 1998, were $413.3 million and
$367.8 million, respectively, and $421.7 million at December 31, 1998. Average
earning assets for the first quarter were $393.6 million, or 21.4% higher than
the $324.4 million during the same quarter last year. Loans at March 31, 1999
totaled $265.1 million versus $247.5 million one year earlier, an increase of
7.1%. Year to date, loans have increased 3.6% from $255.8 million at December
31, 1998. Investment securities of $126.4 million represent a 32.0% increase
over $95.8 million one year ago. Year to date, investments securities have
declined 13.2%, from $145.7 million at December 31, 1998. The sale of securities
generated liquidity needed to fund the run off in deposits. During the quarter,
certificate of deposits decreased approximately $7.8 million. Securities were
also sold to fund the repurchase of the Company's common stock. The Company
repurchased approximately $2.0 million worth of common stock during the quarter.
Average interest bearing liabilities for the first quarter were $330.2 million,
or 16.5% higher than the $283.4 million for the same quarter last year. Total
deposits were $338.2 million at March 31, 1999, a 7.3% increase versus one year
ago, and a 2.0% decrease from the $345.0 recorded at December 31, 1998. During
the first 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.
Total equity was $42.3 million and $23.1 million, at March 31, 1999 and 1998,
respectively. This represents a 83.1% increase over the first quarter last year.
The decrease from December 31, 1998 equals $2.3 million, or a decrease of 5.1%.
The year over year increase is primarily attributable to the stock offering
completed in the second quarter of 1998. Proceeds from the stock offering netted
the Company $18.5 million in additional capital. The decrease since year end
1998 is primarily due to the share repurchase program.
Asset Quality
The allowance ratio at March 31, 1999 stood at 1.03% compared to 1.02% at
December 31, 1998, and 1.03% at March 31, 1998. For the first three months of
1999, the provision for loan losses was $228,000 compared to $265,000 for the
same period earlier. During 1999, the Company has experienced charge-offs of
$111,000 and recoveries of $17,000, or $94,000 in net charge-offs. This equates
to an annualized
10
<PAGE> 13
net charge-off ratio of 0.15% based on average loans outstanding during the
three month period. This compares to $46,000 net charge-offs in the same period
last year.
The Company's allowance for loan loss is analyzed quarterly by management. This
analysis includes a methodology that segments the loan portfolio by selected
types and considers the current status of the portfolio, historical charge-off
experience, current levels of delinquent, impaired and non-performing loans, as
well as economic and inherent risk factors. It is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology employed and other analytical measures in comparison
to a group of peer banks. Management believes the allowance for loan losses is
sufficient to absorb known risk in the portfolio. No assurances can be given
that economic conditions will not adversely affect borrowers and result in
increased losses.
Other real estate owned stood at $929,000 at March 31, 1999 compared to $50,000
one year earlier. The balance at the end of the first quarter represents a
decrease of $522,000 from the $1,451,000 balance at December 31, 1998. The
decline from the most recent year end is attributable to the sale of property
held in this account. A loss of $58,000 was recorded as a result of selling
these pieces of property. The Company is undertaking reasonable steps to
liquidate the remaining balances in this category.
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 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 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 the Bank have capital
levels exceeding the minimum levels for "well capitalized" banks and bank
holding companies as of March 31, 1999.
<TABLE>
<CAPTION>
Regulatory Guidelines Actual
------------------------------ -----------------------------
Well Adequately
Ratio Capitalized Capitalized Company Bank
- ------------------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Total Capital 10.0% 8.0% 15.6% 15.1%
Tier 1 Capital 6.0% 4.0% 14.6% 14.2%
Leverage Capital 5.0% 4.0% 10.2% 9.8%
</TABLE>
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawal, loan funding, dividends to
shareholders, and general corporate activities create a need for liquidity for
the Company. Liquidity is derived from sources such as deposit growth,
maturity/calls/sales of investment securities, principal and interest payments
on loans, access to borrowed funds or lines of credit, and profits. The Company
believes that it has the ability to generate sufficient amounts of cash to cover
day-to-day activity and fund earning assets growth over the twelve month period
analyzed.
