<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, 2000.
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 or organization) Identification Number)
202 South Main Street, Reidsville, NC 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 [ ]
4,485,165 common shares were outstanding as of July 31, 2000, with a par value
per share of $1.00
<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION
AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 1
Consolidated Statements of Income and
Comprehensive Income Three months and six
months ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 199 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 12
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 13
ITEM 6 Exhibits and Reports on Form 8 - K 13
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited; dollars in thousands, except par value)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,199 $ 24,391
Investment securities:
Securities available for sale 131,049 129,445
Federal Home Loan Bank and Federal Reserve Bank Stock 3,622 2,573
Loans, net allowance for credit losses of $5,218 at June 30,
2000, and $4,436 at December 31, 1999 451,626 408,821
Loans held for sale 1,045 754
Premises and equipment, net 11,301 9,807
Accrued income and other assets 11,366 12,628
-------- --------
Total Assets $631,208 $588,419
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 50,227 $ 47,915
Interest bearing 461,108 436,327
-------- --------
Total deposits 511,335 484,242
Federal funds purchased and retail repurchase agreements 11,331 15,599
Other borrowings 52,500 31,500
Accrued expenses and other liabilities 3,585 6,348
-------- --------
Total liabilities 578,751 537,689
-------- --------
Shareholders' Equity:
Preferred stock no par value; authorized 10,000,000 shares;
none issued -- --
Common stock, $1.00 par value; authorized 40,000,000 shares;
outstanding 4,485,038 at June 30, 2000
and 4,478,545 at December 31, 1999 4,485 4,479
Paid-in capital 25,724 25,653
Retained earnings 25,494 23,458
Accumulated other comprehensive income (loss) (3,246) (2,860)
-------- --------
Total shareholders' equity 52,457 50,730
-------- --------
Total Liabilities and Shareholders' Equity $631,208 $588,419
======== ========
</TABLE>
1
<PAGE> 4
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited; dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans $ 10,524 $ 8,270 $ 20,170 $ 16,235
Federal funds sold and overnight deposits 53 92 171 130
Investment securities
Taxable 1,753 1,850 3,540 3,794
Tax exempt 165 89 314 174
Other 76 52 122 84
---------- ---------- ---------- ----------
Total interest income 12,571 10,353 24,317 20,417
---------- ---------- ---------- ----------
Interest expense
Deposits 6,084 5,039 11,744 10,061
Federal funds purchased and other
borrowings 851 339 1,527 617
---------- ---------- ---------- ----------
Total interest expense 6,935 5,378 13,271 10,678
---------- ---------- ---------- ----------
Net interest income 5,636 4,975 11,046 9,739
Provision for credit losses 340 184 876 413
---------- ---------- ---------- ----------
Net interest income after provision for credit
loss 5,296 4,791 10,170 9,326
Other income
Service charges on deposit accounts 517 434 961 802
Bankcard fees 126 130 241 242
Net gain on sale of loans 37 51 52 111
Net gain on sale of credit card operations -- -- 148 --
Net gain on securities available for sale 1 5 1 95
Other income 79 41 163 125
---------- ---------- ---------- ----------
Total other income 760 661 1,566 1,375
Other expenses
Salaries and employee benefits 2,138 2,075 4,065 4,096
Occupancy expense 192 202 396 379
Furniture and equipment expense 349 329 694 682
Insurance expense, including FDIC
assessment 52 27 88 54
Printing and supply expense 62 92 144 173
Bankcard processing 75 114 173 199
Other expenses 991 865 1,760 1,661
---------- ---------- ---------- ----------
Total other expenses 3,859 3,704 7,320 7,244
Income before income taxes 2,197 1,748 4,416 3,457
