-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JgZKSSX45aCoZxbd7KMieIZrZ4KmnSnmdoZSWV1PbH3T2+nTQl7T+KZASMuzyACj NZ2EtiT7i0FpiC+OT5BA2A== 0000914317-05-002571.txt : 20050809 0000914317-05-002571.hdr.sgml : 20050809 20050809171013 ACCESSION NUMBER: 0000914317-05-002571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0000742679 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561382275 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13086 FILM NUMBER: 051010867 BUSINESS ADDRESS: STREET 1: FNB FINANCIAL SERVICES CORP STREET 2: 1501 HIGHWOODS BLVD SUITE 400 CITY: GREENSBORO STATE: NC ZIP: 27410 BUSINESS PHONE: 3363423346 MAIL ADDRESS: STREET 1: FNB FINANCIAL SERVICES CORP STREET 2: 1501 HIGHWOODS BLVD SUITE 400 CITY: GREENSBORO STATE: NC ZIP: 27410 10-Q 1 form10q-70271_fnb.txt ================================================================================ 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: June 30, 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) ------------------ 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 July 26, 2005, 6,998,529 shares of the registrant's common stock, $1.00 stated value, were outstanding. This Form 10-Q has 26 pages. The Exhibit Index begins on page 20. ================================================================================ FNB FINANCIAL SERVICES CORPORATION FORM 10-Q INDEX Page ---- PART I INANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets June 30, 2005 and December 31, 2004 3 Consolidated Statements of Income and Comprehensive Income Three Months and Six Months Ended June 30, 2005 and 2004 4 Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 18 Item 4 Controls and Procedures 18 PART II OTHER INFORMATION Item 1 Legal Proceedings 19 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 3 Defaults Upon Senior Securities 19 Item 4 Submission of Matters to a Vote of Security Holders 19 Item 5 Other Information 20 Item 6 Exhibits 20 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)
June 30, 2005 December 31, (Unaudited) 2004 * ----------- ------------ ASSETS Cash and due from banks $ 27,742 $ 24,246 Investment securities: Securities available for sale 150,054 137,161 Federal Home Loan Bank and Federal Reserve Bank Stock, at cost 5,514 4,442 Loans, net of allowance for credit losses of $8,380 at June 30, 2005 and $7,353 at December 31, 2004 754,875 656,073 Premises and equipment, net 13,094 13,144 Other assets 28,167 30,269 ----------- ----------- Total assets $ 979,446 $ 865,335 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing $ 95,335 $ 78,810 Interest bearing 716,031 645,475 ----------- ----------- Total deposits 811,366 724,285 Short-term borrowings 24,153 21,534 Long-term debt 65,000 45,000 Other liabilities 5,567 4,086 ----------- ----------- Total liabilities 906,086 794,905 ----------- ----------- Shareholders' Equity: Preferred stock no par value; authorized 10,000,000 shares; none issued -- -- Common stock, $1.00 stated value; authorized 75,000,000 shares; outstanding 6,995,029 at June 30, 2005 and 5,550,326 at December 31, 2004 6,995 5,550 Paid-in capital 21,722 21,367 Retained earnings 45,486 43,986 Accumulated other comprehensive loss (843) (473) ----------- ----------- Total shareholders' equity 73,360 70,430 ----------- ----------- Total liabilities and shareholders' equity $ 979,446 $ 865,335 =========== ===========
* Derived from audited consolidated financial statements. See notes to unaudited 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 Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Interest income Loans $ 13,629 $ 9,311 $ 25,732 $ 18,498 Federal funds sold and overnight deposits 61 29 127 46 Investment securities Taxable 976 711 1,799 1,568 Tax exempt 318 342 637 671 Other 77 48 143 96 ----------- ----------- ----------- ----------- Total interest income 15,061 10,441 28,438 20,879 ----------- ----------- ----------- ----------- Interest expense Deposits 5,253 2,967 9,536 6,135 Short-term borrowings 141 51 241 104 Long-term debt 581 378 1,062 746 ----------- ----------- ----------- ----------- Total interest expense 5,975 3,396 10,839 6,985 ----------- ----------- ----------- ----------- Net interest income 9,086 7,045 17,599 13,894 Provision for credit losses 638 272 1,318 660 ----------- ----------- ----------- ----------- Net interest income after provision for credit losses 8,448 6,773 16,281 13,234 Noninterest income Service charges on deposit accounts 964 960 1,788 1,972 Net gain (loss) on sale of securities (3) -- (5) 111 Income from investment services 95 180 233 313 Mortgage banking fees 618 553 1,622 887 Net gain on disposition of branch -- 825 -- 825 Other noninterest income 141 86 315 337 ----------- ----------- ----------- ----------- Total noninterest income 1,815 2,604 3,953 4,445 Noninterest expense Salaries and employee benefits 3,428 2,984 6,895 5,782 Occupancy expense 394 311 796 636 Furniture and equipment expense 789 701 1,547 1,370 Telecommunications expense 152 129 311 286 Marketing expense 220 215 482 367 Printing and supply expense 174 134 347 265 Other noninterest expense 1,888 1,116 3,559 2,330 ----------- ----------- ----------- ----------- Total noninterest expense 7,045 5,590 13,937 11,036 Income before provision for income taxes 3,218 3,787 6,297 6,643 Provision for income taxes 1,083 1,274 2,119 2,235 ----------- ----------- ----------- ----------- Net income 2,135 2,513 4,178 4,408 Other comprehensive income (loss) 604 (3,070) (369) (1,984) ----------- ----------- ----------- ----------- Comprehensive income (loss) $ 2,739 $ (557) $ 3,809 $ 2,424 =========== =========== =========== =========== Per share data Net income, basic $ 0.30 $ 0.36 $ 0.60 $ 0.64 Net income, diluted $ 0.29 $ 0.35 $ 0.58 $ 0.62 Cash dividends $ 0.11 $ 0.10 $ 0.22 $ 0.20 Weighted average shares outstanding, basic 6,991,912 6,868,133 6,936,055 6,862,659 Weighted average shares outstanding, diluted 7,229,261 7,153,771 7,177,459 7,177,491
