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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
March 31, 2005
Commission File Number: 000-13086
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)
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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 May 5, 2005, 5,595,557 shares of the registrant's common stock, $1.00
par value, were outstanding.
This Form 10-Q has 23 pages. The Exhibit Index begins on page 17.
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FNB FINANCIAL SERVICES CORPORATION
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
March 31, 2005 and December 31, 2004
Consolidated Statements of Income and Comprehensive Income 4
for the Three Months Ended March 31, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for 5
the Three Months Ended March 31, 2005 and 2004
Consolidated Statements of Cash Flows for the 6
Three Months Ended March 31, 2005 and 2004
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
Item 4 Controls and Procedures 16
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 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits 17
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)
March 31,
2005 December 31,
(Unaudited) 2004 *
----------- ------------
ASSETS
Cash and due from banks $ 28,356 $ 24,246
Investment securities:
Securities available for sale 139,377 137,161
Federal Home Loan Bank and Federal Reserve Bank Stock 5,289 4,442
Loans, net of allowance for credit losses of $7,843 at
March 31, 2005 and $7,353 at December 31, 2004 705,467 656,073
Premises and equipment, net 12,853 13,144
Accrued income and other assets 29,178 30,269
--------- ---------
Total assets $ 920,520 $ 865,335
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 84,707 $ 78,810
Interest bearing 682,793 645,475
--------- ---------
Total deposits 767,500 724,285
Federal funds purchased and retail repurchase agreements 15,583 21,534
Other borrowings 60,000 45,000
Accrued expenses and other liabilities 6,051 4,086
--------- ---------
Total liabilities 849,134 794,905
--------- ---------
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 5,590,257 at March 31, 2005 and
5,550,326 at December 31, 2004 5,590 5,550
Paid-in capital 21,719 21,367
Retained earnings 45,524 43,986
Accumulated other comprehensive loss (1,447) (473)
--------- ---------
Total shareholders' equity 71,386 70,430
--------- ---------
Total liabilities and shareholders' equity $ 920,520 $ 865,335
========= =========
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
March 31,
---------------------------
2005 2004
----------- -----------
Interest income
Loans $ 12,102 $ 9,187
Federal funds sold and overnight deposits 66 17
Investment securities
Taxable 823 857
Tax exempt 319 329
Other 67 48
----------- -----------
Total interest income 13,377 10,438
----------- -----------
Interest expense
Deposits 4,283 3,168
Short-term borrowings 99 54
Long-term debt 481 368
----------- -----------
Total interest expense 4,863 3,590
----------- -----------
Net interest income 8,514 6,848
Provision for credit losses 680 388
----------- -----------
Net interest income after provision for credit losses 7,834 6,460
Noninterest income
Service charges on deposit accounts 823 1,012
Mortgage banking fees 1,004 334
Investment services fees 139 134
Net gain (loss) on securities available for sale (2) 111
Net gain on disposition of other assets 11 122
Other noninterest income 163 129
----------- -----------
Total noninterest income 2,138 1,842
Noninterest expense
Salaries and employee benefits 3,467 2,797
Occupancy expense 401 325
Furniture and equipment expense 758 670
Telecommunications expense 159 157
Marketing expense 263 151
Printing and supply expense 174 131
Other noninterest expense 1,670 1,215
----------- -----------
Total noninterest expense 6,892 5,446
Income before provision for income taxes 3,080 2,856
Provision for income taxes 1,037 961
----------- -----------
Net income 2,043 1,895
Other comprehensive income (loss) (973) 1,086
----------- -----------
Comprehensive income $ 1,070 $ 2,981
=========== ===========
Per share data
Net income, basic $ 0.37 $ 0.35
Net income, diluted $ 0.36 $ 0.33
Cash dividends $ 0.14 $ 0.12
Weighted average shares outstanding, basic 5,504,159 5,485,747
Weighted average shares outstanding, diluted 5,700,526 5,760,968
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)
Three Months Ended
March 31,
---------------------
2005 2004
-------- --------
Common stock
Balance at beginning of period $ 5,550 $ 5,479
Stock repurchase (23) (17)
Exercise of stock options 63 33
-------- --------
Balance at end of period 5,590 5,495
-------- --------
Paid-in capital
Balance at beginning of period 21,091 22,025
Stock repurchase (495) (302)
Exercise of stock options 671 367
Tax benefit relating to exercise of stock options 452 --
-------- --------
Balance at end of period 21,719 22,090
-------- --------
Retained earnings
Balance at beginning of period 44,262 38,395
Net income 2,043 1,895
Cash dividends declared (781) (658)
Tax benefit relating to exercise of stock options -- 276
-------- --------
Balance at end of period 45,524 39,908
-------- --------
Accumulated other comprehensive income (loss)
Balance at beginning of period (474) (149)
Other comprehensive income (loss) (973) 1,086
-------- --------
Balance at end of period (1,447) 937
-------- --------
Total shareholders' equity $ 71,386 $ 68,430
======== ========
See notes to unaudited consolidated financial statements.
