<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
            ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

Commission File Number:    0-13086



                       FNB FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


         North Carolina                                         56-1382275
--------------------------------------------------------------------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation of organization)                            Identification Number)


                  202 South Main Street, Reidsville, N.C. 27320
--------------------------------------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)


                                  336-342-3346
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


                                 Not Applicable
--------------------------------------------------------------------------------
             (Former name, former address, and former fiscal years,
                          if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  X         No
    ---           ---

3,345,527 common shares were outstanding as of July 31, 1999, with a par value
per share of $1.00.





<PAGE>   2


                       FNB FINANCIAL SERVICES CORPORATION
                                 AND SUBSIDIARY

                                      INDEX

<TABLE>
<S>        <C>                                                                              <C>
PART       I      FINANCIAL INFORMATION                                                 PAGE NUMBER

Item       1      Financial Statements

                  Consolidated Balance Sheets
                  June 30, 1999 and December 31, 1998                                        1

                  Consolidated Statements of Income
                  Three months and six months ended June 30, 1999 and 1998                   2

                  Consolidated Statements of Changes in Shareholders Equity
                  June 30, 1999 and December 31, 1998                                        3

                  Consolidated Statements of Cash Flows
                  Six months ended June 30, 1999 and 1998                                  4 - 5

                  Notes to Consolidated Financial Statements                               6 - 8

Item       2      Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                               9 - 12

Item       3      Quantitative and Qualitative Disclosures About Market Risk                13


Part       II     OTHER INFORMATION

Item       1      Legal Proceedings                                                         13

Item       2      Changes in Securities and Use of Proceeds                                 13

Item       3      Defaults Upon Senior Securities                                           13

Item       4      Submission of Matters to a Vote of Security Holders                       14

Item       5      Other Information                                                         14

Item       6      Exhibits and Reports on Form 8-K                                          14
</TABLE>


<PAGE>   3

PART I -  FINANCIAL INFORMATION
Item 1.      Financial Statements

FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Unaudited; in thousands)

<TABLE>
<CAPTION>
                                                           June 30,            December 31,
                                                             1999                  1998
                                                          ---------             ---------
<S>                                                       <C>                   <C>
Assets
Cash and due from banks                                   $  10,789             $   8,854
Securities available for sale                               123,288               144,391
Other equity securities, at cost                              2,234                 1,335
Loans                                                       278,082               255,827
          Less:       Allowance for loan losses              (2,882)               (2,606)
                                                          ---------             ---------
                    Net Loans                               275,200               253,221

Property and equipment, net                                   7,438                 7,295
Intangible assets                                               534                   580
Accrued income and other assets                               5,361                 6,033
                                                          ---------             ---------

                    Total Assets                          $ 424,844             $ 421,709
                                                          =========             =========

Liabilities and Shareholders Equity
Deposits
     Noninterest bearing                                  $  37,886             $  38,588
     Savings/NOW/MMI                                         75,803                74,365
     Other time accounts                                    227,378               232,052
                                                          ---------             ---------
         Total Deposits                                     341,067               345,005


Federal funds purchased and retail
     repurchase agreements                                   21,406                13,932
Other borrowings                                             20,000                15,000
Accrued expenses and other liabilities                        1,234                 3,206
                                                          ---------             ---------

                    Total Liabilities                       383,707               377,143
                                                          ---------             ---------

Shareholders' Equity
Preferred stock, authorized 10,000,000 shares;
     None issued and outstanding                                  0                     0
Common Stock, $1.00 par; authorized
     40,000,000 shares; 3,343,929 shares
     issued in 1999; 3,429,564 shares
     issued in 1998                                           3,344                 3,430
Paid in capital                                              19,668                21,359
Retained earnings                                            20,178                19,113
                                                          ---------             ---------
                                                             43,190                43,902
Accumulated other comprehensive income (loss)                (2,053)                  664
                                                          ---------             ---------

Total shareholders' equity                                   41,137                44,566
                                                          ---------             ---------

 Total Liabilities and Shareholders' Equity               $ 424,844             $ 421,709
                                                          =========             =========
</TABLE>


