Back to GetFilings.com
================================================================================
UNITED STATES
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, 2004
Commission File Number: 0-13086
FNB FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina 56-1382275
(State of Incorporation) (I.R.S. Employer Identification No.)
1501 Highwoods Boulevard, Suite 400
Greensboro, North Carolina 27410
(Address of principal executive offices) (Zip Code)
(336) 369-0900
(Registrant's telephone number, including area code)
----------
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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
At October 31, 2004, 5,502,735 shares of the registrant's common stock,
$1.00 par value, were outstanding.
This Form 10-Q has 36 pages. The Exhibit Index begins on page 18.
================================================================================
FNB FINANCIAL SERVICES CORPORATION
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 3
Consolidated Statements of Income and Comprehensive Income Three
Months and Nine Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 2004 and 2003 5
Consolidated Statements of Cash Flows for the
Nine months ended September 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Item 2 Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 Controls and Procedures 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands except per share data)
September 30,
2004 December 31,
(Unaudited) 2003 *
------------- ------------
ASSETS
Cash and due from banks $ 22,304 $ 29,319
Investment securities:
Securities available for sale 147,119 139,799
Federal Home Loan Bank and Federal Reserve Bank Stock 2,660 3,882
Loans, net of allowance for credit losses of $7,341 at
September 30, 2004 and $7,124 at December 31, 2003 633,716 574,260
Premises and equipment, net 14,093 13,031
Accrued income and other assets 24,754 20,635
---------- ----------
Total assets $ 844,646 $ 780,926
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 75,614 $ 69,982
Interest bearing 648,281 571,925
---------- ----------
Total deposits 723,895 641,907
Federal funds purchased and retail repurchase agreements 12,798 15,363
Other borrowings 35,000 55,500
Accrued expenses and other liabilities 3,680 2,406
---------- ----------
Total liabilities 775,373 715,176
---------- ----------
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 5,475,626 at September 30, 2004 and
5,478,664 at December 31, 2003 5,476 5,479
Paid-in capital 20,936 22,025
Retained earnings 43,019 38,395
Accumulated other comprehensive loss (158) (149)
---------- ----------
Total shareholders' equity 69,273 65,750
---------- ----------
Total liabilities and shareholders' equity $ 844,646 $ 780,926
========== ==========
See notes to unaudited consolidated financial statements.
* Derived from audited consolidated financial statements.
3
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest income
Loans $ 10,030 $ 9,054 $ 28,528 $ 27,153
Federal funds sold and overnight deposits 92 27 138 68
Investment securities
Taxable 763 879 2,331 3,148
Tax exempt 347 329 1,019 759
Other 43 34 139 129
----------- ----------- ----------- -----------
Total interest income 11,275 10,323 32,155 31,257
----------- ----------- ----------- -----------
Interest expense
Deposits 3,545 3,770 9,679 11,866
Federal funds purchased and other borrowings 345 348 1,197 1,166
----------- ----------- ----------- -----------
Total interest expense 3,890 4,118 10,876 13,032
----------- ----------- ----------- -----------
Net interest income 7,385 6,205 21,279 18,225
Provision for credit losses 285 303 945 1,080
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 7,100 5,902 20,334 17,145
Other income
Service charges on deposit accounts 906 959 2,877 2,590
Net gain (loss) on sale of securities (3) -- 108 562
Income from investment services 133 179 446 422
Mortgage banking fees 549 719 1,436 1,664
Other income 110 154 1,273 334
----------- ----------- ----------- -----------
Total noninterest income 1,695 2,011 6,140 5,572
Other expenses
Salaries and employee benefits 3,124 2,625 8,906 7,751
Occupancy expense 384 298 1,020 856
Furniture and equipment expense 716 638 2,086 1,746
Insurance expense, including FDIC assessment 48 38 145 134
Marketing expense 276 194 643 376
Printing and supply expense 131 118 396 328
Other expenses 1,290 1,101 3,810 3,191
----------- ----------- ----------- -----------
Total noninterest expense 5,969 5,012 17,006 14,382
Income before income taxes 2,825 2,901 9,468 8,335
Provision for income taxes 913 965 3,148 2,875
----------- ----------- ----------- -----------
Net income 1,912 1,936 6,320 5,460
Other comprehensive income (loss) 1,975 (2,187) (9) (2,045)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 3,887 $ (249) $ 6,311 $ 3,415
=========== =========== =========== ===========
Per share data
Net income, basic $ 0.35 $ 0.35 $ 1.15 $ 0.98
Net income, diluted $ 0.34 $ 0.34 $ 1.11 $ 0.95
Cash dividends $ 0.12 $ 0.11 $ 0.36 $ 0.33
Weighted average shares outstanding, basic 5,480,774 5,499,899 5,486,986 5,546,186
Weighted average shares outstanding, diluted 5,660,954 5,713,315 5,714,729 5,721,896
See notes to unaudited consolidated financial statements.