5
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)
Three Months Ended
March 31,
---------------------
2005 2004
-------- --------
Cash flows from operating activities:
Net income $ 2,043 $ 1,895
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, accretion, and amortization 311 673
Provision for credit losses 680 388
Gain on sale of securities available for sale (2) (111)
Gain on disposal of other assets (11) (122)
Net change in loans held for sale 3,526 (4,337)
Changes in assets and liabilities:
Increase in other assets (2,884) (18,196)
Increase in other liabilities 2,418 12,359
-------- --------
Net cash provided by (used in) operating activities 6,081 (7,451)
-------- --------
Cash flows from investing activities:
Proceeds from sales, maturities, or calls of securities available for sale 5,673 15,736
Purchase of securities available for sale (9,649) (3,195)
Purchase of premises and equipment (205) (387)
(Increase) decrease in other real estate owned 201 (1,026)
Net increase in loans (49,688) (18,904)
-------- --------
Net cash used in investing activities (53,668) (7,776)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 43,214 (1,856)
Net decrease in other borrowings 15,000 2,000
Net increase (decrease) in federal funds purchased and repurchase
agreements (5,952) 7,954
Repurchase of common stock (518) (320)
Proceeds from issuance of common stock 734 400
Cash dividends paid (781) (657)
-------- --------
Net cash provided by financing activities 51,697 7,521
-------- --------
Net increase (decrease) in cash and cash equivalents 4,110 (7,706)
Cash and cash equivalents, January 1 24,246 29,319
-------- --------
Cash and cash equivalents, March 31 $ 28,356 $ 21,613
======== ========
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 three-month period ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information
refer to the consolidated financial statements and footnotes thereto
included in FNB Financial Services Corporation's 2004 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
March 31,
----------------------
2005 2004
--------- ---------
Weighted average number of shares
used in basic EPS 5,504,159 5,485,787
Effect of dilutive stock options 196,367 275,221
--------- ---------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 5,700,526 5,760,968
========= =========
For the three months ended March 31, 2005 and 2004, there were
109,000, and 6,250 options, respectively, that were antidilutive because
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 Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 123, the Company has elected to continue
using the measurement prescribed in Accounting Principles Board ("APB")
Opinion No. 25, and accordingly, SFAS No. 123 had no effect on the
Company's financial position or results of operations. The Company has
issued stock under both incentive and non-qualified stock option 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
4. Stock compensation plans (continued)
These plans provide that shares granted come from the Company's
authorized but unissued or reacquired common stock. The exercise price of
the options granted pursuant to these plans will not be less than 100
percent of the fair market value of the shares on the date of grant. The
options granted in 1996 and thereafter vest ratably over a four-year
period. No option will be exercisable after ten years from the date
granted.