                                                                               1


<PAGE>   4

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            Three Months Ended                   Six Months Ended
                                                                 June 30,                            June 30,
                                                       -----------------------------       -----------------------------
                                                          1999              1998              1999              1998
                                                       -----------       -----------       -----------       -----------
<S>                                                    <C>               <C>               <C>               <C>
Interest income
Interest and fees on loans                             $     5,936       $     5,979       $    11,632       $    11,526
Interest on federal funds sold and other deposits               28                45                48                96
Interest and dividends on investments:
     U.S. Treasury securities                                    0                45                 0                90
     Federal Agency securities                               1,749             1,691             3,583             2,777
     State, County and Municipal securities                     53                74               107               149
     Other securities                                           38                20                66                44
                                                       -----------       -----------       -----------       -----------
          Total interest income                              7,804             7,854            15,436            14,682
                                                       -----------       -----------       -----------       -----------

Interest expense
Interest on savings, NOW and MMI deposits                      490               319               973               606
Interest on other time deposits                              2,932             3,329             5,918             6,246
Interest on federal funds purchased and other
borrowings                                                     426               422               784               780
                                                       -----------       -----------       -----------       -----------
          Total interest expense                             3,848             4,070             7,675             7,632
                                                       -----------       -----------       -----------       -----------

Net interest income                                          3,956             3,784             7,761             7,050
Provision for loan losses                                      180               315               408               580
                                                       -----------       -----------       -----------       -----------

Net interest income after loan loss provision                3,776             3,469             7,353             6,470

Noninterest income
Deposit service charge                                         355               273               656               517
Net gain on sale of securities                                   8                 8               103                18
Bankcard fees                                                  121               107               230               190
Net gain/(loss) on sale of loans                                (6)               11                 1                61
Other operating income                                          53                49               107                97
                                                       -----------       -----------       -----------       -----------
          Total noninterest income                             531               448             1,097               883

Noninterest expense
Salaries and employee benefits                               1,699             1,449             3,365             2,885
Net occupancy expense                                          178               157               332               301
Furniture and equipment expense                                274               184               574               359
Insurance, including FDIC assessment                            17                15                30                29
Printing and supplies                                           61                49               112               110
Bankcard processing                                            114               103               197               177
Net loss on disposition of asset                                 0                24                58                24
Other operating expense                                        593               485             1,103               838
                                                       -----------       -----------       -----------       -----------
          Total noninterest expense                          2,936             2,466             5,771             4,723

Income before income taxes                                   1,371             1,451             2,679             2,630
Income tax expense                                             459               498               907               902
                                                       -----------       -----------       -----------       -----------

Net income                                                     912               953             1,772             1,728
Other comprehensive income (loss)                           (1,830)              (28)           (2,717)              (44)
                                                       -----------       -----------       -----------       -----------
Comprehensive income (loss)                            $      (918)      $       925       $      (945)      $     1,684
                                                       ===========       ===========       ===========       ===========

Per share data
     Net income, basic                                 $      0.28       $      0.30       $      0.53       $      0.61
     Net income, diluted                               $      0.27       $      0.28       $      0.52       $      0.57
     Cash dividends                                    $      0.11       $      0.10       $      0.22       $      0.20
     Weighted average shares outstanding, basic          3,314,097         3,191,194         3,358,378         2,844,189
     Weighted average shares outstanding, diluted        3,393,452         3,396,048         3,438,367         3,051,947
</TABLE>


                                                                               2
<PAGE>   5

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited; in thousands)

<TABLE>
<CAPTION>
                                                         June 30,           December 31,
                                                           1999                 1998
                                                         --------             --------
<S>                                                      <C>                  <C>

Common stock:
          Beginning balance, January 1                   $  3,430             $  2,494
          Stock issuance                                        0                  897
          Stock repurchase                                   (119)                   0
          Dividend reinvestment plan                           10                   13
          Exercise of stock options                            18                   19
          Employee stock awards                                 0                    1
          Employee 401(k) plan                                  5                    6
                                                         --------             --------
                    Ending balance, June 30                 3,344                3,430
                                                         --------             --------

Paid in capital:
          Beginning balance, January 1                     21,359                3,287
          Stock issuance                                        0               17,546
          Stock repurchase                                 (1,965)                   0
          Dividend reinvestment plan                          117                  266
          Exercise of stock options                            79                   52
          Employee stock awards                                 0                    6
          Employee 401(k) plan                                 78                  202
                                                         --------             --------
                    Ending balance, June 30                19,668               21,359
                                                         --------             --------