4
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited; dollars in thousands, except share and per share data)
Nine Months Ended
September 30,
---------------------
2004 2003
-------- --------
Common stock
Balance at beginning of period $ 5,479 $ 4,467
Stock repurchase (140) (108)
Exercise of stock options 137 35
-------- --------
Balance at end of period 5,476 4,394
-------- --------
Paid-in capital
Balance at beginning of period 22,025 23,833
Stock repurchase (2,364) (1,802)
Exercise of stock options 1,275 376
Employee stock awards -- 4
-------- --------
Balance at end of period 20,936 22,411
-------- --------
Retained earnings
Balance at beginning of period 38,395 34,549
Net income 6,320 5,460
Cash dividends declared (1,972) (1,853)
Tax benefit relating to stock purchase 276 --
-------- --------
Balance at end of period 43,019 38,156
-------- --------
Accumulated other comprehensive income (loss)
Balance at beginning of period (149) 1,484
Other comprehensive income (loss) (9) (2,045)
-------- --------
Balance at end of period (158) (561)
-------- --------
Total shareholders' equity $ 69,273 $ 64,400
======== ========
See notes to unaudited consolidated financial statements.
5
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Nine Months Ended
September 30,
-----------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 6,320 $ 5,460
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, accretion, and amortization 60 1,745
Provision for credit losses 945 1,080
Gain on sale of securities available for sale (108) (562)
Gain on disposal of premises and equipment (106) (4)
Net change in loans held for sale (4,221) (557)
Changes in assets and liabilities:
Increase in other assets (190) (1,185)
Increase (decrease) in other liabilities 1,550 (301)
--------- ---------
Net cash provided by operating activities 4,250 5,676
--------- ---------
Cash flows from investing activities:
Proceeds from sales, maturities, or calls of securities available for sale 27,294 97,673
Purchase of securities available for sale (32,688) (120,618)
Purchase of premises and equipment (2,547) (3,022)
Proceeds from disposal of premises and equipment 292 --
(Increase) decrease in other real estate owned 226 (2,498)
Net (increase) decrease in loans (59,700) 1,886
--------- ---------
Net cash used in investing activities (67,123) (26,579)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 81,988 28,546
Net decrease in other borrowings (20,500) (5,000)
Net decrease in federal funds purchased and repurchase agreements (2,566) (1,542)
Repurchase of common stock (2,504) (1,910)
Proceeds from issuance of common stock 1,411 415
Cash dividends paid (1,971) (1,853)
--------- ---------
Net cash provided by financing activities 55,858 18,656
--------- ---------
Net decrease in cash and cash equivalents (7,015) (2,247)
Cash and cash equivalents, January 1 29,319 24,524
--------- ---------
Cash and cash equivalents, September 30 $ 22,304 $ 22,277
========= =========
See notes to unaudited consolidated financial statements.
6
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 accounting principles generally accepted
in the United States of America 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 accounting principles
generally accepted in the United States of America 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, 2004 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2004. For further information
refer to the consolidated financial statements and footnotes thereto
included in FNB Financial Services Corporation's 2003 Annual Report on
Form 10-K. Certain reclassifications have been made to the prior period
consolidated financial statements to place them on a comparable basis with
the current period consolidated financial statements. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
2. Per share data
Basic and diluted net income per share amounts have been computed
based upon net income as presented in the accompanying statements of
income divided by the weighted average number of common shares outstanding
or assumed to be outstanding as summarized.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average number of shares
used in basic EPS 5,480,774 5,499,899 5,486,986 5,546,186
Effect of dilutive stock options 180,180 213,416 227,743 175,710
---------- ---------- ---------- ----------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 5,660,954 5,713,315 5,714,729 5,721,896
========== ========== ========== ==========
For the three months ended September 30, 2004 and 2003, there were
275,541, and 143,541 options, respectively, that were antidilutive since
the exercise price exceeded the average market price for the period and
were omitted from the calculation of diluted earnings per share for their
respective periods. For the nine months ended September 30, 2004 and 2003,
there were 271,375, and 143,541 options, respectively, that were
antidilutive since the exercise price exceeded the average market price
for the period and were omitted from the calculation of diluted earnings
per share for their respective periods.
3. Stock compensation plans
The proforma impact on net income and net income per share as if the
fair value of stock-based compensation plans had been recorded as a
component of compensation expense in the consolidated financial statements
as of the date of grant of awards related to such plans, pursuant to the
provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock Based Compensation," is disclosed in the
accompanying table.
7
3. Stock compensation plans (cont.)
For the three months ended For the nine months ended
-------------------------- -------------------------
September 30, September 30,
------------- -------------
(Dollars in thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------------- ---- ---- ---- ----
Net income, as reported $ 1,912 $ 1,936 $ 6,320 $ 5,460
Less: Stock based compensation as
calculated per fair value method, net of
tax effect (91) (64) (273) (191)
-------- -------- -------- --------
Proforma net income $ 1,821 $ 1,873 $ 6,046 $ 5,269
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.35 $ 0.35 $ 1.15 $ 0.98
Basic - proforma $ 0.33 $ 0.34 $ 1.11 $ 0.94
Diluted - as reported $ 0.34 $ 0.34 $ 1.11 $ 0.95
Diluted - proforma $ 0.32 $ 0.34 $ 1.07 $ 0.92
4. Loans
Loan Category:
(Dollars in thousands) September 30, December 31,
2004 2003
------------- ------------
Real estate - commercial $ 150,009 $ 159,953
Real estate - residential 111,708 95,939
Real estate - construction 161,497 117,786
Commercial, financial and agricultural 90,067 90,224
Consumer 133,072 118,557
---------- ----------
Subtotal loans 646,353 582,459
Loans held for sale 5,296 1,075
---------- ----------
Gross loans $ 641,057 $ 581,384
========== ==========
Allowance for credit losses:
September 30, 2004 December 31, 2003
----------------------- -----------------------
% of Loans % of Loans
in Each in Each
Category to Category to
(Dollars in thousands) Allowance Total Loans Allowance Total Loans
--------- ----------- --------- -----------
Balance at end of period
applicable to:
