<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2000.
Commission File Number: 0-13086
FNB FINANCIAL SERVICES CORPORATION
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(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
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(Address of principal executive offices)
(Zip Code)
336-342-3346
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(Registrant's telephone number, including area code)
Not Applicable
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(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 [ ]
4,485,278 common shares were outstanding as of November 2, 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
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Income and Comprehensive Income
Three months and nine months ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 3 - 4
Notes to Consolidated Financial Statements 5 - 9
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 14
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 15
ITEM 2 Changes in Securities and Use of Proceeds 15
ITEM 3 Defaults Upon Senior Securities 15
ITEM 4 Submission of Matters to a Vote of Security Holders 15
ITEM 5 Other Information 15
ITEM 6 Exhibits and Reports on Form 8 - K 15
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except par value)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
Unaudited Audited
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,305 $ 24,391
Investment securities:
Securities available for sale 134,346 129,457
Federal Home Loan Bank and Federal Reserve Bank Stock 3,610 2,561
Loans, net allowance for credit losses of $5,270 at September
30, 2000, and $4,436 at December 31, 1999 476,257 409,575
Premises and equipment, net 12,047 9,807
Accrued income and other assets 12,207 12,628
-------- --------
Total Assets $665,772 $588,419
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 51,732 $ 47,915
Interest bearing 501,961 436,327
-------- --------
Total deposits 553,693 484,242
Federal funds purchased and retail repurchase agreements 10,339 15,599
Other borrowings 42,500 31,500
Accrued expenses and other liabilities 4,530 6,348
-------- --------
Total liabilities 611,062 537,689
-------- --------
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 4,485,278 at September 30, 2000
and 4,478,545 at December 31, 1999 4,485 4,479
Paid-in capital 25,725 25,653
Retained earnings 26,424 23,458
Accumulated other comprehensive income (loss) (1,924) (2,860)
-------- --------
Total shareholders' equity 54,710 50,730
-------- --------
Total Liabilities and Shareholders' Equity $665,772 $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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans $ 11,317 $ 8,877 $ 31,487 $ 25,111
Federal funds sold and overnight deposits 179 52 350 181
Investment securities
Taxable 1,767 1,845 5,307 5,639
Tax exempt 200 79 514 254
Other 57 52 179 137
---------- ---------- ---------- ----------
Total interest income 13,520 10,905 37,837 31,322
---------- ---------- ---------- ----------
Interest expense
Deposits 6,935 5,098 18,679 14,933
Federal funds purchased and other
borrowings 897 535 2,424 1,379
---------- ---------- ---------- ----------
Total interest expense 7,832 5,633 21,103 16,312
---------- ---------- ---------- ----------
Net interest income 5,688 5,272 16,734 15,010
Provision for credit losses 370 705 1,246 1,117
---------- ---------- ---------- ----------
Net interest income after provision for credit
loss 5,318 4,567 15,488 13,893
Other income
Service charges on deposit accounts 606 478 1,566 1,280
Net gain on sale of loans 19 20 71 131
Net gain on sale of credit card operations -- -- 148 --
Net gain on securities available for sale 62 3 62 98
Other income 45 186 451 553
---------- ---------- ---------- ----------
Total other income 732 687 2,298 2,062
Other expenses
Salaries and employee benefits 2,198 2,113 6,263 6,209
Occupancy expense 234 186 630 565
Furniture and equipment expense 372 260 1,066 942
Insurance expense, including FDIC
assessment 75 28 163 81
Printing and supply expense 69 91 212 264
Merger related cost -- 675 -- 675
Other expenses 824 923 2,758 2,784
---------- ---------- ---------- ----------
Total other expenses 3,772 4,276 11,092 11,520
Income before income taxes 2,278 978 6,694 4,435
Income tax expense 794 638 2,222 1,755
---------- ---------- ---------- ----------
Net income 1,484 340 4,472 2,680
Other comprehensive income (loss) 1,322 312 936 (2,614)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 2,806 $ 652 $ 5,408 $ 66
========== ========== ========== ==========
Per share data
Net income, basic $ 0.33 $ 0.08 $ 1.00 $ 0.60
Net income, diluted $ 0.33 $ 0.07 $ 0.99 $ 0.58
Cash dividends $ 0.11 $ 0.11 $ 0.33 $ 0.27
Weighted average shares outstanding, basic 4,485,209 4,467,803 4,483,468 4,465,852