For the three months ended
March 31,
--------------------------
(Dollars in thousands, except per share data) 2005 2004
------ ------
Net income, as reported $2,043 $1,895
Less: Stock based
compensation as calculated per
fair value method, net of tax
effect (367) (362)
------ ------
Proforma net income $1,676 $1,533
====== ======
Earnings per share:
Basic - as reported $ 0.37 $ 0.35
Basic - proforma $ 0.36 $ 0.33
Diluted - as reported $ 0.36 $ 0.33
Diluted - proforma $ 0.35 $ 0.32
In December 2004, the FASB issued SFAS No. 123(R), Accounting for
Stock-Based Compensation. This Statement focuses primarily on accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair
value of such equity instruments be recognized as an expense in the
financial statements as services are performed. The provisions of this
Statement are effective for the first interim reporting period that begins
after December 31, 2005. Accordingly, the Company will adopt SFAS No.
123(R) commencing with the quarter ending March 31, 2006.
4. Loans
Loan Category:
(Dollars in thousands) March 31, 2005 December 31, 2004
-------------- -----------------
Real estate - construction $188,904 $162,143
Real estate - mortgage 305,928 290,927
Commercial 84,505 83,332
Consumer 140,755 137,332
-------- --------
Gross loans 720,092 673,734
Less: Loans held for sale 6,782 10,308
-------- --------
Loans held for investment $713,310 $663,426
======== ========
8
4. Loans (continued)
Allowance for credit losses:
March 31, 2005 December 31, 2004
------------------------- -------------------------
% of Loans % of Loans
(Dollars in thousands) in Each in Each
Category to Category to
Allowance Total Loans Allowance Total Loans
--------- ----------- --------- -----------
Balance at end of period
applicable to:
Real estate - construction $ 1 26% $ 1 24%
Real estate - mortgage 71 42 43 42
Commercial 5,410 12 5,166 13
Consumer 2,361 20 2,143 21
------ ------ ------ ------
Total $7,843 100% $7,353 100%
====== ====== ====== ======
Rollforward - allowance for credit losses:
Three Months Ended
March 31,
------------------------
(Dollars in thousands) 2005 2004
------- -------
Balance, beginning of period $ 7,353 $ 7,124
Charge-offs 214 327
Recoveries (24) (18)
------- -------
Net charge-offs 190 309
------- -------
Provision for credit losses 680 388
------- -------
Balance, end of period $ 7,843 $ 7,203
======= =======
Annualized net charge-offs during the
period to average loans outstanding
during the period 0.11% 0.21%
======= =======
Allowance for credit losses to
period end loans 1.10% 1.21%
======= =======
Nonperforming assets:
March 31, December 31,
(Dollars in thousands) 2005 2004
--------- ------------
Nonaccrual $2,569 $3,450
Past due 90 days or more and still accruing interest 44 65
Other real estate 5,357 5,559
Renegotiated troubled debt -- --
9
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
ended March 31,
--------------------
(Dollars in thousands) 2005 2004
---------------------- ----- -----
Service cost $ 127 $ 127
Interest cost 90 90
Expected return on plan assets (121) (121)
Amortization of prior service cost 5 5
----- -----
Net periodic pension cost $ 101 $ 101
===== =====
For the 2005 Plan Year, no tax-deductible contributions are required
or allowed.
6. Subsequent event
On April 21, 2005, the Board of Directors approved a five-for-four
(5:4) stock split of its common stock, to be effected as a 25% stock
dividend. Shareholders of record at the close of business on May 12, 2005
shall receive one additional share of the Company's common stock for each
four shares owned. Certificates for the new shares and any cash to be paid
to shareholders in lieu of fractional shares will be issued on or about
May 31, 2005. The par value of the common stock will remain at $1.00 per
share.
The accompanying table presents, on a proforma basis, March 31, 2005
and 2004 share data, restated to reflect the impact of the stock split.