Real estate - construction 1 23 $ 5 20
Real estate - mortgage 42 41 49 44
Commercial 5,141 15 5,116 16
Consumer 2,157 21 1,954 20
-------- -------- -------- --------
Total $ 7,341 100% $ 7,124 100%
======== ======== ======== ========
8
4. Loans (cont.)
Rollforward - allowance for credit losses:
Nine Months Ended
September 30,
----------------------
(Dollars in thousands) 2004 2003
-------- --------
Balance, beginning of period $ 7,124 $ 7,059
Charge-offs 792 1,237
Recoveries (64) (167)
-------- --------
Net charge-offs 728 1,068
-------- --------
Provision for credit losses 945 1,080
-------- --------
Balance, end of period $ 7,341 $ 7,071
======== ========
Ratio of annualized net charge-offs during the
period to average loans outstanding
during the period 0.16% 0.25%
======== ========
Ratio of allowance for credit losses to
period end loans 1.15% 1.26%
======== ========
Nonperforming assets:
September 30, December 31,
(Dollars in thousands) 2004 2003
------------- ------------
Nonaccrual $ 3,965 $ 5,174
Past due 90 days or more and still accruing interest 389 53
Other real estate 4,966 5,191
Renegotiated troubled debt -- --
5. Employee benefit plans
The accompanying table details the components of pension expense
recognized in the Company's Consolidated Statements of Income and
Comprehensive Income:
For the three months For the nine months
-------------------- -------------------
ended September 30, ended September 30,
------------------- -------------------
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------- ---- ---- ---- ----
Service cost $ 127 $ 93 $ 381 $ 279
Interest cost 90 75 270 225
Expected return on plan assets (121) (200) (363) (600)
Amortization of prior service cost 5 132 15 396
------ ------ ------ ------
Net periodic pension cost $ 101 $ 100 $ 303 $ 300
====== ====== ====== ======
For the 2004 Plan Year, no tax-deductible contributions are required
or allowed.
9
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.
Application of Critical Accounting Policies
The Company's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and financial
condition. The Company's significant accounting policies are discussed in detail
in Note 1 of the consolidated financial statements included in the Company's
2003 Annual Report on Form 10-K. The following is a summary of the allowance for
credit losses, one of the most complex and judgmental accounting policies of the
Company.
The allowance for credit losses, which is utilized to absorb actual losses
in the loan portfolio, is maintained at a level consistent with management's
best estimate of probable credit losses incurred as of the balance sheet date.
The Company's allowance for credit losses is also analyzed quarterly by
management. This analysis includes a methodology that separates the total loan
portfolio into homogeneous loan classifications for purposes of evaluating risk,
as well as analysis of certain individually identified loans. The required
allowance is calculated by applying a risk adjusted reserve requirement to the
dollar volume of loans within a homogenous group. Major loan portfolio subgroups
include: risk graded commercial loans, mortgage loans, home equity loans, retail
loans and retail credit lines. Management also analyzes the loan portfolio on an
ongoing basis to evaluate current risk levels, and risk grades are adjusted
accordingly. While management uses the best information to make evaluations,
future adjustments may be necessary, if economic or other conditions differ
substantially from the assumptions used.
Executive Summary
FNB Financial Services Corporation (the "Company") is a North Carolina
financial holding company. The Company's wholly owned subsidiary, FNB Southeast
(the "Bank"), is a North Carolina chartered commercial bank. As of September 30,
2004, the Bank operated thirteen banking offices in North Carolina and four
banking offices in Virginia. The Bank has two wholly owned subsidiaries: FNB
Southeast Investment Services, Inc., which operated three offices, and FNB
Southeast Mortgage Corporation, which operated seven offices. The Company
relocated its headquarters from Reidsville, North Carolina to Greensboro, North
Carolina in April 2004.
Effective April 16, 2004, The Bank of Tazewell purchased loans and assumed
the deposits of the Bank's Richlands, Virginia branch. The Bank transferred
$15.0 million in deposit accounts and $7.3 million in loan accounts in the
transaction. The Company recognized $700,000 in net gain on the sale. Also
during April, an approximate $125,000 gain was realized from the sale of the
fixed assets associated with the Bank's Richlands, Virginia branch.
Assets at September 30, 2004 were $844.6 million, an increase of $63.7
million, or 8.2%, since December 31, 2003. A $59.5 million increase in net
loans, combined with a $2.1 million increase in investment securities, were the
principal factors impacting this overall increase during the first nine months
of 2004. Over the past nine months, noninterest bearing deposits increased $5.6
million and interest bearing deposits rose $76.4 million, resulting in a 12.8%
increase in total deposits for the period.