Weighted average shares outstanding, diluted 4,528,485 4,547,866 4,525,720 4,619,847
</TABLE>
2
<PAGE> 5
FNB Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 36,893 $ 30,023
Fees and commissions received 2,812 2,919
Interest paid (20,182) (16,560)
Noninterest expense paid (11,132) (9,897)
Income taxes paid (3,049) (1,938)
Proceeds from mortgage loans 1,849 7,654
-------- --------
Net cash provided by operating activities 7,191 12,201
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 5,179 60,402
Proceeds from maturities of securities available for sale 488 19,245
Purchase of securities (12,404) (62,860)
Capital expenditures (3,082) (846)
(Increase) decrease in other real estate owned 304 974
(Increase) decrease in loans (68,525) (44,305)
-------- --------
Net cash used in investing activities (78,040) (27,390)
-------- --------
Cash flows from financing activities:
Increase (decrease) in demand, savings and interest checking accounts (5,165) (422)
Increase (decrease) in time deposits 74,616 6,819
Increase (decrease) in federal funds purchased and retail repurchase
agreements (5,260) (946)
Increase (decrease) in other borrowings 11,000 10,000
Proceeds from issuance of common stock 77 422
Repurchase of common stock -- (2,084)
Dividends paid (1,505) (1,054)
-------- --------
Net cash provided by financing activities 73,763 12,735
-------- --------
Net increase (decrease) in cash and cash equivalents 2,914 (2,454)
Cash and cash equivalents, January 1 24,391 15,728
-------- --------
Cash and cash equivalents, September 30 $ 27,305 $ 13,274
======== ========
Supplemental disclosure of non-cash transactions:
Non-cash transfers from loans to other real estate $ 202 $ 192
======== ========
</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>
Nine Months Ended
September 30,
-----------------------
2000 1999
------- -------
<S> <C> <C>
Net income $ 4,472 $ 2,680
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 1,246 1,117
Depreciation 859 716
Accretion and amortization 301 366
(Gain) loss on sale of securities available for sale (62) (98)
(Gain) loss on sale of mortgage loans 71 (131)
Proceeds from mortgage loans 1,849 7,654
(Gain) loss on other assets (148) 58
(Increase) decrease in accrued income and other assets 421 (748)
Increase (decrease) in accrued expenses and other liabilities (1,818) 587
------- -------
Net cash provided by operating activities $ 7,191 $12,201
======= =======
</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 nine month period ended September 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, FNB Financial Services Corporation ("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:
(Dollars in thousands) FNB Southeast Black Diamond Combined
------------- ------------- --------------
Total assets $ 445,172 $ 143,247 $ 588,419
Total income 34,477 11,033 45,410
Net interest income 16,749 3,678 20,427
Net income 3,744 504 4,248
During April of this year, FNB Southeast ("the Bank") 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.
As of September 30, 2000, FNB Southeast operated thirteen offices in North
Carolina, and Black Diamond operated five offices in Virginia.
On October 6, 2000, the five Virginia branches of Black Diamond Savings
Bank were converted into branches of FNB Southeast. This consolidation
creates one North Carolina chartered commercial bank held by the Company.
3. Comprehensive Income
The Company's other comprehensive income for the three and nine month
periods ended September 30, 2000, and 1999 consists of unrealized gains and
losses on available for sale securities, net of related income taxes.
5
<PAGE> 8
4. Segment information
During the year ended December 31, 1998, the Company 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 September 30, and for the nine months ended September 30,
related to the Company's segments is as follows:
(Dollars in thousands) FNB Southeast Black Diamond Combined
------------- ------------- -------------
September 30, 2000
------------------
Total assets $ 512,038 $ 153,734 $ 665,772
Total income 30,997 9,138 40,135
Net income 3,631 841 4,472
September 30, 1999
------------------
Total assets 425,448 134,595 560,043
Total income 25,322 8,062 33,384
Net income 2,477 203 2,680
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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of shares
used in basic EPS 4,485,209 4,467,803 4,483,468 4,465,852
Effect of dilutive stock options 43,276 80,063 42,252 153,995
--------- --------- --------- ---------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 4,528,485 4,547,866 4,525,720 4,619,847
========= ========= ========= =========
</TABLE>
As of September 30, 2000, there were 745,808 potentially dilutive share
options not included in the weighted average calculation since the option
exercise prices are greater than the fair market value of the common
shares.