Three Months Ended
March 31,
-------------------------
2005 2004
---------- ----------
Per share data
Net income, basic $ 0.30 $ 0.28
Net income, diluted $ 0.29 $ 0.26
Cash dividends $ 0.11 $ 0.10
Weighted average shares outstanding, basic 6,880,199 6,857,184
Weighted average shares outstanding, diluted 7,125,658 7,201,210
10
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
2004 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 March 31,
2005, 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 ten offices.
Assets at March 31, 2005 were $920.5 million, an increase of $55.2
million, or 6.4%, since December 31, 2004. A $49.9 million increase in net
loans, combined with a $3.1 million increase in investment securities, were the
principal factors impacting this overall increase during the first three months
of 2005. Over the past three months, interest-bearing deposits rose $37.3
million due to promotional campaigns and noninterest-bearing deposits increased
$5.9 million, resulting in a 6.0% increase in total deposits for the period. The
Company's first quarter earnings were $2.04 million in 2005 and $1.90 million in
2004. Earnings per diluted share were $0.36 for the first quarter of 2005,
compared to $0.33 for the same period in 2004.
Financial Condition
Since December 31, 2004, the Company's assets have increased $55.2
million, rising from $865.3 million at yearend 2004 to $920.5 million at March
31, 2005. The principal factors impacting this overall increase during the first
three months of 2005 were a $49.4 million increase in net loans, combined with a
11
$3.1 million increase in investment securities. Loans at March 31, 2005 totaled
$713.3 million, compared to $663.4 million at yearend 2004, an increase of 7.5%.
Investment securities of $144.7 million at March 31, 2005 were 2.2% higher than
the $141.6 million balance at December 31, 2004.
Deposits totaled $767.5 million at March 31, 2005, compared to $724.3
million at December 31, 2004. At the end of the first quarter 2005,
noninterest-bearing deposits were $84.7 million, or 11.0%, of total deposits. At
March 31, 2005, borrowings at the Federal Home Loan Bank of Atlanta ("FHLB")
totaled $60.0 million, an increase of 33.3%, compared to $45.0 million at
December 31, 2004. This increase was primarily utilized to fund loan demand.
Federal funds purchased and retail repurchase agreements totaled $15.6 million
at March 31, 2005, a decrease of $6.0 million from December 31, 2004.
Shareholders' equity remains strong, with all of our regulatory capital
ratios at levels that classify the Company as "well capitalized" under bank
regulatory capital guidelines. Shareholders' equity increased to $71.4 million
at the end of the first quarter 2005, compared to $70.4 million at December 31,
2004. The Company paid dividends of $0.14 per share during the quarter ended
March 31, 2005, a 16.7% increase over the $0.12 per share dividend rate for the
first quarter of 2004.
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. The 2004 program provides for 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. During the quarter ended March 31,
2005, a total of 22,836 shares were purchased at an average price of $22.67
through the 2004 stock repurchase program. 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 1.10% at March 31, 2005, 1.11% at
December 31, 2004, and 1.21% at March 31, 2004. For the first quarter of 2005,
provision charges against earnings totaled $680,000, compared to $388,000 in the
first quarter of 2004. The increased level of provision in 2005 related
primarily to an increased level of outstanding loans. Net charge-offs for the
first quarter of 2005 totaled $189,000, or a 0.11% annualized loss ratio based
on average loans outstanding. This is a decrease from the net charge-offs for
the first quarter of 2004 totaling $309,000, or 0.21% annualized loss ratio.
Nonperforming loans totaled $2.6 million at March 31, 2005, compared to
$3.5 million at yearend 2004 and $3.6 million at March 31, 2004. Other real
estate owned ("OREO") was $5.4 million at March 31, 2005, $5.6 million at
December 31, 2004, and $5.0 million at March 31, 2004. Approximately $308,000
has been transferred from loans into OREO and approximately $426,000 of such
assets were disposed of during the first three months of 2005. A net loss of
$9,000 has been recorded on disposition of OREO in the current year, compared to
$110,000 in net losses for the same period a year ago. The Company had a
writedown of $149,000 on OREO in the first quarter of 2005 and none in the first
quarter of 2004.