Year 2000
As the Year 2000 approaches, 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 is
in the process of modifying, upgrading or replacing its computer applications to
ensure Year 2000 compliance.
11
<PAGE> 14
The vendor has advised the Company that the vendor has hired the services of a
consultant to review the plan and assist such vendor in achieving Year 2000
compliance.
The Federal Financial Institutions Examination Council recognizes five phases
that banks must complete to achieve Year 2000 readiness: 1) Awareness of the
potential risks associated with Year 2000; 2) Assessment of all information and
environmental systems needing enhancements; 3) Renovation of the systems that
are not Year 2000 ready; 4) Validation of the renovated systems to assure Year
2000 readiness; and 5) Implementation of the renovated product into the ongoing
operations. 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 has substantially completed the
validation and implementation phases for non-mission critical applications.
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 first quarter no 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 is also developing
contingency plans in the event one or more systems would fail. 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 is developing 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.
Recent Events
In December 1998, the Company announced that the Board of Directors had
authorized the purchase of up to 170,000 shares of the Company's common stock
through December 31, 2001. Through the end of the first quarter 1999, the
Company had purchased a total of 119,000 shares, or 70.0% of the total shares
authorized, at an average price per share of $17.51.
In March, 1999, the wholly-owned subsidiary of the Company, First National Bank
Southeast (the "Bank") converted from a national charter to a North
Carolina-chartered bank and, at the same time, changed its name to FNB
Southeast. As a North Carolina bank and member of the Federal Reserve, the Bank
is supervised and examined by the Federal Reserve and the Commissioner and is
also subject to the supervisory authority of the Federal Deposit Insurance
Corporation.
12
<PAGE> 15
In April 1999, the Bank received regulatory approved 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 and located less than three miles from the closing branch. Customers were
notified by letter, and the Bank anticipates closing the branch in July 1999.
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
current and future period net interest income, which is the favorable
spread earned from the excess of interest income on interest-earning
assets, over interest expense on interest-bearing liabilities.
The Company considers interest rate risk to be its most significant
market risk, which could potentially have the greatest impact on
operating earnings. The Company is asset sensitive, which means that
falling interest rates could result in a reduced amount of net interest
income. The monitoring of interest rate risk is 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.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3
Defaults Upon Senior Securities.
Not applicable.
ITEM 4
Submission of Matters to a Vote of Security Holders.
None.
13
<PAGE> 16
ITEM 5
Other Information.
Not applicable.
ITEM 6
Exhibits and Reports on Form 8-K.
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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)
/s/ Robert F. Albright
Date 5/17/99 ----------------------------------------------------
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 THREE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,842
<INT-BEARING-DEPOSITS> 1,923
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 124,215
<INVESTMENTS-CARRYING> 2,234
<INVESTMENTS-MARKET> 0
<LOANS> 265,120
<ALLOWANCE> (2,740)
<TOTAL-ASSETS> 413,320
<DEPOSITS> 338,220
<SHORT-TERM> 10,103
<LIABILITIES-OTHER> 2,708
<LONG-TERM> 20,000
0
0
<COMMON> 3,325
<OTHER-SE> 38,964
<TOTAL-LIABILITIES-AND-EQUITY> 413,320
<INTEREST-LOAN> 5,696
<INTEREST-INVEST> 1,888
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 7,632
<INTEREST-DEPOSIT> 3,470
<INTEREST-EXPENSE> 3,827
<INTEREST-INCOME-NET> 3,805
<LOAN-LOSSES> (228)
<SECURITIES-GAINS> 95
<EXPENSE-OTHER> 2,835
<INCOME-PRETAX> 1,308
<INCOME-PRE-EXTRAORDINARY> 1,308
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 7.78
<LOANS-NON> 727
<LOANS-PAST> 727
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,331
<CHARGE-OFFS> (948)
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 2,606
<ALLOWANCE-DOMESTIC> 2,524
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 82
</TABLE>