See notes to unaudited consolidated financial statements. 4 FNB Financial Services Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited; dollars in thousands)
Six Months Ended June 30, ----------------------------- 2005 2004 ----------- ----------- Cash flows from operating activities: Net income $ 4,178 $ 4,408 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, accretion, and amortization 634 1,215 Provision for credit losses 1,318 660 (Gain) loss on sale of securities available for sale 5 (111) (Gain) loss on disposal of premises and equipment 3 (108) Net change in loans held for sale 3,229 (1,982) Changes in assets and liabilities: Increase in other assets (4,391) (1,599) Increase in other liabilities 1,934 986 ----------- ----------- Net cash provided by operating activities 6,910 3,467 ----------- ----------- Cash flows from investing activities: Proceeds from sales, maturities, or calls of securities available for sale 10,956 18,362 Purchase of securities available for sale (26,366) (9,564) Purchase of premises and equipment (1,089) (1,688) Proceeds from disposal of premises and equipment 111 229 (Increase) decrease in other real estate owned 3,005 (40) Net increase in loans (98,398) (19,642) ----------- ----------- Net cash used in investing activities (111,781) (12,343) ----------- ----------- Cash flows from financing activities: Net increase (decrease) in deposits 87,080 (3,271) Net decrease in other borrowings 20,000 2,000 Net decrease in federal funds purchased and repurchase agreements 2,618 4,939 Repurchase of common stock (627) (1,135) Proceeds from issuance of common stock 853 831 Cash dividends paid (1,557) (1,316) ----------- ----------- Net cash provided by financing activities 108,367 2,048 ----------- ----------- Net decrease in cash and cash equivalents 3,496 (6,828) Cash and cash equivalents, January 1 24,246 29,319 ----------- ----------- Cash and cash equivalents, June 30 $ 27,742 $ 22,491 =========== ===========
See notes to unaudited consolidated financial statements. 5 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 six-month period ended June 30, 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 Six Months Ended June 30, June 30, ------------------------ ------------------------ 2005 2004 2005 2004 --------- --------- --------- --------- Weighted average number of shares used in basic EPS 6,991,912 6,868,133 6,936,055 6,862,659 Effect of dilutive stock options 237,349 285,639 241,404 314,833 --------- --------- --------- --------- Weighted average number of common shares and dilutive potential common shares used in dilutive EPS 7,229,261 7,153,771 7,177,459 7,177,491 ========= ========= ========= =========
For the three months ended June 30, 2005 and 2004, there were 131,875 and 272,375 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 six months ended June 30, 2005 and 2004, there were 131,875 and 269,875 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. 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 received 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 were issued on or about May 31, 2005. All relevant per share data has been restated to reflect this stock split. At the Annual Meeting of Shareholders held on May 19, 2005, proposals to increase the number of authorized shares of common stock from 40,000,000 to 75,000,000 with no par value were approved. For accounting purposes, the common stock will have a stated value of $1.00 per share. 6 3. Stock based compensation 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. 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 For the six months ended -------------------------- ------------------------ June 30, June 30, -------- -------- (Dollars in thousands, except per share data) 2005 2004 2005 2004 - --------------------------------------------- ---- ---- ---- ---- Net income, as reported $ 2,135 $ 2,513 $ 4,178 $ 4,408 Less: Stock based compensation as calculated per fair value method, net of tax effect (92) (91) (183) (182) --------- --------- --------- --------- Proforma net income $ 2,043 $ 2,422 $ 3,995 $ 4,226 ========= ========= ========= ========= Basic earnings per share: As reported $ 0.30 $ 0.36 $ 0.60 $ 0.64 Proforma $ 0.29 $ 0.36 $ 0.58 $ 0.59 Diluted earnings per share: As reported $ 0.29 $ 0.35 $ 0.58 $ 0.62 Proforma $ 0.28 $ 0.35 $ 0.56 $ 0.56
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. 7 4. Loans Loan Category:
June 30, December 31, (Dollars in thousands) 2005 2004 ------------ ------------ Real estate - commercial $ 167,827 $ 166,491 Real estate - residential 149,989 124,436 Real estate - construction 213,165 162,143 Commercial, financial and agricultural 91,098 83,332 Consumer 148,256 137,332 ------------ ------------ Subtotal loans 770,335 673,734 Less: Loans held for sale 7,080 10,308 ------------ ------------ Gross loans $ 763,255 $ 663,426 ============ ============
Allowance for credit losses:
June 30, 2005 December 31, 2004 ------------------------------ ------------------------------ % 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 2 28 $ 1 24 Real estate - mortgage 68 41 43 42 Commercial 5,635 12 5,166 13 Consumer 2,675 19 2,143 21 ------------ ------------ ------------ ------------ Total $ 8,380 100% $ 7,353 100% ============ ============ ============ ============