Total nonperforming assets (comprised of nonperforming loans and OREO)
decreased to $8.0 million, or 0.87% of total assets, at March 31, 2005, from
$9.1 million, or 1.05% of total assets, at December 31, 2004 and $8.6 million,
or 1.08% of total assets, a year ago. Management believes these changes indicate
a trend of improving asset quality.
12
Results of Operations for the Three Months Ended March 31, 2005 and 2004
Interest Income and Interest Expense
- ------------------------------------
Total interest income was $13.38 million for the first quarter of 2005,
compared to $10.44 million for the same period a year ago. Average earning
assets for the current quarter were $842.1 million, an increase of 13.5% over
the first quarter average of $742.2 million a year ago. Interest income from
loans was $12.10 million, up 31.7% from $9.19 million in the first quarter of
2004. The increase in interest income was driven by an increase in average loans
outstanding, combined with a rising interest rate environment. Average loans of
$691.2 million were 17.1% higher than the $590.1 million last year. Interest
income on investment securities totaled $1.21 million for the three months ended
March 31, 2005, compared to $1.23 million for the first quarter of 2004. The
average balance of the investment portfolio was $142.0 million for the quarter
ended March 31, 2005, a 2.1% decline from the average balance of $145.0 million
for the prior year first quarter.
Average Balance Sheets/ Interest Income and Expense
For the Three Months Ended: March 31, 2005 March 31, 2004
-------------- --------------
Interest Average Interest Average
(Dollars in thousands) Average Income / Yield / Average Income / Yield /
Balance (3) Expense Rate Balance (3) Expense Rate
--------------------------------------- ---------------------------------------
Interest earning assets:
Loans (2) $ 691,180 $ 12,102 7.10% $ 590,083 $ 9,187 6.31%
Taxable investment securities 103,591 824 3.23% 107,323 856 3.23%
Tax-exempt investment securities 32,328 483 6.06%(1) 33,206 502 6.13%(1)
Other securities 6,044 66 4.43% 4,502 48 4.32%
Overnight deposits 8,998 66 2.97% 7,070 16 0.92%
------------------------ ------------------------
Total earning assets 842,141 13,541 6.52% 742,184 10,609 5.80%
Non-earning assets:
Cash and due from banks 22,681 18,553
Premises and equipment 12,847 12,906
Other assets 28,969 21,772
Less: Allowance for credit losses (7,555) (7,147)
--------- ---------
Total assets $ 899,083 $ 788,268
========= =========
Interest bearing liabilities:
Savings and NOW $ 52,739 20 0.15% $ 52,083 16 0.12%
MMI 121,175 665 2.23% 65,909 225 1.38%
Time deposits 485,920 3,598 3.00% 448,819 2,926 2.64%
Federal funds purchased,
borrowed funds and securities sold
under agreements to repurchase 76,218 580 3.09% 76,379 422 2.24%
------------------------ ------------------------
Total interest bearing liabilities 736,052 4,863 2.68% 643,190 3,589 2.26%
Other liabilities and shareholders'
equity:
Demand deposits 78,685 69,793
Other liabilities 13,526 8,517
Shareholders' equity 70,820 66,768
--------- ---------
Total liabilities and equity $ 899,083 $ 788,268
========= =========
Net interest income and net yield on
earning assets (3) (4) $ 8,678 4.18% $ 7,020 3.84%
======================= =======================
Interest rate spread (5) 3.84% 3.53%
========= =========
(1) The fully tax equivalent basis is computed using a federal tax rate of
34%. The adjustments made to convert to a fully taxable equivalent basis
were $164,000 for 2005 and $172,000 for 2004.
(2) The average loan balances include nonaccruing loans.