Retained earnings:
          Beginning balance, January 1                     19,113               16,541
          Net income for years                              1,772                3,847
          Cash dividends                                     (707)              (1,275)
                                                         --------             --------
                    Ending balance, June 30                20,178               19,113
                                                         --------             --------

Accumulated other comprehensive income (loss)
          Beginning balance, January 1                        664                  196
          Other comprehensive income (loss)                (2,717)                 468
                                                         --------             --------
                    Ending balance, June 30                (2,053)                 664
                                                         --------             --------

Total Shareholders' Equity                               $ 41,137             $ 44,566
                                                         ========             ========
</TABLE>


                                                                               3
<PAGE>   6

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)

<TABLE>
<CAPTION>
                                                                                          Six Months Ended
                                                                                    -----------------------------
                                                                                    June 30,             June 30,
                                                                                      1999                 1998
                                                                                    --------             --------
<S>                                                                                 <C>                  <C>

Cash flows from operating activities
          Interest received                                                         $ 14,882             $ 12,924
          Fees and commissioners                                                       1,461                1,202
          Interest paid                                                               (7,868)              (7,335)
          Noninterest expense paid                                                    (5,190)              (4,396)
          Income taxes paid                                                           (1,180)                (968)
          Proceeds from sale of mortgage loans                                         5,044               12,836
                                                                                    --------             --------
                    Net cash provided by operating activities:                         7,149               14,263
                                                                                    --------             --------

Cash flows from investing activities:
          Proceeds from sale of securities                                            55,652               28,832
          Proceeds from call/maturity of securities                                   14,067                9,520
          Purchase of securities                                                     (54,374)             (92,685)
          Capital expenditure                                                           (549)                (733)
          (Increase)/Decrease in other real estate                                     1,113               (1,369)
          (Increase)/Decrease in net loans                                           (27,175)             (37,019)
                                                                                    --------             --------
                    Net cash used by investing activities:                           (11,266)             (93,454)
                                                                                    --------             --------

Cash flows from financing activities:
          Increase/(Decrease) in DDA, Savings, NOW, MMI                                  737                8,054
          Increase/(Decrease) in time deposits                                        (4,675)              48,921
          Increase/(Decrease) in federal funds and repurchase agreements               7,474               (1,297)
          Increase/(Decrease) in long term debt                                        5,000                5,000
          Proceeds from stock issuance                                                   307               19,033
          Repurchase of common stock                                                  (2,084)                   0
          Dividends paid                                                                (707)                (590)
                                                                                    --------             --------
               Net cash provided by investing activities:                              6,052               79,121
                                                                                    --------             --------

Net Increase/(Decrease) in cash and cash equivalents                                   1,935                  (70)
Cash and cash equivalents as of January 1                                              8,854                9,612
                                                                                    --------             --------

Cash and cash equivalents as of June 30                                             $ 10,789             $  9,542
                                                                                    ========             ========

Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate                                  $    157             $  1,467
</TABLE>


                                                                               4
<PAGE>   7

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)

Reconciliation of net income to net
     cash provided by operating activities:

<TABLE>
<CAPTION>
                                                                               Six Months Ended
                                                                        ----------------------------
                                                                        June 30,            June 30,
                                                                          1999                1998
                                                                        --------            --------
<S>                                                                     <C>                 <C>

Net Income                                                              $  1,772            $  1,728

Adjustments to reconcile net income to cash:
          Provision for loan loss                                            408                 580
          Depreciation                                                       406                 265
          Accretion and amortization                                         248                 167
          (Gain)/Loss on sale of securities                                 (103)                (18)
          (Gain)/Loss on sale of assets                                       58                  24
          (Gain)/Loss on sale of mortgages                                    (1)                (61)
          Proceeds from mortgage loans                                     5,044              12,836
          (Increase)/Decrease in interest receivable                           8                (879)
          (Increase)/Decrease in prepaid expense                            (134)                (61)
          (Increase)/Decrease in accrued interest                            (42)                  4
          (Increase)/Decrease in miscellaneous assets                       (274)               (391)
          Increase/(Decrease) in taxes payable                              (268)                (66)
          Increase/(Decrease) in interest payable                           (193)                297
          Increase/(Decrease) in accrued expenses                            205                  47
          Increase/(Decrease) in prepaid income                                5                   8
          Increase/(Decrease) in miscellaneous liabilities                    10                (217)
                                                                        --------            --------