6
<PAGE> 9
6. Investment Securities Available for Sale
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
---------------------- ----------------------
(Dollars in thousands) 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 119,285 116,219 122,604 118,002
State and municipal obligations 16,260 16,550 9,989 9,959
Other debt securities 1,220 1,166 1,340 1,284
Other equity 211 211 12 12
-------- -------- -------- --------
Total investment securities available for sale $137,176 $134,346 $134,145 $129,457
======== ======== ======== ========
</TABLE>
7. Loans
September 30, 2000 December 31, 1999
------------------ -----------------
(Dollars in thousands)
Loan Category
Real estate - commercial $126,208 $115,434
Real estate - residential 139,011 129,922
Real estate - construction 55,077 34,680
Commercial, financial and agricultural 76,134 58,002
Consumer - direct 38,849 32,778
Consumer - home equity 37,665 32,836
Consumer - other 6,117 9,605
-------- --------
Subtotal loans $479,061 $413,257
Loans held for sale 2,466 754
-------- --------
Gross Loans $481,527 $414,011
======== ========
7
<PAGE> 10
8. Allocation of Allowance for Credit Losses
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
---------------------------------- ----------------------------------
% of Loans in % of Loan in
(Dollars in thousands) 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 952 29 868 60
Commercial 2,688 43 2,087 14
Consumer 1,549 17 1,276 18
General 75 0 155 0
------------- ----------------- ------------- -----------------
Total allocation $5,270 100% $4,436 100%
============= ================= ============= =================
</TABLE>
9. Analysis of Allowance for Credit Losses
Nine Months Ended
September 30,
-------------------
(Dollars in thousands) 2000 1999
------ ------
Balance, beginning of period $4,436 $3,452
Charge-offs 537 306
Recoveries 125 59
------ ------
Net Charge-offs 412 247
------ ------
Allowance charged to operations 1,246 1,117
------ ------
Balance, end of period $5,270 $4,322
====== ======
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.12% 0.09%
====== ======
Ratio of allowance for loan loss to
month end loans 1.09% 1.08%
====== ======
8
<PAGE> 11
10. Nonperforming Assets
September 30, December 31,
(Dollars in thousands) 2000 1999
------------- ------------
Nonaccrual (1) $3,657 $1,195
Past due 90 days or more and
still accruing interest 53 117
Other real estate 230 534
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.
11. New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133, as amended, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. This standard establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. Based on its operations at September 30, 2000, management does
not expect this standard to have a material effect on the Company's
financial statements.
In October of 2000, the Financial Accounting Standards Board issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" a replacement of SFAS 125. SFAS 140 is
effective for all fiscal quarters of all fiscal years ending after December
15, 2000. This standard establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Based on its operations at September 30, 2000, management does
not expect this standard to have a material effect on the Company's
financial statements.
In April of 2000, the Financial Accounting Standards Board issued FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to
Employees". FIN 44 was effective July 1, 2000. This interpretation
clarifies (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a
business combination. Based on its operations at September 30, 2000,
management does not expect this interpretation to have a material effect on
the Company's financial statements.
In December of 1999, the Securities and Exchange Commission issued SAB 101,
"Revenue Recognition in Financial Statements". SAB 101, as amended, is
effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. This staff accounting bulletin provides the
staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. Based on its operations at September
30, 2000, management does not expect his interpretation to have a material
effect on the Company's financial statements.
9
<PAGE> 12
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 risk factors described in the
Company's Form 10-K filed with the Securities and Exchange Commission.
Summary
Net income for the quarter ended September 30, 2000, of $1.5 million was a
338.0% increase over the $339,000 earned in the third quarter last year. Diluted
earnings per share for the current quarter was $0.33 per share, a 371.4%
increase from $0.07 reported one year earlier. For the nine months to date,
earnings of $4.5 million were 66.9% over $2.7 million in the same period in
1999. Net income in the same period of 1999 was affected by $972,000 in after
tax merger costs from the acquisition of Black Diamond.