(3) The average balances for all years include market adjustments to fair
value for securities and loans available/held for sale.
(4) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5) Earning asset yield minus interest bearing liabilities rate.
13
First quarter total interest expense was $4.86 million, compared to $3.59
million from the first quarter of last year, a 35.5% increase. Average interest
bearing deposits increased 16.4%, to $659.8 million, from $566.8 for the first
quarter of 2004. The average balance of federal funds purchased, borrowed funds
and securities sold under agreements to repurchase was $76.2 million for the
first quarter of 2005 and $76.4 million for the same period in 2004. The Company
primarily utilized the growth in deposits as funding sources to support balance
sheet growth.
During the three months ended March 31, 2005, net interest income
increased $1.67 million, or 24.3%, over the same period a year ago. Net interest
income benefited from strong growth in average earning assets which rose from
$742.2 million for the first quarter of 2004 to $842.1 million for the first
quarter of 2005, a 13.5% increase. The average yields on total interest earning
assets for the same periods increased 72 basis points, from 5.80% to 6.52%.
Average interest bearing liabilities for the first quarter of 2005 increased
14.4%, to $736.1 million, from $643.2 million for the first quarter of 2004. The
average cost of interest bearing liabilities for the same periods increased 42
basis points from 2.26% to 2.68%. The net result was an improvement in the
interest rate spread from 3.53% for the three months ended March 31, 2004 to
3.84% for the same period in 2005.
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 first quarter of 2005 was $680,000
compared to $388,000 in 2004. The allowance for credit losses as a percent of
gross loans outstanding was 1.10% at March 31, 2005, 1.11% at December 31, 2004,
and 1.21% at March 31, 2004. Annualized net credit losses, as a percent of
average loans, was 0.11% and 0.21% for the quarters ended March 31, 2005 and
2004, respectively.
Noninterest Income and Expense
- ------------------------------
Noninterest income in the first quarter of 2005 was $2.14 million,
compared to $1.84 million in the same period last year. Deposit service charges
were $823,000 for the first quarter of 2005, compared to $1.01 million in the
first quarter of 2004. Sales of securities available for sale during the first
quarter of 2005 resulted in a $2,000 loss; however, gains on sales of securities
during the same period in 2004 were $111,000. Noninterest income in the first
quarter of 2005 included $1.00 million in mortgage banking fees and $139,000 in
investment service fees compared to revenues of $334,000 and $134,000,
respectively, for the same period a year ago. The increase in mortgage banking
fees for 2005 was primarily attributable to the increased volume generated by
the mortgage banking subsidiary.
Noninterest expense for the first quarter of 2005 was $6.89 million, a
26.6% increase over the $5.45 million expense in the first quarter of 2004.
Salaries and employee benefits increased $670,000 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 $76,000, and furniture and equipment
expense, which rose $88,000, compared to first quarter 2005. Marketing expense
increased $111,000 in the first quarter 2005, compared to the same period a year
ago, primarily because of costs associated with various deposit campaigns. Other
expense for the first quarters of 2005 and 2004 totaled $1.67 million and $1.22
million, respectively.
14
Provision for Income Taxes
- --------------------------
The Company's provision for income taxes totaled $1.04 million for the
first quarter of 2005 and $961,000 for the same period in 2004. The Company's
effective tax rates were 33.7% for the three-month periods ended March 31, 2005
and 2004. The increase in the provision for 2005, compared to the prior year,
results primarily from the increase in taxable income. Overall, the effective
tax rate is attributable to the current expense required to provide an adequate
provision for income taxes for the quarters ended March 31, 2005 and 2004.
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 the Bank and the Company, respectively, have
adopted minimum capital regulations or guidelines that categorize components and
the level of risk associated with various types of assets. Financial
institutions are required to maintain a level of capital commensurate with the
risk profile assigned to their assets in accordance with the guidelines.
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 March 31, 2005.