Income tax expense 711 566 1,428 1,116
---------- ---------- ---------- ----------
Net income 1,486 1,182 2,988 2,341
Other comprehensive income (loss) 150 (1,982) (386) (2,868)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 1,636 $ (800) $ 2,602 $ (527)
========== ========== ========== ==========
Per share data
Net income, basic $ 0.33 $ 0.26 $ 0.67 $ 0.52
Net income, diluted $ 0.33 $ 0.26 $ 0.66 $ 0.51
Cash dividends $ 0.11 $ 0.08 $ 0.22 $ 0.16
Weighted average shares outstanding, basic 4,484,675 4,427,494 4,482,589 4,460,309
Weighted average shares outstanding, diluted 4,520,514 4,529,058 4,528,556 4,569,332
</TABLE>
2
<PAGE> 5
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 23,277 $ 19,723
Fees and commissions received 1,887 1,760
Interest paid (12,896) (10,871)
Noninterest expense paid (7,748) (6,663)
Income taxes paid (2,152) (1,397)
Proceeds from mortgage loans 1,254 5,724
-------- --------
Net cash provided by operating activities 3,622 8,276
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 4,784 55,652
Proceeds from maturities of securities available for sale 228 17,280
Purchase of securities (10,231) (57,474)
Capital expenditures (2,031) (614)
(Increase) decrease in other real estate owned 356 1,016
(Increase) decrease in loans (42,869) (34,280)
-------- --------
Net cash used in investing activities (49,763) (18,420)
-------- --------
Cash flows from financing activities:
Increase (decrease) in demand, savings and interest checking accounts (6,533) 746
Increase (decrease) in time deposits 33,625 2,464
Increase (decrease) in federal funds purchased and retail repurchase
agreements (4,268) 7,474
Increase (decrease) in other borrowings 21,000 5,000
Proceeds from issuance of common stock 76 307
Repurchase of common stock 0 (2,084)
Dividends paid (951) (707)
-------- --------
Net cash provided by financing activities 42,949 13,200
-------- --------
Net increase (decrease) in cash and cash equivalents (3,192) 3,056
Cash and cash equivalents, January 1 24,391 15,728
-------- --------
Cash and cash equivalents, June 30 $ 21,199 $ 18,784
======== ========
Supplemental disclosure of non-cash transactions:
Non-cash transfers from loans to other real estate $ 59 $ 157
======== ========
</TABLE>
3
<PAGE> 6
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Reconciliation of net income to net cash provided by operating activities:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
2000 1999
------- ------
<S> <C> <C>
Net income $ 2,988 $2,341
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 876 413
Depreciation 534 474
Accretion and amortization 213 256
(Gain) loss on sale of securities available for sale 1 (103)
(Gain) loss on sale of mortgage loans (1) (1)
Proceeds from mortgage loans 1,402 6,001
(Gain) loss on other assets 148 58
(Increase) decrease in accrued income and other assets (1,153) (802)
Increase (decrease) in accrued expenses and other liabilities (1,386) (361)
------- ------
Net cash provided by operating activities $ 3,622 $8,276
======= ======
</TABLE>
4
<PAGE> 7
FNB Financial Services Corporation and Subsidiaries
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, these statements 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 six month period ended June 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000.
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,
1999, is as follows:
FNB Southeast Black Diamond Combined
--------------- --------------- ------------
Total assets $ 445,172 $ 143,247 $ 588,419
Total income 34,477 11,033 45,510
Net interest income 16,749 3,678 20,427
Net income 3,744 504 4,248
During April of this year, FNB Southeast opened three new offices in North
Carolina. The Bank added two full-service banking offices in Greensboro,
and a Wilmington office with primary emphasis in construction and mortgage
lending.
FNB Southeast operates 13 offices in North Carolina, and Black Diamond
operates 5 offices in Virginia.