Rollforward - allowance for credit losses:
Six Months Ended June 30, ------------------------------ (Dollars in thousands) 2005 2004 ------------ ------------ Balance, beginning of period $ 7,353 $ 7,124 Charge-offs 503 634 Recoveries (212) (33) ------------ ------------ Net charge-offs 291 601 ------------ ------------ Provision for credit losses 1,318 660 ------------ ------------ Balance, end of period $ 8,380 $ 7,183 ============ ============ Annualized net charge-offs during the period to average loans outstanding during the period 0.08% 0.20% ============ ============ Ratio of allowance for credit losses to period end loans 1.10% 1.20% ============ ============
8 4. Loans (continued) Nonperforming assets:
June 30, December 31, (Dollars in thousands) 2005 2004 ------------ ------------ Nonaccrual $ 3,974 $ 3,450 Past due 90 days or more and still accruing interest 28 65 Other real estate 2,544 5,559 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 six months -------------------- ------------------ ended June 30, ended June 30, -------------- -------------- (Dollars in thousands) 2005 2004 2005 2004 - ---------------------- ---- ---- ---- ---- Service cost $ 174 $ 127 $ 348 $ 254 Interest cost 109 90 217 180 Expected return on plan assets (131) (121) (262) (242) Amortization of prior service cost 5 5 10 10 ------------ ------------ ------------ ------------ Net periodic pension cost $ 157 $ 101 $ 313 $ 202 ============ ============ ============ ============
For the 2005 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 may contain 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 believes that it uses the best information available 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" or "FNB") 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 June 30, 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 seven offices. The Company relocated its headquarters from Reidsville, North Carolina to Greensboro, North Carolina in April 2004. Assets at June 30, 2005 were $979.4 million, an increase of $114.1 million, or 13.2%, since December 31, 2004. A $98.8 million increase in net loans, combined with a $14.0 million increase in investment securities, were the principal factors impacting this overall increase during the first six months of 2005. Over the past six months, noninterest bearing deposits increased $16.5 million and interest bearing deposits rose $70.6 million, resulting in a 12.0% increase in total deposits for the period. The Company's second quarter earnings were $2.14 million in 2005 and $2.51 million in 2004. Earnings per diluted share were $0.29 for the second quarters of 2005, compared to $0.35 for the same period in 2004. For the first six months of 2005, earnings were $4.18 million, or $0.58 per diluted share, compared to $4.41 million, or $0.62 per diluted share, for the first half of 2004. Excluding after-tax gains of $548,000 from the sale of a banking operation in the second quarter of 2004, year to date earnings for 2005 increased 8.2% and second quarter earnings rose 8.7%. 10 Subsequent to June 30, 2005, two loan production offices of FNB Southeast Mortgage Corporation, located in Charlotte, NC and Cornelius, NC were closed. Management determined that these locations have been unable to produce market share significant enough to warrant FNB's continued commitment to that market and the decision was made to redirect the resources required to fund the operations at these offices into other areas of the Company. Financial Condition Since December 31, 2004, the Company's assets have increased $114.1 million, rising from $865.3 million at yearend 2004 to $979.4 million at June 30, 2005. The principal factors impacting this overall increase during the first six months of 2005 were a $98.8 million increase in net loans, combined with a $14.0 million increase in investment securities. Loans at June 30, 2005 totaled $763.3 million, compared to $663.4 million at yearend 2004, an increase of 15.0%. Investment securities of $155.6 million at June 30, 2005 were $14.0 million higher than the $141.6 million balance at December 31, 2004. Deposits totaled $811.4 million at June 30, 2005, compared to $724.3 million at December 31, 2004. At the end of the second quarter 2005, noninterest bearing deposits were $95.3 million, or 11.8%, of total deposits. At June 30, 2005, borrowings at the Federal Home Loan Bank of Atlanta (FHLB) totaled $65.0 million, an increase of 44.4%, compared to $45.0 million at December 31, 2004. The proceeds form this increase were utilized as a funding source for the growth in the loan portfolio. Federal funds purchased and retail repurchase agreements totaled $24.2 million at June 30, 2005, an increase of $2.6 million from December 31, 2004. Shareholders' equity remains strong, with all of our regulatory capital ratios at levels that enable the Company to be considered "well capitalized" under bank regulatory capital guidelines. Shareholders' equity increased to $73.4 million at the end of the second quarter 2005, compared to $70.4 million at December 31, 2004. The Company paid cash dividends of $0.11 per share during the quarter ended June 30, 2005, a 10.0% increase over the $0.10 per share dividend rate for the second quarter of 2004. As discussed in the Notes to the Consolidated Financial Statements, a five-for-four (5:4) stock split was effected on or about May 31, 2005 with the issuance of shares and cash payment for fractional shares to shareholders of record on May 12, 2005. The Company recorded a fraud loss of $250,000 for the quarter ended June 30, 2005, which represents the deductible amount under the Bank's blanket bond policy. The loss reported is a result of some improper loans made in violation of certain policies and procedures of the Bank. Management of the Company and the Bank is in the process of conducting an investigation of this matter as well as an internal audit of the relevant loan portfolio. In addition, the Bank has engaged an outside consultant to conduct a comprehensive, independent credit review of that loan portfolio. 