Regulatory Guidelines
-------------------------
Well Adequately FNB
Capitalized Capitalized Company Southeast
----------- ----------- ------- ---------
Total Capital 10.0% 8.0% 10.92% 10.57%
Tier 1 Capital 6.0 4.0 9.85 9.50
Leverage Capital 5.0 4.0 8.00 7.72
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 three months of 2005, the Company had net cash provided
by operating activities of $6.1 million, compared to $7.5 million of net cash
used in operating activities in the first three months of 2004. This is
primarily attributable to the $7.9 million decrease in loans held for sale for
the first three months of 2005, compared to a $4.3 million increase in loans
held for sale for the same period in 2004. Also contributing to this variance
were changes in other assets and liabilities: other assets increased $2.9
million in the first quarter of 2005, compared to an increase of $18.2 million
for the same period in 2004; and other liabilities increased $2.4 million and
$12.4 million for the periods ended March 31, 2005 and 2004.
Net cash used in investing activities in the first three months of 2005
totaled $53.7 million. Purchases of investment securities in the current year
totaled $9.6 million and proceeds from sales, calls, or maturities of securities
were $5.7 million. This compares to the first three months of 2004 when proceeds
from sales, calls, or maturities of securities totaled $15.7 million and
purchases of investment securities totaled $3.2 million, leading to net cash
used in investment activities of $7.8 million. An increase in loans outstanding
used $49.7 million in cash during 2005 and $18.9 million during the first
quarter of 2004. Purchases of premises and equipment used $205,000 in 2005,
compared to $387,000 in 2004.
15
During the three months ended March 31, 2005, financing activities
provided $51.7 million. An increase of $43.2 million in deposits and $15.0
million in borrowings were the principal components of this increase, offset
somewhat by a decrease in federal funds purchased and repurchase agreements.
Financing activities in the three months ended March 31, 2004 provided $7.5
million, based primarily on an increase of $8.0 million rise in federal funds
purchased and repurchase agreements, combined with a $2.0 million increase in
borrowings and a $1.9 decrease in deposits
Overall cash and cash equivalents totaled $28.4 million at March 31, 2005,
compared to $24.2 million at December 31, 2004 and $21.6 million at March 31,
2004.
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
five 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 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 three months ended March 31, 2005.
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.
16
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
share repurchase program approved by the Company's Board of Directors in July
2004 authorizing the repurchase of up to 275,124 shares of the Company's
outstanding common stock. The program was publicly announced in the month of
approval.
Stock Repurchase Program - Approved July 2004
---------------------------------------------
(a) (b) (c) (d)
Maximum Number
Total Number of of Shares that
Shares Average Price Cumulative Number of May Yet Be
Period Purchased Paid Per Share Shares Purchased Purchased
- -----------------------
January 1, 2005 to
January 31, 2005 ...... -- -- -- 198,710
February 1, 2005 to
February 28, 2005 ..... 16,650 $ 22.70 39,528 182,060
March 1, 2005 to
March 31, 2005 ........ 6,186 $ 22.60 45,714 175,874
Total ........... 22,836 $ 22.67
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).
17
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).
10.06(8) Benefit Equivalency Plan of the Registrant effective
January 1, 1994.
10.07(12) 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(12) 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(11) 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.
10.18(12) 2005 Annual Incentive Bonus Plan
10.19(12) Third Amendment to Employment Agreement and First
Amendments to Split-Dollar Agreements and Collateral
Agreements with Ernest J. Sewell effective January 1,
2004
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.
18
(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.
(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,
2002, filed with the Securities and Exchange Commission.
(11) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004,
filed with the Securities and Exchange Commission.
(12) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
2004, filed with the Securities and Exchange Commission.
19
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)
May 9, 2005 /s/ MICHAEL W. SHELTON
----------------------
Michael W. Shelton
(Senior Vice President, Chief Financial Officer,
Secretary, and Treasurer)
20