3. Comprehensive Income
The Company's other comprehensive income for the three and six month
periods ended June 30, 2000, and 1999 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 Enterprise 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 at June 30, and for the six months ended June 30, related to
the Company's segments is as follows:
FNB Southeast Black Diamond Combined
--------------- --------------- ------------
June 30, 2000
-------------
Total assets $ 485,147 $ 146,061 $ 631,208
Total income 19,956 5,928 25,884
Net income 2,401 587 2,988
June 30, 1999
-------------
Total assets 424,844 134,952 559,796
Total income 16,532 5,260 21,792
Net income 1,772 569 2,341
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of shares
used in basic EPS 4,484,675 4,427,494 4,482,589 4,460,309
Effect of dilutive stock options 35,839 101,564 45,967 109,023
-------------- --------------- -------------- -------------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 4,520,514 4,529,058 4,528,556 4,569,332
============== =============== ============== =============
</TABLE>
6. Investment Securities
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 200 $ 200 $ 200 $ 200
U.S. Agency securities 119,816 114,741 122,604 118,002
State and municipal obligations 14,609 14,648 9,989 9,959
Other debt securities 1,320 1,460 1,340 1,284
Other equity 3,622 3,622 2,573 2,573
--------------- ------------ ------------ -----------
Total investment securities $ 139,567 $ 134,671 $ 136,706 $132,018
=============== ============ ============ ===========
</TABLE>
7. Loans
June 30, 2000 December 31, 1999
------------- -----------------
Loan Category
Real estate - commercial $122,775 $115,434
Real estate - residential 140,529 130,676
Real estate - construction 48,900 34,680
Commercial, financial and agricultural 67,754 58,002
Consumer - direct 36,202 32,778
Consumer - home equity 35,924 32,836
Consumer - other 5,805 9,605
-------- --------
Total loans $457,889 $414,011
======== ========
6
<PAGE> 9
8. Allocation of Allowance for Credit Losses
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------------- ----------------------------------
% of Loans in % of Loan in
Each Category Each Category
Allowance to Total Loans Allowance to Total Loans
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance at end of period applicable to :
Real estate - construction $ 6 11% $ 50 8%
Real estate - mortgage 903 58 868 60
Commercial 2,662 15 2,087 14
Consumer 1,464 16 1,276 18
General 183 0 155 0
------ --- ------ ---
Total allocation $5,218 100% $4,436 100%
====== === ====== ===
</TABLE>
9. Analysis of Allowance for Credit Losses
Six Months Ended
June 30,
----------------------
2000 1999
------ ------
Balance, beginning of period $4,436 $3,452
Charge-offs 165 190
Recoveries 71 35
------ ------
Net Charge-offs 94 155
------ ------
Allowance charged to operations 876 413
------ ------
Balance, end of period $5,218 $3,710
====== ======
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.04% 0.09%
====== ======
Ratio of allowance for loan loss to
month end loans 1.14% 0.95%
====== ======
7
<PAGE> 10
10. Nonperforming Assets
June 30, December 31,
2000 1999
------ ------
Nonaccrual (1) $3,752 $1,195
Past due 90 days or more and still accruing interest 173 117
Other real estate 179 534
Renegotiated troubled debt -- --
(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 affect 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 Operations
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, 2000, of $1.5 million was a 25.7%
increase over the $1.2 million earned in the second quarter last year. Diluted
earnings per share for the current quarter was $0.33 per share, a 26.9% increase
from $0.26 reported one year earlier. For the six months to date, earnings of
$3.0 million were 27.7% over the same period in 1999.
Assets at June 30, 2000 reached $631.2 million, an increase of $71.4 million
compared to $560.0 million one year earlier. Assets have increased $42.8 million
since December 31, 1999. The increase in assets is due to loan growth of $65.3
million over the proceeding twelve months, with $13.3 million of this growth
occurring in the second quarter of 2000.
To support this asset growth over the past year, deposits have increased $48.5
million, and other borrowings have increased $30.0 million.
Interest Income and Interest Expense
Second quarter total interest income was $12.6 million, an increase of 21.4%
over the same quarter last year. Average earning assets for the quarter were
$593.1 million, compared to $524.7 million for the year ago period. Interest
income from loans was $10.5 million, up 27.3% from $8.3 million one year
earlier. The increase was driven by a 19.5% increase in average loans, and an
increase in the average yield to 9.29% from 8.72%. For the six months ended on
June 30, total interest income was up 19.1%, on an 11.9% increase in average
assets.