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 became effective immediately upon completion of the 2002 program. The new authorization allows the repurchase of up to 343,905 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 June 30, 2005, a total of 6,375 shares were purchased at an average price of $18.09 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 11 the methodology employed and other analytical measures in comparison to a group of peer banks. Management believes the allowance for credit 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, as a percentage of period end loans, was 1.10% at June 30, 2005, 1.11% at December 31, 2004, and 1.20% at June 30, 2004. For the second quarter of 2005, provision charges against earnings totaled $638,000, compared to $272,000 in the second quarter of 2004. Net charge-offs for the second quarter of 2005 totaled $102,000, or a 0.06% annualized loss ratio based on average loans outstanding. This is a decrease from the net charge-offs for the second quarter of 2004 totaling $292,000, or 0.20% annualized loss ratio. Annualized net charge-offs for the first six months of 2005 and 2004 were 0.08% and 0.20%, respectively, based on average loans outstanding. Nonperforming loans totaled $4.0 million at June 30, 2005, compared to $3.5 million at yearend 2004 and $2.7 million at June 30, 2004. Other real estate owned ("OREO") was $2.6 million at June 30, 2005, $5.6 million at December 31, 2004, and $5.2 million at June 30, 2004. Approximately $321,000 has been transferred from loans into OREO and approximately $3.0 million of such assets were disposed of during the first six months of 2005. A net loss of $535,000 has been recorded on disposition or writedown of OREO in the current year. Total nonperforming assets (comprised of nonperforming loans and OREO) decreased to $6.6 million, or 0.67% of total assets at June 30, 2005, from $9.1 million, or 1.05% of total assets at December 31, 2004, and $8.0 million, or 1.01% of total assets a year ago. Results of Operations for the Three Months Ended June 30, 2005 and 2004 Interest Income and Interest Expense - ------------------------------------ Total interest income was $15.1 million for the second quarter of 2005, compared to $10.4 million for the same period a year ago. Average earning assets for the current quarter were $899.5 million, an increase of 21.6% over the second quarter average of $739.6 million a year ago. Interest income from loans was $13.6 million, up 46.4% from $9.3 million in the second quarter of 2004. The average rate on loans increased to 7.41% in 2005, a 117 basis point increase over 2004. The increase in interest income was driven primarily by an increase in average loans outstanding combined with increases in the prime lending rate during the past year. Average loans of $737.7 million were 23.3% higher than the $598.3 million last year. Interest income on investments totaled $1.4 million for the three months ended June 30, 2005, compared to $1.1 million for the second quarter of 2004. The average balance of the investment portfolio was $153.4 million for the quarter ended June 30, 2005, a 14.6% increase from the average balance of $133.9 million for the prior year second quarter. Second quarter total interest expense was $6.0 million, compared to $3.4 million from the second quarter of last year, a 76.0% increase. Average interest bearing deposits increased 24.7%, to $694.5 million, from $556.9 for the second quarter of 2004. Interest expense on federal funds purchased and other borrowings was $722,000 and $429,000 for the quarters ended June 30, 2005 and 2004, respectively. The average balance of federal funds purchased and other borrowings was $87.2 million in 2005 and $79.7 million in 2004. The Company utilized the growth in deposits and the increased levels of borrowings as funding sources to support the growth in earning assets. During the three months ended June 30, 2005, net interest income increased $2.0 million, or 29.0%, over the same period a year ago. Net interest income benefited from strong growth in average earning assets which rose from $739.6 million for the second quarter of 2004 to $899.5 million for the second quarter of 2005, a 21.6% increase. The average yields on total interest earning assets for the same periods increased 103 basis points, from 5.76% to 6.79%. Average interest bearing liabilities for the second quarter of 2005 increased 22.8%, to $781.7 million from $636.6 million for the second quarter of 2004. The average cost of interest bearing liabilities for the same periods increased 93 basis points from 12 2.14% to 3.07%. The net result was an improvement in the interest rate spread from 3.62% for the three months ended June 30, 2004 to 3.72% for the same period in 2005. Average Balance Sheet and Net Interest Income Analysis Fully Taxable Equivalent Basis (Dollars in thousands)