10
The Company's third quarter earnings were $1.91 million in 2004 and $1.94
million in 2003. Earnings per diluted share were $0.34 for the third quarters of
2004 and 2003. For the first nine months of 2004, earnings of $6.3 million were
$860,000, or 15.8%, higher than the same period a year ago. Diluted earnings per
share for the first nine months of 2004 were $1.11, a 16.8% increase compared to
the 2003 earnings of $0.95 per diluted share. Excluding one-time after-tax gains
of $548,000 from the sale of a banking operation discussed earlier, year to date
earnings increased 5.7%.
Financial Condition
Since December 31, 2003, the Company's assets have increased $63.7
million, rising from $780.9 million at yearend 2003 to $844.6 million at
September 30, 2004. The principal factors impacting this overall increase during
the first nine months of 2004 were a $59.5 million increase in net loans,
combined with a $2.1 million increase in investment securities. Loans at
September 30, 2004 totaled $641.1 million, compared to $581.4 million at yearend
2003, an increase of 10.3%. Investment securities of $145.8 million at September
30, 2004 were 1.5% higher than the $143.7 million balance at December 31, 2003.
Deposits totaled $723.9 million at September 30, 2004, compared to $641.9
million at December 31, 2003. At the end of the third quarter 2004, noninterest
bearing deposits were $75.6 million, or 10.5%, of total deposits. At September
30, 2004, borrowings at the Federal Home Loan Bank of Atlanta (FHLB) totaled
$35.0 million, a decrease of 36.9% compared to $55.5 million at December 31,
2003. Federal funds purchased and retail repurchase agreements totaled $12.8
million at September 30, 2004, a decrease of $2.6 million from December 31,
2003.
Our capital position remains strong, with all of our regulatory capital
ratios at levels that make the Company "well capitalized" under bank regulatory
capital guidelines. Shareholders' equity increased to $69.3 million at the end
of the third quarter 2004, compared to $65.8 million at December 31, 2003. The
Company paid dividends of $0.12 per share during the quarter ended September 30,
2004, a 9.1% increase over the $0.11 per share dividend rate for the third
quarter of 2003. Year to date dividends per share for 2004 were $0.36, compared
to $0.33 in 2003.
In July 2004, the Company's Board of Directors approved the continuation
of its stock repurchase program by authorizing the repurchase of up to 5% of the
Company's outstanding common stock. This program succeeds a stock repurchase
program authorized in November 2002 and will be effective immediately upon
completion of the current program. The new authorization will allow the
repurchase of up to 275,124 additional shares of common stock. This program is
intended to help the Company achieve its goal of building shareholder value
while maintaining appropriate capital levels. A total of 279,813 shares have
been purchased through August 17, 2004 at an average price of $16.211, when the
November 2002 program was completed. During the remainder of the quarter ended
September 30, 2004, a total of 30,403 shares were purchased at an average price
of $17.505 through the stock repurchase program authorized by the Company's
Board of Directors in July 2004. In accordance with state law, repurchased
shares are cancelled and are no longer considered issued.
Asset Quality
The Company's allowance for credit losses is analyzed quarterly by
management. This analysis includes a methodology that segments the loan
portfolio into homogeneous loan classifications 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.
The credit loss allowance ratio was 1.15% at September 30, 2004, 1.23% at
December 31, 2003, and 1.26% at September 30, 2003. For the third quarter of
2004, provision charges against earnings
11
totaled $285,000, compared to $303,000 in the third quarter of 2003. Net
charge-offs for the third quarter of 2004 totaled $127,000, or a 0.08%
annualized loss ratio based on average loans outstanding. This is a decrease
from the net charge-offs for the third quarter of 2003 totaling $324,000, or
0.23% annualized loss ratio. Annualized net charge-offs for the first nine
months of 2004 and 2003 were 0.16% and 0.25%, respectively, based on average
loans outstanding.
Nonaccrual loans totaled $4.0 million at September 30, 2004, compared to
$5.2 million at yearend 2003 and $7.5 million at September 30, 2003. Other real
estate owned ("OREO") was $5.0 million at September 30, 2004, $5.2 million at
December 31, 2003, and $2.6 million at September 30, 2003. Approximately $1.8
million has been transferred from loans into OREO and approximately $2.0 million
of such assets were disposed of during the first nine months of 2004. A net loss
of $140,000 has been recorded on disposition of OREO in the current year.
Total nonperforming assets (comprised of nonaccrual loans and OREO)
decreased to $8.9 million, or 1.11% of total assets at September 30, 2004, from
$10.4 million, or 1.34% of total assets at December 31, 2003 and $10.1 million,
or 1.33% of total assets a year ago. Management believes these changes indicate
a trend of improving asset quality.
Results of Operations for the Three Months Ended September 30, 2004 and 2003
Interest Income and Interest Expense
- ------------------------------------
Total interest income was $11.3 million for the third quarter of 2004,
compared to $10.3 million for the same period a year ago. Average earning assets
for the current quarter were $776.5 million, an increase of 7.2% over the third
quarter average of $724.2 million a year ago. Interest income from loans was
$10.0 million, up 10.8% from $9.1 million in the third quarter of 2003. The
increase in interest income was driven primarily by an increase in average loans
outstanding. Average loans of $619.2 million were 8.3% higher than the $571.8
million last year. Interest income on investments totaled $1.2 million for the
three months ended September 30, 2004, compared to $1.3 million for the third
quarter of 2003. The average balance of the investment portfolio was $138.6
million for the quarter ended September 30, 2004, a 4.2% decline from the
average balance of $144.6 million for the prior year third quarter.