Interest income on investments totaled $1.8 million, for the current quarter,
down from $1.9 million for the year ago quarter. The change is attributable to a
decrease in average investments from $137.1 million in 1999 to $133.2 million in
2000.
Second quarter total interest expense was $6.9 million compared to $5.4 million
from last year, a 29.0% increase. Average interest bearing liabilities for the
second quarter 2000 increased 15.4% to $517.4 million. Overall cost of funds for
the second quarter was 5.36% and 4.80% for 2000 and 1999, respectively. Total
interest expense for the first six months of 2000 was $13.3 million, a 24.3%
increase over the $10.7 million expense in 1999.
Interest expense on deposits for the quarter increased 20.7% to $6.1 million as
average interest bearing deposits increased 10.3% to $455.2 million. The average
rate for the quarter on interest bearing deposits increased to 5.35% from 4.89%
one year earlier.
Interest expense on federal funds purchased and other borrowings was $851,000,
up 151.3%, from $339,000 in the second quarter of 1999. The increase is
primarily attributable to an increase in average purchased funds from $35.8
million in the 1999 second quarter compared to $62.2 million in the 2000 second
quarter.
9
<PAGE> 12
Comparable net interest margins as follows:
Liability Interest Rate
Time Period Asset Yield Rate Spread
----------- ----------- --------- -------------
Second Quarter, 2000 8.54% - 5.36% = 3.18%
Second Quarter, 1999 7.93% - 4.80% = 3.13%
Year to Date, 2000 8.40% - 5.24% = 3.16%
Year to Date, 1999 7.87% - 4.80% = 3.07%
Noninterest Income and Expense
Noninterest income in the second quarter this year increased 15.0% to $760,000.
For the current quarter, net securities gains were $1,000 compared to $5,000
recorded one year earlier. For the current quarter, net gains on sales of
mortgages were $37,000 compared to $51,000 recorded one year earlier, a decrease
of $14,000. Increases in noninterest income primarily resulted from deposit
service charges. Deposit service charges increased 19.0% to 517,000 for the 2000
second quarter compared to $434,000 in the same period last year. Bankcard fees
decreased slightly for the 2000 second quarter to $126,000 from $130,000
recorded last year. The credit card and merchant discount operations were sold
during the first quarter 2000. Total noninterest for the first six months was
$1.6 million, a 13.9% increase over 1999. Deposit service charges of $961,000
for the six months were 19.7% higher this year than the $802,000 recorded last
year.
Noninterest expense for the second quarter of 2000 was $3.9 million, a 4.2%
increase from the second quarter of 1999. The increase is due to a $63,000, or
3.0%, increase in salaries and modest increases in other expense categories.
Bankcard processing expense was $75,000 and $114,000 for the 2000 second quarter
and 1999 second quarter, respectively. These expenses have decreased since the
Company's credit card operations were sold during the first quarter 2000. This
year's six-month noninterest expenses of $7.3 million were 1.1% higher than that
same time period last year.
The provision for loan losses was funded at a higher level due to overall loan
growth. Consolidated provision expense for the second quarter was $340,000
compared to $184,000 in the second quarter of 1999. The allowance ratio at
quarter end stood at 1.14% for 2000, compared to 0.95% in 1999. For the 2000 six
months, the provision totaled $876,000, compared to $413,000 for the same period
in 1999.
The effective income tax rate of 32.3% for the six months of 2000 did not change
from the same period of 1999.
Financial Condition
The Company's total assets at June 30, 2000 and 1999, were $631.2 million and
$559.8 million, respectively. The $71.4 million increase represents a 12.8%
increase over one year earlier. Since December 31, 1999, assets have increased
$42.8 million. Average earning assets for the current quarter were $593.1
million, or 13.0% higher than the $524.7 million average in the same quarter
last year.
Loans at June 30, 2000, totaled $457.9 million compared to $391.6 million one
year earlier, an increase of 16.9%. Loans have increased 10.6% from $414.0
million at December 31, 1999. Average loans for the quarter were $453.0 million,
or 19.5% higher than one year ago.