                    Net cash provided by operating activities           $  7,149            $ 14,263
                                                                        ========            ========
</TABLE>


                                                                               5
<PAGE>   8

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 generally accepted accounting principles
         for interim information and with the instructions to Form 10-Q and Rule
         10-01 of Regulation S-X. Accordingly, they do not include all of the
         information and footnotes required by generally accepted accounting
         principles for complete financial statements. In the opinion of
         management, all adjustments (consisting of normal recurring accruals)
         considered necessary for a fair presentation have been included.
         Operating results for the three and six month periods are not
         necessarily indicative of the results that may be expected for the year
         ended December 31, 1999.

2.       Comprehensive Income

         The Company's other comprehensive income for the three and six months
         period ended June 30, 1999 and 1998 consists of unrealized gains and
         losses on available for sale securities.

3.       Net Income Per Share

         Basic and diluted earnings per share amounts have been computed based
         upon net income as presented in the accompanying income statements
         divided by the weighted average number of common shares outstanding or
         assumed to be outstanding as summarized below:

<TABLE>
<CAPTION>
                                                           Three Month Ended                        Six Months Ended
                                                  June 30, 1999        June 30, 1998       June 30, 1999      June 30, 1998
                                                  ----------------     ---------------     ---------------    ----------------
<S>                                                     <C>                 <C>                 <C>                 <C>

Weighted average number of shares
          Used in basic EPS                             3,314,097           3,191,194           3,358,378           2,844,189
Effect of dilutive stock options                           79,355             204,854              79,989             207,758
                                                  ----------------     ---------------     ---------------    ----------------

Weighted average number of common
          shares and dilutive potential common
          shares used in dilutive EPS                   3,393,452           3,396,048           3,438,367           3,051,947
                                                  ================     ===============     ===============    ================
</TABLE>


4.       Investment Securities

<TABLE>
<CAPTION>
                                                             June 30, 1999                         December 31, 1998
                                                     Amortized              Fair             Amortized             Fair
                                                       Cost                Value                Cost               Value
                                                  ------------------------------------     -----------------------------------
<S>                                                     <C>                 <C>                 <C>                 <C>

Securities available for sale
          U.S. Agency Securities                        $ 122,899           $ 119,390           $ 139,488           $ 140,280
          State and Municipal Obligations                   3,754               3,898               3,815               4,111
                                                  ----------------     ---------------     ---------------    ----------------

                    Total Available for Sale            $ 126,653           $ 123,288           $ 143,303           $ 144,391
                                                  ================     ===============     ===============    ================
</TABLE>


                                                                               6
<PAGE>   9

5.       Loans

<TABLE>
<CAPTION>
                                                          June 30,        December 31,
                                                            1999              1998
                                                          --------          --------
<S>                                                       <C>               <C>

Loan Category
          Real estate - residential                       $ 47,583          $ 50,121
          Real estate - commercial                         101,627            83,202
          Real estate - construction                        20,653            24,976
          Commercial, financial and agricultural            42,363            45,141
          Consumer - direct                                 33,675            23,908
          Consumer - home equity                            27,239            24,122
          Consumer - other                                   4,942             4,357
                                                          --------          --------

                    Total Loans *                         $278,082          $255,827
                                                          ========          ========
</TABLE>


         * The Bank has no foreign loan activity.


6.       Allocation of Allowance for Loan Loss

<TABLE>
<CAPTION>
                                                             June 30, 1999                          December 31, 1998
                                                   ----------------------------------       ----------------------------------
                                                                     % of Loans in                           % of Loans in
Balance at end of period                                             Each Category                           Each Category
Applicable to:                                     Allowance         to Total Loans         Allowance        to Total Loans
                                                   ----------------------------------       ----------------------------------
<S>                                                       <C>                   <C>               <C>                   <C>

          Real estate - construction                      $   5                   7%               $   4                  10%
          Real estate - mortgage                             25                  17%                  27                  18%
          Commercial                                      1,891                  52%               1,427                  52%
          Consumer                                          858                  24%               1,066                  20%
          General                                            40                   0%                  57                   0%
                                                   ----------------------------------       ----------------------------------