Third quarter total interest expense was $3.9 million, compared to $4.1
million from the third quarter of last year, a 5.5% decrease. Interest expense
on deposits for the third quarter decreased 6.0%, to $3.5 million for 2004 from
$3.8 million in 2003. Average interest bearing deposits increased 7.4%, to
$621.2 million, from $578.2 for the third quarter of 2003. Interest expense on
federal funds purchased and other borrowings was $346,000 and $348,000 for the
quarters ended September 30, 2004 and 2003, respectively. The average balance of
federal funds purchased and other borrowings was $54.5 million in 2004 and $50.3
million in 2003. The Company utilized the growth in deposits and the increased
levels of borrowings as funding sources to support balance sheet growth.
Comparable net interest margins are as follows:
Three months ended September 30,
2004 2003
-------- --------
Asset Yield 5.85% 5.75%
Liability Rate 2.28% 2.60%
------ ------
Interest Rate Spread 3.57% 3.15%
====== ======
During the three months ended September 30, 2004, net interest income
increased $1.2 million, or 19.0%, over the same period a year ago. Net interest
income benefited from strong growth in average
12
earning assets which rose from $724.2 million for the third quarter of 2003 to
$776.5 million for the third quarter of 2004, a 7.2% increase. The average
yields on total interest earning assets for the same periods increased 10 basis
points from 5.75% to 5.85%. Average interest bearing liabilities for the third
quarter of 2004 increased 7.5%, to $675.7 million from $628.5 million for the
third quarter of 2003. The average cost of interest bearing liabilities for the
same periods decreased 32 basis points from 2.60% to 2.28%. The net result was
an improvement in the interest rate spread from 3.15% for the three months ended
September 30, 2003 to 3.57% for the same period in 2004.
Provision for Credit Losses
- ---------------------------
A provision for credit losses is charged against earnings in order to
maintain the allowance for credit losses at a level that reflects management's
evaluation of the incurred losses inherent in the portfolio. The amount of the
provision is based on continuing assessments of nonperforming and "watch list"
loans, analytical reviews of loan loss experience in relation to outstanding
loans, loan charge-offs, nonperforming asset trends and management's judgment
with respect to current and expected economic conditions and their impact on the
existing credit portfolio.
The provision for credit losses in the third quarter of 2004 was $285,000
compared to $303,000 in 2003. The allowance for credit losses as a percentage of
gross loans outstanding was 1.15% at September 30, 2004, 1.23% at December 31,
2003, and 1.26% at September 30, 2003. Annualized net credit losses, as a
percent of average loans, was 0.08% and 0.23% for the quarters ended September
30, 2004 and 2003, respectively.
Noninterest Income and Expense
- ------------------------------
Noninterest income in the third quarter of 2004 was $1.7 million, compared
to $2.0 million in the same period last year. Deposit service charges were
$906,000 for the third quarter of 2004, compared to $959,000 in the third
quarter of 2003. Sales of securities available for sale during the third quarter
of 2004 resulted in a $3,000 loss; however, there were no sales of securities
during the same period in 2003. Noninterest income in the third quarter of 2004
included $549,000 in mortgage banking fees and $133,000 in investment service
fees compared to revenues of $719,000 and $179,000, respectively, for the
previous year. The decrease in mortgage banking fees for 2004 was attributable
to diminishing refinance opportunities as interest rates have experienced some
upward movement.
Noninterest expense for the third quarter of 2004 was $6.0 million, a
19.1% increase over the $5.0 million expense in the third quarter of 2003.
Salaries and employee benefits increased $500,000 because of increased staffing
associated with the expansion of the mortgage banking operations and the
corporate headquarters relocation, combined with higher insurance and retirement
costs. Other items impacted by the increased staffing related to the expansion
of the mortgage banking operations and the corporate headquarters relocation
were occupancy expense, which increased $86,000, and furniture and equipment
expense, which rose $78,000, compared to third quarter 2003. Marketing expense
increased $82,000 in the third quarter of 2004, compared to the same period a
year ago, primarily because of costs associated with deposit campaigns and
promotional activity related to the corporate headquarters relocation. Other
expense for the third quarters of 2004 and 2003 totaled $1.3 million and $1.1
million, respectively.
Provision for Income Taxes
- --------------------------
The Company's provision for income taxes totaled $913,000 for the third
quarter of 2004 and $965,000 for the same period in 2003. The Company's
effective tax rates for the three-month periods ended September 30, 2004 and
2003 were 32.3% and 33.2%, respectively. The decline in the effective rate from
2003 to 2004 reflects the implementation of investment strategies that resulted
in a reduction in the consolidated income tax provision. The decrease in the
provision for 2004, compared to the prior year, results primarily from the lower
effective tax rate. Overall, the effective tax rate is attributable to the
current expense required to provide an adequate provision for income taxes for
the quarters ended September 30, 2004 and 2003.