For the quarter ended: June 30, 2005 June 30, 2004 Interest Average Interest Average Average Income / Yield / Average Income / Yield / Balance(3) Expense Rate Balance(3) Expense Rate Interest earning assets: Loans (2) $ 737,735 $ 13,629 7.41% $ 598,329 $ 9,311 6.24% Taxable investment securities 114,686 976 3.41% 96,432 711 2.95% Tax-exempt investment securities (1) 32,134 482 6.01% 33,942 521 6.16% Other securities 6,591 77 4.69% 3,501 46 6.87% Federal funds sold and overnight deposits 8,376 61 2.87% 7,426 29 0.92% --------- --------- --------- --------- Total earning assets 899,522 15,225 6.79% 739,630 10,618 5.76% --------- --------- Non-earning assets: Cash and due from banks 32,115 23,938 Premises and equipment 12,898 13,788 Other assets 18,330 20,861 Less: Allowance for credit losses (8,079) (7,152) --------- --------- Total assets $ 954,786 $ 791,065 ========= ========= Interest bearing liabilities: Savings and NOW $ 52,850 $ 31 0.24% $ 52,337 $ 17 0.13% MMI 127,786 823 2.58% 63,947 216 1.35% Time deposits 513,857 4,399 3.43% 440,614 2,734 2.49% Short-term borrowings 23,335 141 2.42% 22,231 51 0.92% Long-term debt 63,835 581 3.65% 57,500 378 2.64% --------- --------- --------- --------- Total interest bearing liabilities 781,663 5,975 3.07% 636,629 3,396 2.14% --------- --------- Other liabilities and shareholders' equity: Demand deposits 88,550 80,590 Other liabilities 12,419 6,577 Shareholders' equity 72,154 67,269 --------- --------- Total liabilities and equity $ 954,786 $ 791,065 ========= ========= Net interest income and net yield on earning assets (3) (4) $ 9,250 4.12% $ 7,222 3.91% ========= ==== ========= ==== Interest rate spread (5) 3.72% 3.62% ==== ====
(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 $179,000 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 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 is deemed appropriate by management. The amount of the provision is based on continuing assessments of factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The provision for credit losses in the second quarter of 2005 was $638,000, compared to $272,000 in 2004. The allowance for credit losses as a percentage of gross loans outstanding was 1.10% at June 30, 2005, 1.11% at December 31, 2004, and 1.20% at June 30, 2004. Annualized net credit losses, as a percent of average loans, was 0.06% and 0.20% for the quarters ended June 30, 2005 and 2004, respectively. Noninterest Income and Expense - ------------------------------ Noninterest income in the second quarter of 2005 was $1.8 million, compared to $2.6 million in the same period last year. Deposit service charges were $964,000 for the second quarter of 2005, compared to $960,000 in the second quarter of 2004. Sales of securities available for sale during the second quarter of 2005 resulted in a $3,000 net loss; however, there were no net gains or losses on the sales of securities during the same period in 2004. Noninterest income in the second quarter of 2005 included $618,000 in mortgage banking fees and $95,000 in investment service fees compared to revenues of $553,000 and $180,000, respectively, for the previous year. Additionally, the Company realized a net gain of $825,000 on the disposition of a branch banking operation in the second quarter of 2004. Noninterest expense for the second quarter of 2005 was $7.0 million, a 26.0% increase over the $5.6 million expense in the second quarter of 2004. Salaries and employee benefits increased $444,000 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 were occupancy expense, which increased $83,000, and furniture and equipment expense, which rose $88,000, compared to second quarter 2004. Marketing expense increased $5,000 in the second quarter of 2004, compared to the same period a year ago, primarily because of costs associated with campaigns designed to increase deposits. Other noninterest expense for the second quarters of 2005 and 2004 totaled $1.9 million and $1.1 million, respectively. The Company recorded a fraud loss of $250,000 for the quarter ended June 30, 2005, which represents the deductible amount under the Bank's blanket bond policy. The loss reported is a result of some improper loans made in violation of certain policies and procedures of the Bank. Management of the Company and the Bank is in the process of conducting an investigation of this matter as well as an internal audit of the relevant loan portfolio. In addition, the Bank has engaged an outside consultant to conduct a comprehensive, independent credit review of that loan portfolio. Provision for Income Taxes - -------------------------- The Company's provision for income taxes totaled $1.1 million for the second quarter of 2005 and $1.3 million for the same period in 2004. The Company's effective tax rates for the three-month periods ended June 30, 2005 and 2004 were 33.6% for each period. Overall, the effective tax rate is attributable to the current expense required to provide an adequate provision for income taxes for the quarters ended June 30, 2005 and 2004. Results of Operations for the Six Months Ended June 30, 2005 and 2004 Interest Income and Interest Expense - ------------------------------------ Total interest income was $28.4 million for the first six months of 2005, compared to $20.9 million for the same period in 2004. Average earning assets for the six months ended June 30, 2005 were $871.0 million, an increase of 17.6% over the average of $740.9 million a year ago. Interest income from 14 loans was $25.7 million, up 39.1% from $18.5 million in 2004. The increase in interest income was driven primarily by a continuing increase in average loans outstanding. Average loans of $714.6 million were 20.3% higher than the $594.2 million last year. The average rate on loans increased to 7.26% in 2005, a 98 basis point increase over 2004. The increase in average loan rate is driven by increases in the prime lending rate over the past year. Interest income on investments for the six-month period totaled $2.6 million in 2005 and $2.3 million in 2004. Average Balance Sheet and Net Interest Income Analysis Fully Taxable Equivalent Basis (Dollars in thousands)