                    Total balance sheet allocation        2,819                 100%               2,581                 100%
                                                                    =================                        =================

Off balance sheet commitments                                63                                       25
                                                   -------------                            -------------

                    Total allocation                    $ 2,882                                  $ 2,606
                                                   =============                            =============
</TABLE>


                                                                               7
<PAGE>   10

7.       Analysis of Allowance for Loan Loss

<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                         June 30,           June 30,
                                                           1999               1998
                                                          ------             ------
<S>                                                       <C>                <C>

Beginning balance                                         $2,606             $2,331

Charge-offs:                                                 162                188
Recoveries:                                                   30                 41
                                                          ------             ------
Net Charge-offs                                              132                147
                                                          ------             ------

Allowance charged to operations                              408                580
                                                          ------             ------

Balance at end of period                                  $2,882             $2,764
                                                          ======             ======

Ratio of annualized net charge-offs during the
          Period to average loans outstanding
          during the period                                0.10%              0.16%
                                                          ======             ======

Ratio of allowance for loan loss to
          month end loans                                  1.04%              1.10%
                                                          ======             ======
</TABLE>



8.       Nonperforming Assets

                                                        June 30,   December 31,
                                                          1999         1998
                                                        --------   ------------

Nonaccrual (1)                                           $  793      $  355
Past due 90 days or more and still accruing interest          0           0
Other real estate                                           338       1,451
Renegotiated trouble debt                                 $   0       $   0


(1)      Other than amounts listed above, there are no other loans which: (a)
         represent or result from trends or uncertainties which management
         reasonably expects will materially impact future operating results,
         liquidity, or capital resources, or (b) represent material credits
         about which management is aware of any information which causes
         management to have serious doubts as to the ability of such borrowers
         to comply with the loan repayment terms.


                                                                               8

<PAGE>   11

ITEM 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operation

Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements, including the factors set forth under "Risk Factors"
in the Company's Registration Statement on Form S-4 filed with the Securities
and Exchange Commission (File No. 333-82873).

Summary

Net income for the quarter ended June 30, 1999 of $912,000 was 4.3% less than
the $953,000 earned in the second quarter last year, with the decline primarily
due to higher noninterest expense for the quarter. For the six months to date,
earnings of $1,772,000 were up 2.5% over the same period in 1998, with the
increase primarily due to increase in noninterest income for the six-month
period. Total assets at June 30, 1999 stood at $424.8 million, an increase of
$18.8 million compared to $406.0 million one year earlier. The increase in total
assets is due to loan growth over the preceding twelve months.

Interest Income and Interest Expense

Total second quarter interest income decreased 0.6% over the same quarter last
year, with a 5.7% improvement in average earning assets. Average loans increased
6.6% during the quarter and income from loans was down 0.7%, as the weighted
average yield of 8.90% this quarter was down from 9.55% one year ago. Average
investment in securities in the second quarter was up 4.8% compared to the 1998
second quarter. For the full six-month period this year, total interest income
was up 5.1%, on a 12.9% increase in average earning assets.

Total interest expense in the second quarter this year was 5.5% less than the
1998 second quarter, with average interest bearing liabilities up 4.4%. Interest
expense on certificates of deposits decreased by $397,000 and the certificate
portfolio repriced in response to the interest rates cuts in the latter portion
of 1998. Increased interest expense on savings, NOW and MMI accounts is
primarily due to interest expense on MMI accounts, as these balances have
increased substantially over the past quarters. MMI accounts typically have a
lower rate than certificates of deposit and have served to maintain deposit
customers during a period of decreasing rates on certificates.

Comparable net interest margins were as follows:

                                              Liability         Interest Rate
Time Period             Asset Yield             Rate                Spread
-----------             -----------             ----                ------
Second Quarter, 1999      7.90 %        -       4.64 %      =       3.26 %
Second Quarter, 1998      8.44 %        -       4.63 %      =       3.81 %
Year to Date, 1999        7.84 %        -       4.64 %      =       3.20 %
Year to Date, 1998        8.50 %        -       4.61 %      =       3.89 %

Noninterest Income and Expense

Noninterest income in the second quarter this year was up 18.4%, which included
gains of 30.3% in deposit service charges and 12.5% increase in bankcard fees
from the Company's credit card operation. Six months noninterest income was
24.2% higher, including 26.9% more from deposit service charges and 21.5% more



                                                                               9
<PAGE>   12

in bankcard fees. Net securities gains increased by $85,000, but were largely
offset by a decline of $60,000 in gains on the sale of mortgage loans.