13
Results of Operations for the Nine Months Ended September 30, 2004 and 2003
Interest Income and Interest Expense
- ------------------------------------
Total interest income was $32.2 million for the first nine months of 2004,
compared to $31.3 million for the same period in 2003. Average earning assets
for the nine months ended September 30, 2004 were $752.9 million, an increase of
5.0% over the average of $716.8 million a year ago. Interest income from loans
was $28.5 million, up 5.1% from $27.2 million in 2003. The increase in interest
income was driven primarily by a continuing increase in average loans
outstanding. Average loans of $602.6 million were 5.4% higher than the $571.9
million last year. Investment income for the nine-month period totaled $3.6
million in 2004 and $4.1 million in 2003. The $2.3 million, or 1.7%, increase in
the average balance of the investment portfolio was offset by a decline in the
yield from 4.35% in 2003 to 3.82% in 2004.
Total interest expense for the first nine months of 2004 was $10.9
million, a 16.5% decrease from the $13.0 million expense for the first nine
months of 2003. Overall cost of funds for the nine months ended September 30,
2004 and 2003 was 1.99% and 2.55%, respectively. Interest expense on deposits
for the nine-month period decreased 18.4%, to $9.7 million for 2004 from $11.9
million in 2003. The average rate for the nine months on interest bearing
deposits decreased to 2.22% in 2004; from 2.84% one year earlier while average
interest bearing deposits increased 4.0%, to $581.8 million, from $559.1 for the
first nine months of 2003. Interest expense on federal funds purchased and other
borrowings was $1.2 million for the nine months ended September 30, 2004 and
2003. The average balance of federal funds purchased and other borrowings
increased from $59.2 million in 2003 to $70.2 million in 2004. The average rate
paid on purchased funds declined from 2.55% for the first nine months of 2003 to
1.99% for the same period in 2004. The Company utilized the growth in deposits
and the increased levels of borrowings as funding sources to support balance
sheet growth.
Comparable net interest margins are as follows:
Nine months ended September 30,
2004 2003
-------- --------
Asset Yield 5.78% 5.90%
Liability Rate 2.22% 2.82%
------ ------
Interest Rate Spread 3.56% 3.08%
====== ======
During the nine months ended September 30, 2004, net interest income
increased $3.1 million, or 16.8%, over the same period a year ago. Net interest
income benefited from strong growth in average earning assets which rose from
$716.8 million for the first nine months of 2003 to $752.9 million for the same
period in 2004, a 5.0% increase. The average yields on total interest earning
assets for the same periods decreased 12 basis points from 5.90% to 5.78%.
Average interest bearing liabilities for the first nine months of 2004 increased
5.4%, to $651.9 million from $618.4 million for the first nine months of 2003.
The average cost of interest bearing liabilities for the same periods decreased
60 basis points from 2.82% to 2.22%. The net result was an improvement in the
interest rate spread from 3.08% for the nine months ended September 30, 2003 to
3.56% for the same period in 2004.
Provision for Credit Losses
- ---------------------------
A provision for credit losses is charged against earnings in order to
maintain the allowance for credit losses at a level that reflects management's
evaluation of the incurred losses inherent in the portfolio. The amount of the
provision is based on continuing assessments of nonperforming and "watch list"
loans, analytical reviews of loan loss experience in relation to outstanding
loans, loan charge-offs,
14
nonperforming asset trends and management's judgment with respect to current and
expected economic conditions and their impact on the existing credit portfolio.
The provision for credit losses for the first nine months of 2004 was
$945,000 compared to $1.1 million in 2003. The allowance for credit losses as a
percentage of gross loans outstanding was 1.15% at September 30, 2004, 1.23% at
December 31, 2003, and 1.26% at September 30, 2003. Year to date annualized net
credit losses declined to 0.16% of average loans in 2004, compared to 0.25% for
the same period in 2003.
Noninterest Income and Expense
- ------------------------------
Noninterest income for the first nine months of this year increased 10.2%
to $6.1 million from $5.6 million in the same period last year. Excluding
one-time net gains of $825,000 from the sale of the Company's banking operation
in Richlands, Virginia, year to date noninterest income was $5.3 million in
2004. For the nine months, $108,000 of net gains from sales of investment
securities were recognized, a decrease from $562,000 of net gains in the same
period last year. Deposit service charges of $2.9 million for the first nine
months of 2004 increased 11.1% from the $2.6 million in 2003. Growth in deposits
and enhancements to the deposit service charge pricing structure were the
principal factors contributing to this increase. Mortgage banking fees declined
to $1.4 million for the first nine months of 2004, compared to $1.7 million for
the same period a year ago as refinancing activity continued to slow. Investment
service fees increased 5.7% for the first nine months of 2004, rising from
$422,000 in the first nine months of 2003 to $446,000 for the same period in
2004.
Noninterest expense for the first nine months of 2004 was $17.0 million,
an 18.2% increase over the $14.4 million expense in 2003. Salaries and employee
benefits increased $1.2 million primarily because of increased staffing
associated with the expansion of the mortgage banking operations and the
corporate headquarters relocation, combined with higher insurance and retirement
costs. Other items impacted by the increased staffing related to the expansion
of the mortgage banking operations and the corporate headquarters relocation
were occupancy expense, which increased $165,000, and furniture and equipment
expense, which rose $340,000, compared to the first nine months of 2003.