Investment securities of $134.7 million at June 30, 2000, were slightly lower
than the $135.3 million one year earlier. Average investment securities were
$133.2 million and $137.1 million for the 2000 and 1999 second quarter,
respectively.
10
<PAGE> 13
Deposits totaled $511.3 million at June 30, 2000, an 10.5% increase versus one
year ago, and a 5.6% increase over the $484.2 million recorded at December 31,
1999. At June 30, 2000, noninterest bearing deposits were $50.2 million, or 9.8%
of total deposits. The new FNB Southeast branches in Greensboro and Burgaw,
North Carolina, have contributed $15.6 million to the company's deposit growth
during the first six months of 2000.
At the end of the current quarter, borrowings at the Federal Home Loan Bank of
Atlanta totaled $52.5 million. The Company has access to approximately $88.5
million line of credit at the Federal Home Loan Bank of Atlanta through its
subsidiaries. In recent years, the Company has increasingly utilized these
borrowings to supplement deposit growth in order to fund loan growth.
Shareholders' equity increased to $52.5 million at quarter end, compared to
$50.7 million at the previous year-end.
Asset Quality
The allowance ratio at June 30, 2000, stood at 1.14% compared to 1.07% at
December 31, 1999, and 0.95% at June 30, 1999. For the second quarter 2000,
provision charges against earnings totaled $340,000 compared to $184,000 in the
second quarter one year earlier. Net loan losses for the quarter totaled
$54,000, or a 0.05% annualized loss ratio based on average loans outstanding.
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 other 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 $179,000 at June 30, 2000, compared to
$534,000 at December 31, 1999. 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 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,
the Office of Thrift Supervision and the Federal Reserve, which are the primary
regulatory agencies for FNB Southeast, Black Diamond 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 their assets in accordance with
the guidelines. As shown in the table below, the Company and its wholly-owned
subsidiaries, have capital levels exceeding the minimum levels for "well
capitalized" banks and bank holding companies as of June 30, 2000.
<TABLE>
<CAPTION>
Regulatory Guidelines Actual
----------------------------------- -------------------------------------------------
Well Adequately FNB Black Diamond
Ratio Capitalized Capitalized Company Southeast
--------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Total Capital 10.0% 8.0% 13.5% 13.6% 12.1%
Tier 1 Capital 6.0 4.0 12.3 12.5 10.6
Leverage Capital 5.0 4.0 8.9 9.2 6.7
</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,
maturities/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.
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 I - 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.
12
<PAGE> 15
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 May 18, 2000, 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 I Directors, each to serve a
three-year term until the Annual Meeting of Shareholders in 2003.
To elect one nominee to serve as Class II Director, to serve a one-year
term until the Annual Meeting of Shareholders in 2001.
To elect one nominee to serve as Class III Director, to serve a
two-year term until the Annual Meeting of Shareholders in 2002.
Directors elected were Ernest J. Sewell, Charles A. Britt, Barry Z.
Dodson, Don M. Green, and Gary G. Blosser.
Votes for each nominee were as follows:
CLASS NOMINEE FOR WITHHELD
----- ------- --------- --------
I Ernest J. Sewell 3,317,786 30,519
I Charles A. Britt 3,317,786 30,519
I Barry Z. Dodson 3,317,786 30,519
II Don M. Green 3,313,649 34,656
III Gary G. Blosser 3,312,964 35,341
The following directors continue in office after the meeting: Willard
B. Apple, Jr., O. Eddie Green, Clifton G. Payne, Joseph H. Kinnarney,
Elton H. Trent, Jr., and Kenan C. Wright.
Proposal Two
To ratify the selection by the Board of Directors of
PricewaterhouseCoopers, LLP as the Company's independent auditors for
the 2000 fiscal year.
FOR - 3,320,643
AGAINST - 1,200
ABSTAIN - 26,462
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
None.
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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 August 11, 2000 /s/ Michael W. Shelton
--------------------------------------------
Michael W. Shelton
(Vice President and Chief Financial Officer)
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