Noninterest expense was up 19.0% in the 1999 second quarter, primarily because
of increased personnel expense associated with increased staffing levels
necessary to manage to Company's growth. Personnel expense increased 17.3%,
occupancy increased 13.6%, and furniture and fixture expense increased 48.7%.
The six-month comparison mirrored the quarter, with personnel expense 16.7%
higher, occupancy up 10.9% and furniture and fixture up 59.8%. Furniture and
fixture expense was up sharply at June 30, 1999 primarily due to higher
depreciation expense on the Company's computer network installed in 1998.

The provision for loan losses was funded at a lower level due to more moderate
loan growth in 1999 compared to 1998. The provision was $180,000 for the second
quarter 1999, compared to $315,000 in 1998. For the 1999 six months, the
provision totaled $408,000, compared to $580,000 in the 1998 six-month period.

Financial Condition

The Company's total assets at June 30, 1999 and 1998, were $424.8 million and
$406.0 million, respectively, and $421.7 million at December 31, 1998. Average
earning assets for the second quarter were $396.3 million, or 5.7% higher than
the $374.8 million during the same quarter last year. Loans at June 30, 1999,
totaled $278.1 million versus $251.7 million one year earlier, an increase of
10.5%. Year to date, loans have increased 8.7% from $255.8 million at December
31, 1998. Investment securities of $125.5 million represent a 6.3% decrease from
$134.0 million one year ago, and a 13.9% decrease from $145.7 million at
December 31, 1998.

Average interest bearing liabilities for the second quarter were $332.0 million,
or 4.4% higher than the $318.1 million for the same quarter last year. Deposits
totaled $341.1 million at June 30, 1999, a 3.6% increase versus one year ago,
and a 1.1% decrease over the $345.0 million recorded at December 31, 1998. The
Bank experienced a decrease in deposits for the first half of the year when
maturing certificates of deposit were repriced downward in response to a sharp
decline in interest rates in the latter portion of 1998. For the second quarter,
borrowings at the Federal Home Loan Bank of Atlanta remained at $20.0 million.
The Company has a $40.0 million line of credit at the Federal Home Loan Bank of
Atlanta, and management believes this is a cost effective funding source.

Shareholders' equity decreased to $41.1 million, from $44.6 million at December
31, 1998. The decrease is due to the unrealized loss on available for sale
securities and the repurchase of 119,000 shares of common stock in the first
quarter of 1999.

Asset Quality

The allowance ratio at June 30, 1999, stood at 1.04% compared to 1.03% at
December 31, 1998 and 1.10% at June 30, 1998. The decrease in the allowance
ratio from 1.10% one-year earlier is attributable to net charge-offs of $577,000
in the third quarter of 1998. For the first six months of 1999, the provision
for loan losses was $408,000 compared to $580,000 for the same period earlier.
The decreased level of provision is attributable to more moderate growth in the
loan portfolio in 1999. During 1999, the Company has experienced charge-offs of
$162,000 and recoveries of $30,000, or $132,000 in net charge-offs. This
compares favorably to the same period last year when net charge-offs were
$147,000.

The Company's allowance for loan loss is analyzed quarterly by management. This
analysis includes a methodology that segments the loan portfolio by selected
types and considers the current status of the portfolio, historical charge-off
experience, current levels of delinquent, impaired and non-performing loans, as
well as economic and inherent 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.



                                                                              10
<PAGE>   13

Other real estate owned decreased to $338,000 at June 30, 1999 compared to $1.4
million at December 31, 1998. The decline resulted from the sale of other real
estate during the first six months. A loss of $58,000 was recorded in
conjunction with the sale of approximately $1.2 million of such property.

Capital Resources

Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The Office of the Commissioner of Banks in North Carolina and
the Federal Reserve, who are the primary regulators 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 its assets in accordance with the
guidelines. As shown in the table below, the Company and FNB Southeast, which is
the wholly-owned subsidiary of the Company, have capital levels exceeding the
minimum levels for "well capitalized" banks and bank holding companies as of
June 30, 1999.