Marketing expense increased $267,000 in the first nine months of 2004, compared
to the same period a year ago, primarily because of costs associated with
deposit campaigns and promotional activity related to the corporate headquarters
relocation. Other expense for the first nine months of 2004 and 2003 totaled
$3.8 million and $3.2 million, respectively.
Provision for Income Taxes
- --------------------------
The Company's provision for income taxes totaled $3.1 million for the
first nine months of 2004, compared to $2.9 million for the same period of 2003.
The Company's effective tax rates for the nine-month periods ended September 30,
2004 and 2003 were 33.3% and 34.5%, respectively. The decline in the effective
rate from 2003 to 2004 reflects the implementation of investment strategies that
resulted in a reduction in the consolidated income tax provision. The increase
in the provision for 2004, compared to the prior year, results from higher
pretax income, offset in part by lower effective tax rate. Overall, the
effective tax rate is attributable to the current expense required to provide an
adequate provision for income taxes for the nine months ended September 30, 2004
and 2003.
Capital Resources
Banks and financial holding companies, as regulated institutions, must
meet required levels of capital. The Office of the Commissioner of Banks in
North Carolina and the Board of Governors of the Federal Reserve, which are the
primary regulatory agencies for FNB Southeast and the Company, respectively,
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are required to maintain a level of capital commensurate
with the risk profile assigned to their assets in accordance with the
guidelines.
15
As shown in the accompanying table, the Company and its wholly owned
banking subsidiary have capital levels exceeding the minimum levels for "well
capitalized" banks and financial holding companies as of September 30, 2004.
Regulatory Guidelines
--------------------------
Well Adequately FNB
Ratio Capitalized Capitalized Company Southeast
- ----- ----------- ----------- ------- ---------
Total Capital 10.0% 8.0% 11.4% 11.1%
Tier 1 Capital 6.0 4.0 10.3 10.0
Leverage Capital 5.0 4.0 8.2 8.0
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 withdrawals, loan funding and general corporate
activity create a need for liquidity for the Company. Liquidity is derived from
sources such as deposit growth; maturity, calls, or sales of investment
securities; principal and interest payments on loans; access to borrowed funds
or lines of credit; and profits.
During the first nine months of 2004 the Company had net cash provided by
operating activities of $4.3 million. This was a decrease of $1.4 million from
the $5.7 million of net cash provided by operating activities in the first nine
months of 2003. The decrease is primarily attributable to the $4.2 million
change in loans held for sale for the first nine months of 2004, compared to a
$557,000 change in loans held for sale and a $1.2 million rise in other assets
for the same period in 2003.
Net cash used in investing activities in the first nine months of 2004
totaled $67.1 million. Purchases of investment securities in the current year
totaled $32.7 million and proceeds from sales, calls, or maturities of
securities were $27.3 million. This compares to the first nine months of 2003
when proceeds from sales, calls, or maturities of securities totaled $97.7
million and purchases of investment securities totaled $120.6 million, leading
to net cash used in investment activities of $26.6 million. An increase in loans
outstanding used $59.7 million in cash during 2004, compared to a decrease in
outstanding loans in 2003 totaling $1.9 million. Capital expenditures used $2.5
million in 2004, compared to $3.0 million in 2003.
During the nine months ended September 30, 2004, financing activities
provided $55.9 million. An increase of $82.0 million in deposits was offset
primarily by a decrease of $20.5 million in borrowings. Financing activities in
the nine months ended September 30, 2003 provided $18.7 million, based primarily
on $28.5 million rise in deposits. These cash inflows were partially offset by a
repayment of other borrowings of $5.0 million during the first nine months.
Overall cash and cash equivalents totaled $22.3 million at September 30,
2004 compared to $29.3 million at December 31, 2003 and $22.3 million at
September 30, 2003.
Liquidity is further enhanced by a line of credit with the FHLB
collateralized by FHLB stock, investment securities and qualifying 1-4 family
residential mortgage loans, and qualifying commercial real estate loans. The
Company provides various reports to the FHLB on a regular basis throughout the
year to maintain the availability of the credit line. Each borrowing request to
the FHLB is initiated through an advance application that is subject to approval
by the FHLB before funds are advanced under the credit agreement.
The Company also has unsecured overnight borrowing lines available through
four financial institutions. These lines are used to manage the day to day,
short-term liquidity needs of the Company. Each Federal funds line has a
requirement to repay the line in full on a frequent basis, typically within five
to ten business days. The Company has also established a $15 million wholesale
repurchase agreement
16
with a regional brokerage firm. The Company can access this additional source of
liquidity by pledging investment securities with the brokerage firm.
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.
The Company has not experienced any substantive changes in portfolio risk
during the nine months ended September 30, 2004.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Company's management, under the supervision and with the participation
of the Chief Executive Officer and the Chief Financial Officer of the Company
(its principal executive officer and principal financial officer, respectively),
has concluded based on its evaluation as of the end of the period covered by
this Report, that the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in the
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the applicable rules and forms, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including the Chief Executive Officer and the Chief Financial Officer of the
Company, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There have been no significant changes in internal control over financial
reporting during the period covered by this Report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The accompanying table details, by month, the information related to the
activity related to the share repurchase programs approved by the Company's
Board of Directors in November 2002 and July 2004 authorizing the repurchase of
up to 279,814 shares and 275,124 shares, respectively, of the Company's
outstanding common stock. Both programs were publicly announced in the month of
approval.