For the six months ended: June 30, 2005 June 30, 2004 ----------------------------------------- ------------------------------------------ Interest Average Interest Average Average Income / Yield / Average Income / Yield / Balance(3) Expense Rate Balance(3) Expense Rate ----------------------------------------- ------------------------------------------ Interest earning assets: Loans (2) $ 714,586 $ 25,732 7.26% $ 594,206 $ 18,498 6.28% Taxable investment securities 109,169 1,799 3.32% 101,347 1,568 3.11% Tax-exempt investment securities (1) 32,231 965 6.04% 33,389 1,017 6.17% Other securities 6,318 143 4.56% 4,716 96 4.10% Overnight deposits 8,686 127 2.95% 7,249 46 1.25% --------- --------- --------- --------- Total earning assets 870,990 28,766 6.66% 740,907 21,225 5.78% --------- --------- Non-earning assets: Cash and due from banks 31,901 25,653 Premises and equipment 12,991 13,242 Other assets 19,026 17,020 Less: Allowance for credit losses (7,819) (7,156) --------- --------- Total assets $ 927,089 $ 789,666 ========= ========= Interest bearing liabilities: Savings and NOW $ 52,795 $ 51 0.19% $ 52,211 $ 33 0.13% MMI 124,499 1,488 2.41% 64,928 441 1.37% Time deposits 499,966 7,997 3.23% 444,715 5,661 2.57% Short-term borrowings 21,784 241 2.23% 22,161 104 0.95% Long-term debt 59,939 1,062 3.57% 55,895 746 2.69% --------- --------- --------- --------- Total interest bearing liabilities 758,983 10,839 2.88% 639,910 6,985 2.20% --------- --------- Other liabilities and shareholders' equity: Demand deposits 85,498 76,482 Other liabilities 11,118 6,255 Shareholders' equity 71,490 67,019 --------- --------- Total liabilities and equity $ 927,089 $ 789,666 ========= ========= Net interest income and net yield on earning assets (3) (4) $ 17,927 4.15% $ 14,240 3.92% ========= ==== ========= ==== Interest rate spread (5) 3.78% 3.58% ==== ====
(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 $328,000 for 2005 and $346,000 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. 15 Total interest expense for the first six months of 2005 was $10.8 million, a 55.2% increase from the $7.0 million expense for the first six months of 2004. Interest expense on deposits for the six-month period increased 55.4%, to $9.5 million for 2005 from $6.1 million in 2004. The average rate for the six months on interest bearing deposits increased to 2.84% in 2005, from 2.20% one year earlier while average interest bearing deposits increased 20.5%, to $677.3 million, from $561.9 for the first six months of 2004. Interest expense on federal funds purchased and other borrowings was $1.3 million for the six months ended June 30, 2005 and $850,000 in 2004. The average balance of federal funds purchased and other borrowings increased from $78.1 million in 2004 to $81.7 million in 2005. The average rate paid on purchased funds increased from 2.20% for the first six months of 2004 to 3.22% for the same period in 2005. The Company utilized the growth in deposits and the increased levels of borrowings as funding sources to support balance sheet growth. During the six months ended June 30, 2005, net interest income increased $3.7 million, or 26.7%, over the same period a year ago. Net interest income benefited from strong growth in average earning assets which rose from $740.9 million for the six months of 2004 to $871.0 million for the same period in 2005, a 17.6% increase. The average yields on total interest earning assets for the same periods increased 88 basis points from 5.78% to 6.66%. Average interest bearing liabilities for the first six months of 2005 increased 18.6%, to $759.0 million from $639.9 million for the first six months of 2004. The average cost of interest bearing liabilities for the same periods increased 68 basis points from 2.20% to 2.88%. The net result was an improvement in the interest rate spread from 3.58% for the six months ended June 30, 2004 to 3.78% 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 is deemed appropriate by management. The amount of the provision is based on continuing assessments of factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The provision for credit losses for the first six months of 2005 was $1.3 million, compared to $660,000 in 2004. The allowance for credit losses as a percentage of gross loans outstanding was 1.10% at June 30, 2005, 1.11% at December 31, 2004, and 1.20% at June 30, 2004. Year to date annualized net credit losses declined to 0.08% of average loans in 2005, compared to 0.20% for the same period in 2004. Noninterest Income and Expense - ------------------------------ Noninterest income for the first six months of this year decreased 11.1% to $4.0 million from $4.4 million in the same period last year. For the six months, $5,000 of net losses from sales of investment securities was recognized in 2005, compared to $111,000 of net gains in the same period last year. Deposit service charges of $1.8 million for the first six months of 2005 decreased 9.3% from the $2.0 million in 2004. Mortgage banking fees increased to $1.6 million for the first six months of 2005, compared to $887,000 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 Bank's mortgage subsidiary. Investment service fees decreased 25.6% for the first six months of 2005, from $313,000 in the first six months of 2004 to $233,000 for the same