Assets at September 30, 2000 reached $665.8 million, an increase of $77.4
million since December 31, 1999. The increase in assets is due to loan growth of
$67.5 million over the first nine months of 2000, with $23.6 million of this
growth occurring in the third quarter of 2000. To support this asset growth over
the past nine months, deposits have increased $69.5 million, and other
borrowings have increased $11.0 million.
Interest Income and Interest Expense
Third quarter total interest income was $13.5 million, an increase of 21.4% over
the same quarter last year. Average earning assets for the quarter were $620.9
million, compared to $535.3 million for the year ago period. Interest income
from loans was $11.3 million, up 27.5% from $8.9 million in the third quarter of
1999. The increase was driven by an 18.4% increase in average loans, and an
increase in the average yield to 9.64% from 8.95%. For the nine months ended on
September 30, total interest income was up 20.8% to $37.8 million from $31.3
million in the same period in 1999, on a 13.1% increase in average assets.
Interest income on investments totaled $2.0 million, for the current quarter, up
slightly from $1.9 million for the year ago quarter. The change is attributable
to an increase in tax exempt bonds in the investment portfolio. Investment
income for the nine month period decreased from $5.9 million in 1999 to $5.8
million in 2000.
Third quarter total interest expense was $7.8 million compared to $5.6 million
from the third quarter of last year, a 39.0% increase. Average interest bearing
liabilities for the third quarter 2000 increased 17.7% to $542.5 million from
$460.9 million for the third quarter of 1999. Overall cost of funds for the
third quarter was 5.77% and 4.89% for 2000 and 1999, respectively. Total
interest expense for the first nine months of 2000 was $21.1 million, a 29.4%
increase over the $16.3 million expense for the first nine months of 1999.
Interest expense on deposits for the quarter increased 27.7% to $6.9 million as
average interest bearing deposits increased 14.1% to $480.0 million. The average
rate for the quarter on interest bearing deposits increased to 5.78% from 4.95%
one year earlier. Deposit interest expense for the nine months ended September
30, increased from $14.9 million in 1999 to $18.7 million in 2000.
Interest expense on federal funds purchased and other borrowings was $897,000,
up 133.6%, from $384,000 in the third quarter of 1999. The increase is primarily
attributable to an increase in average purchased funds from $40.2 million in the
1999 third quarter compared to $102.7 million in the 2000 third quarter.
Interest expenses for this category increased from $1.4 million in 1999 to $2.4
million in 2000 for the nine months ended September 30.
10
<PAGE> 13
Comparable net interest margins as follows:
Liability
Time Period Asset Yield Rate Interest Rate Spread
----------- ----------- --------- --------------------
Third Quarter, 2000 8.78% - 5.77% = 3.01%
Third Quarter, 1999 8.18% - 4.89% = 3.29%
Year to Date, 2000 8.53% - 5.42% = 3.11%
Year to Date, 1999 7.97% - 4.85% = 3.12%
Noninterest Income and Expense
Noninterest income in the third quarter this year increased 4.9% to $732,000
from the $687,000 in the same period last year. For the current quarter, net
securities gains were $62,000 compared to $13,000 recorded in the same period
one year earlier. During this year's third quarter, net gains on sale of
mortgages were $19,000 compared to $22,000 recorded in the same period one year
earlier, a decrease of $3,000. Increases in noninterest income primarily
resulted from deposit service charges. Deposit service charges increased 26.8%
to $606,000 for the 2000 third quarter compared to $478,000 in the same period
last year. Total noninterest income for the first nine months was $2.3 million,
a 10.9% increase over the same period in 1999. Deposit service charges of $1.6
million for the nine months were 22.4% higher this year than the $1.3 million
recorded in the same period last year.
Noninterest expense for the third quarter of 2000 was $3.8 million, an 11.8%
decrease from the third quarter of 1999. These expenses include an $84,000, or
4.0%, increase in salaries and modest increases in other expense categories. The
third quarter 1999 noninterest expenses include $675,000 in costs related to the
merger with Black Diamond. This year's nine-month noninterest expenses of $11.1
million were 3.7% lower than $11.5 million in the same period last year.
The provision for loan losses was lower than last year's third quarter when the
provision was increased due to the acquisition of Black Diamond. Consolidated
provision expense for the third quarter of 2000 was $370,000 compared to
$705,000 in the third quarter of 1999. The allowance ratio at quarter end stood
at 1.09% for 2000, compared to 1.08% in 1999. For the 2000 nine months, the
provision totaled $1.2 million, compared to $1.1 million for the same period in
1999.