17
Stock Repurchase Program - Approved November 2002
-------------------------------------------------
(a) (b) (c) (d)
Cumulative Maximum Number
Total Number Average Number of of Shares that
of Shares Price Paid Shares May Yet Be
Period Purchased Per Share Purchased Purchased
- -----------------------
July 1, 2004 to
July 31, 2004 ......... 17,000 $16.91 246,891 32,922
August 1, 2004 to
August 31, 2004 ....... 32,922 $16.72 279,813 --
September 1, 2004 to
September 30, 2004 .... -- -- 279,813 --
Total ....... 49,922 $16.78
Stock Repurchase Program - Approved July 2004
---------------------------------------------
(a) (b) (c) (d)
Cumulative Maximum Number
Total Number Average Number of of Shares that
of Shares Price Paid Shares May Yet Be
Period Purchased Per Share Purchased Purchased
- -----------------------
July 1, 2004 to
July 31, 2004 ......... -- -- -- 275,124
August 1, 2004 to
August 31, 2004 ....... 22,878 $17.21 22,878 252,246
September 1, 2004 to
September 30, 2004 .... 7,525 $18.43 30,403 244,721
Total ....... 30,403 $17.50
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
Exhibit No. Description
----------- -----------
3.01 (1) Amended and Restated Articles of Incorporation.
3.02 (1) Bylaws of Company, as amended.
4.01 (1) Specimen Common Stock Certificate.
10.01 (3) Stock Compensation Plan of the Registrant approved April 11,
1989, by the shareholders of the Registrant, with forms of
stock option and stock bonus agreements attached.
10.02 (4) Omnibus Equity Compensation Plan of the Registrant.
10.03 (5) Severance Policy for Senior Officers of the Registrant
(employed for five years or more).
10.04 (6) Revised Severance Plan for Senior Officers of the Registrant
(employed for five years or more).
10.05 (4) Severance Policy for Senior Officers of the Registrant
(employed for less than five years).
18
10.06 (8) Benefit Equivalency Plan of the Registrant effective January
1, 1994.
10.07 (11) Annual Management Incentive Plan of the Registrant.
10.08 (8) Long Term Incentive Plan of the Registrant.
10.09 (10) Long Term Incentive Plan of the Registrant for certain senior
management employees.
10.10 (8) Employment Agreement dated May 18, 1995, between the
Registrant, as employer, and Ernest J. Sewell, President and
Chief Executive Officer of the Registrant.
10.11 (9) Split-Dollar Agreement dated January 27, 1995, between the
Registrant and Ernest J. Sewell.
10.12 (9) Split-Dollar Agreement dated January 27, 1995, between the
Registrant and C. Melvin Gantt.
10.13 (9) Split-Dollar Agreement dated December 8, 1995, between the
Registrant and Richard L. Powell.
10.14 (2) Amendment to Benefit Equivalency Plan of the Registrant
effective January 1, 1998.
10.15 (9) Split-Dollar Agreement dated March 20, 1998, between the
Registrant and Ernest J. Sewell.
10.16 Second Amendment, dated May 19, 2004, to the Employment
Agreement dated May 18, 1995, between the Registrant, as
employer, and Ernest J. Sewell, President and Chief Executive
Officer of the Registrant.
10.17 Employment and Change of Control Agreement dated July 1, 2004,
between the Registrant, as employer, and Pressley A. Ridgill,
Executive Vice President and Chief Operating Officer of the
Registrant.
31.01 Certification of Ernest J. Sewell.
31.02 Certification of Michael W. Shelton.
32.01 Certification of Periodic Financial Report Pursuant to 18
U.S.C Section 1350.
Exhibit references:
(1) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1998,
filed with the Securities and Exchange Commission.
(2) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed with
the Securities and Exchange Commission.
(3) Incorporated herein by reference to the Registrant's Statement on
Form S-8 (No. 33-33186), filed with the Securities and Exchange
Commission.
(4) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996, filed
with the Securities and Exchange Commission.
(5) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989, filed with
the Securities and Exchange Commission.
(6) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1994, filed
with the Securities and Exchange Commission.
(7) Incorporated herein by reference to the Registrant's Quarterly
Report, on Form 10-QSB for the fiscal quarter ended June 30, 1995,
filed with the Securities and Exchange Commission.
19
(8) Incorporated herein by reference to the Registrant's Statement on
Form S-2 (File No. 333-47203) filed with the Securities and Exchange
Commission on March 3, 1998.
(9) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997, filed
with the Securities and Exchange Commission.
(10) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, filed with
the Securities and Exchange Commission.
(11) Incorporated herein by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003, filed with
the Securities and Exchange Commission.
20
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 9, 2004 /s/ MICHAEL W. SHELTON
---------------------------
Michael W. Shelton
(Senior Vice President, Chief Financial Officer,
Secretary, and Treasurer)
21