period in 2005. Noninterest expense for the first six months of 2005 was $13.9 million, a 26.3% increase over the $11.0 million expense in 2004. Salaries and employee benefits increased $1.1 million primarily because of increased staffing associated with the expansion of banking operations and the corporate headquarters relocation, combined with higher insurance and retirement costs. Other items impacted were occupancy expense, which increased $160,000, and furniture and equipment expense, which rose $177,000, compared to the first six months of 2004. Marketing expense increased $115,000 in the first six months of 2005, compared to the same period a year ago. Other noninterest expense was impacted by the expansion of banking operations that included a $336,000 increase in mortgage banking fees during the first six months 16 of 2005, compared to the same period in 2004. Other expense for the first six months of 2005 and 2004 totaled $3.4 million and $2.3 million, respectively. The Company recorded a fraud loss of $250,000 for the quarter ended June 30, 2005, which represents the deductible amount under the Bank's blanket bond policy. The loss reported is a result of some improper loans made in violation of certain policies and procedures of the Bank. Management of the Company and the Bank is in the process of conducting an investigation of this matter as well as an internal audit of the relevant loan portfolio. In addition, the Bank has engaged an outside consultant to conduct a comprehensive, independent credit review of that loan portfolio. Provision for Income Taxes - -------------------------- The Company's provision for income taxes totaled $2.1 million for the first six months of 2005, compared to $2.2 million for the same period of 2004. The Company's effective tax rates for the six-month periods ended June 30, 2005 and 2004 were 33.7% and 33.6%, respectively. Overall, the effective tax rate is attributable to the current expense required to provide an adequate provision for income taxes for the six months ended June 30, 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 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. As shown in the accompanying table, the Company and the Bank have capital levels exceeding the minimum levels for "well capitalized" banks and financial holding companies as of June 30, 2005. Regulatory Guidelines ------------------------- Well Adequately Ratio Capitalized Capitalized Company Bank ----- ----------- ----------- ------- ---- Total Capital 10.0% 8.0% 10.2% 10.1% Tier 1 Capital 6.0 4.0 9.2 9.1 Leverage Capital 5.0 4.0 7.7 7.6 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 six months of 2005 the Company had net cash provided by operating activities of $6.9 million. This was an increase of $3.4 million from the $3.5 million of net cash provided by operating activities in the first six months of 2004. The increase is primarily attributable to the $5.2 million change in loans held for sale and a $2.8 million rise in other assets for the first six months of 2005, compared to the same period in 2004. Net cash used in investing activities in the first six months of 2005 totaled $111.8 million. Purchases of investment securities in the current year totaled $26.4 million and proceeds from sales, calls, or maturities of securities were $11.0 million. This compares to the first six months of 2004 when 17 proceeds from sales, calls, or maturities of securities totaled $18.4 million and purchases of investment securities totaled $9.6 million, leading to net cash used in investment activities of $12.3 million. An increase in loans outstanding used $98.4 million in cash during the first six months of 2005, compared to an increase in outstanding loans in 2004 totaling $19.6 million. Capital expenditures used $1.1 million in 2005, compared to $1.7 million in 2004. During the six months ended June 30, 2005, financing activities provided $108.4 million compared to $2.0 million during the same six months in 2004. This change in financing activities is based primarily on an $87.1 million rise in deposits and cash inflows from other borrowings of $20.0 million during the first six months of 2005. Overall cash and cash equivalents totaled $27.7 million at June 30, 2005 compared to $24.2 million at December 31, 2004 and $22.5 million at June 30, 2004. Liquidity is further enhanced by an approximately $145 million line of credit with the FHLB collateralized by FHLB stock, investment securities, qualifying 1 to 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 of $51.0 million available through six 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 six months ended June 30, 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 18 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 share repurchase program approved by the Company's Board of Directors in July 2004 authorizing the repurchase of up to 343,905 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 Average Price Cumulative Number of of Shares that Period Shares Purchased Paid Per Share Shares Purchased May Yet Be Purchased - --------------------------- ---------------- -------------- ---------------- -------------------- April 1, 2005 to April 30, 2005 ............ -- -- -- 219,843 May 1, 2005 to May 31, 2005 .............. 6,375 $ 18.09 130,438 213,468 June 1, 2005 to June 30, 2005 ............. -- -- -- 213,468 Total ................ 6,375 $ 18.09
Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders On May 19, 2005, at the Annual Meeting of the Company's shareholders, the following proposals were voted on by shareholders: Proposal -------- To elect six members of the Board of Directors as follows: Three Directors to serve for a term of three years ending in 2008. Votes for each nominee were as follows: Nominee For Withheld ------- --- -------- Gary G. Blosser 4,727,516 131,220 Joseph H. Kinnarney 4,716,710 142,027 Kenan C. Wright 4,726,407 132,330 19 Three Directors to serve for a term of two years ending in 2007. Votes for each nominee were as follows: Nominee For Withheld ------- --- -------- Pressley A. Ridgill 4,727,214 131,523 Robbie Perkins 4,683,080 175,657 E. Reid Teague 4,717,918 140,818 The following directors remain in office: Ernest J. Sewell, C. Arnold Britt, and Barry Z. Dodson. Proposal -------- To ratify the appointment of Dixon Hughes PLLC as the Company's independent registered public accounting firm for fiscal year 2005: For Against Abstain --- ------- ------- 4,720,672 68,845 69,220 Proposal -------- To approve an amendment to Article 4 of the Articles of Incorporation of the Corporation to increase the authorized number of shares of common stock from 40,000,000 to 75,000,000: For Against Abstain --- ------- ------- 4,032,800 751,669 74,268 Proposal -------- To approve an amendment to Article 10 of the Articles of Incorporation of the Corporation related to possible acquisitions or business combinations in the form of Article VI of the proposed Amended and Restated Articles of Incorporation: For Against Abstain --- ------- ------- 2,947,001 816,556 105,878 Proposal -------- To approve additional amendments to the Articles of Incorporation in the form of the proposed Amended and Restated Articles of Incorporation: For Against Abstain --- ------- ------- 4,349,696 382,226 126,813 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(2) Specimen Common Stock Certificate. 10.01(4) 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(5) Omnibus Equity Compensation Plan of the Registrant. 20 10.03(6) Severance Policy for Senior Officers of the Registrant (employed for five years or more). 10.04(7) Revised Severance Plan for Senior Officers of the Registrant(employed for five years or more). 10.05(8) Severance Policy for Senior Officers of the Registrant (employed for less than five years). 10.06(9) Benefit Equivalency Plan of the Registrant effective January 1, 1994. 10.07(13) Annual Management Incentive Plan of the Registrant. 10.08(9) Long Term Incentive Plan of the Registrant. 10.09(11) Long Term Incentive Plan of the Registrant for certain senior management employees. 10.10(9) 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(10) Split-Dollar Agreement dated January 27, 1995, between the Registrant and Ernest J. Sewell. 10.12(10) Split-Dollar Agreement dated January 27, 1995, between the Registrant and C. Melvin Gantt. 10.13(10) Split-Dollar Agreement dated December 8, 1995, between the Registrant and Richard L. Powell. 10.14(3) Amendment to Benefit Equivalency Plan of the Registrant effective January 1, 1998. 10.15(10) Split-Dollar Agreement dated March 20, 1998, between the Registrant and Ernest J. Sewell. 10.16(13) 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(12) 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(13) 2005 Annual Incentive Bonus Plan 10.19(13) 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 Current Report on Form 8-K, dated May 25, 2005, filed with the Securities and Exchange Commission. (2) 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. (3) 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. (4) Incorporated herein by reference to the Registrant's Statement on Form S-8 (No. 33-33186), filed with the Securities and Exchange Commission. 21 (5) 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. (6) 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. (7) 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. (8) 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. (9) 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. (10) 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. (11) 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. (12) 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. (13) 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. 22 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) August 9, 2005 /s/ MICHAEL W. SHELTON ----------------------------- Michael W. Shelton (Senior Vice President, Chief Financial Officer, Secretary, and Treasurer) 23 EX-31.1 2 ex31-1.txt Exhibit 31.01 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification: I, Ernest J. Sewell, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of FNB Financial Services Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2005 /s/ ERNEST J. SEWELL ------------------------- Ernest J. Sewell Chief Executive Officer 24 EX-31.2 3 ex31-2.txt Exhibit 31.02 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification: I, Michael W. Shelton, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of FNB Financial Services Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2005 /s/ MICHAEL W. SHELTON ------------------------- Michael W. Shelton Chief Financial Officer 25 EX-32.1 4 ex32-1.txt Exhibit 32.01 FNB FINANCIAL SERVICES CORPORATION Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of FNB Financial Services Corporation (the "Company") certify that the Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 9, 2005 /s/ ERNEST J. SEWELL -------------------- Ernest J. Sewell Chief Executive Officer Dated: August 9, 2005 /s/ MICHAEL W. SHELTON ---------------------- Michael W. Shelton Chief Financial Officer *This certificate is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. 26 -----END PRIVACY-ENHANCED MESSAGE-----