The effective income tax rate of 33.2% for the first nine months of 2000 was
lower than the 39.6% rate for the same nine month period of 1999. The tax rate
for 1999 was higher due to the tax treatment of non-deductible merger related
costs incurred during the third quarter.
Financial Condition
The Company's total assets at September 30, 2000 and 1999, were $665.8 million
and $562.1 million, respectively. The $103.7 million increase represents an
18.5% increase over one year earlier. Since December 31, 1999, assets have
increased $77.3 million. Average earning assets for the 2000 third quarter were
$620.9 million, or 16.0% higher than the $535.3 million average in the same
quarter last year.
Loans at September 30, 2000, totaled $481.5 million compared to $401.0 million
one year earlier, an increase of 20.1%. Loans have increased 16.3% from $414.0
million at December 31, 1999. Average loans for the third quarter of 2000 were
$469.3 million, or 18.4% higher than $396.5 million in this same period one year
ago.
Investment securities of $138.0 million at September 30, 2000, were 4.4% higher
than the $132.1 million one year earlier. Average investment securities were
$136.2 million and $132.9 million for the 2000 and 1999 third quarters,
respectively.
11
<PAGE> 14
Deposits totaled $553.7 million at September 30, 2000, an 18.8% increase versus
$465.9 million one year ago, and a 14.3% increase over the $484.2 million
recorded at December 31, 1999. At September 30, 2000, noninterest bearing
deposits were $51.7 million, or 9.3% of total deposits. The new FNB Southeast
branches in Greensboro and Burgaw, North Carolina, contributed $23.9 million to
the Company's deposit growth during the first nine months of 2000.
At the end of the 2000 third quarter, borrowings at the Federal Home Loan Bank
of Atlanta totaled $42.5 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 $54.7 million at the end of the third quarter
2000, compared to $50.8 million at December 31, 1999.
Asset Quality
The allowance ratio at September 30, 2000, stood at 1.09% compared to 1.07% at
December 31, 1999, and 1.08% at September 30, 1999. For the third quarter 2000,
provision charges against earnings totaled $370,000 compared to $705,000 in the
third quarter one year earlier. The third quarter 1999 included charges taken
for the Black Diamond merger. Net loan losses for the quarter totaled $409,000,
or a 0.12% 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 $230,000 at September 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 $90,000 was recorded in conjunction with the
sale of such property during the first nine months of 2000.
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 September 30, 2000.
<TABLE>
<CAPTION>
Regulatory Guidelines Actual
----------------------------------- -------------------------------------------------
Well Adequately FNB Black
Ratio Capitalized Capitalized Company Southeast Diamond
--------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Total Capital 10.0% 8.0% 12.9% 12.9% 12.0%
Tier 1 Capital 6.0 4.0 11.8 11.9 10.6
Leverage Capital 5.0 4.0 8.5 8.9 6.6
</TABLE>
12
<PAGE> 15
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. This standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Based on its operations
at September 30, 2000, management does not expect this standard to have a
material effect on the Company's financial statements.
In October of 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" a replacement of SFAS 125. SFAS 140 is effective
for all fiscal quarters of all fiscal years ending after December 15, 2000. This
standard establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Based on its
operations at September 30, 2000, management does not expect this standard to
have a material effect on the Company's financial statements.
In April of 2000, the Financial Accounting Standards Board issued FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to Employees".
FIN 44 was effective July 1, 2000. This interpretation clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. Based on its operations at
September 30, 2000, management does not expect this interpretation to have a
material effect on the Company's financial statements.
In December of 1999, the Securities and Exchange Commission issued SAB 101,
"Revenue Recognition in Financial Statements". SAB 101, as amended, is effective
no later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. This staff accounting bulletin provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
Based on its operations at September 30, 2000, management does not expect his
interpretation to have a material effect on the Company's financial statements.
13
<PAGE> 16
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 and 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 rolling twelve month period ending September 30, 2001.
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.
14
<PAGE> 17
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
None.
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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<PAGE> 18
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)
November 10, 2000 /s/ Michael W. Shelton
--------------------------------------------
Michael W. Shelton
(Vice President and Chief Financial Officer)
16