                        Regulatory  Guidelines                   Actual
                     ----------------------------      -------------------------
                        Well           Adequately                         FNB
Ratio                Capitalized      Capitalized      Company         Southeast
-----                -----------      -----------      -------         ---------
Total Capital          10.0 %            8.0 %          15.2 %           14.7 %
Tier 1 Capital          6.0 %            4.0 %          14.2 %           13.7 %
Leverage Capital        5.0 %            4.0 %          10.3 %           9.9 %

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawal, loan funding, dividends to
shareholders, and general corporate activities create a need for liquidity for
the Company. Liquidity is derived from sources such as deposit growth,
maturity/calls/sales of investment securities, principal and interest payments
on loans, access to borrowed funds or lines of credit, and profits. Internal
liquidity analysis indicates the Company has the ability to generate sufficient
amounts of cash to cover day-to-day activity and fund earning assets growth over
the twelve month period analyzed.

Year 2000

As the Year 2000 approaches, the Company has taken, and continues to take, steps
to become Year 2000 compliant. The Company primarily utilizes a third party
vendor for processing its primary banking applications. In addition, the Company
also utilizes third party vendor application software for all ancillary computer
applications. The third party vendor for the Company's banking applications has
completed a review of all processing systems in addition to third party software
applications. Furthermore, they have completed all phases of Year 2000 review
and implemented any renovation necessary to achieve Year 2000 readiness.

The Federal Financial Institutions Examination Council recognizes five phases
that banks must complete to achieve Year 2000 readiness: 1) Awareness of the
potential risks associated with Year 2000; 2) Assessment of all information and
environmental systems needing enhancements; 3) Renovation of the systems that
are not Year 2000 ready; 4) Validation of the renovated systems to assure Year
2000 readiness; and 5) Implementation of the renovated product into the ongoing
operations. By the end of September 1998, the Company had completed the
awareness, assessment, and renovation phases for its core processing systems.
The Company completed the validation and implementation phase for its core
processing applications, and other mission critical applications during the
forth quarter of 1998. Also by the end of 1998, the Company had completed the
awareness, assessment and renovation phases for non-mission critical
applications. By March 31, 1999 the Company had substantially completed the
validation and implementation phases for non-mission critical applications. By
June 30, 1999 the Company had tested contingency plans developed to process
transactions in a non-computerized environment. (See discussion of contingency
plans in a following paragraph.)



                                                                              11
<PAGE>   14

The Company also uses non-computer systems, such as ATMs, security systems,
telecommunications systems and alarm systems that may contain embedded
technology. The Company completed the implementation phase for non-computer
systems during the first quarter 1999.

Cost of Year 2000 compliance is not expected to be material to the result of
operations. Year 2000 costs are budgeted at $35,000 for 1999, and at the end of
the second quarter $1,000 of Year 2000 expenses have been incurred. These costs
only reflect external costs of Year 2000 compliance, and do not include
personnel expense based on time devoted to this effort by employees since the
company does not track these internal costs separately.

As a lending institution, The Company is also exposed to potential risk if
borrowers suffer Year 2000 related difficulties and are unable to repay their
loans. The Company is discussing the Year 2000 with borrowers as part of the
loan granting or renewal process. At this time, it is impossible to determine
what impact, if any the Year 2000 will have on the loan payment performance of
the Company's borrowers. No single borrower is significant enough to materially
impact the financial position of the Company. Thus far, however, none of the
Company's borrowers have reported the expectation of material adverse impacts as
a result of the Year 2000.

In addition to the above noted efforts, the Company has developed and tested
contingency plans in the event one or more systems would fail. During the second
quarter, the Company tested these back-up procedures and determined these plans
to be an effective method of processing transactions in the event of a system
failure. The most reasonably likely worst case scenario is that the Company's
core banking applications fail to function properly at or near the century date
change. In this scenario, the Company would not be able to process daily
transactions as normal. A Year 2000 Contingency Planning Team developed
procedures for key areas in the event that one or more computer systems fail.
These contingency plans and procedures do not involve standard and ordinary
computer processing. By utilizing these procedures, management feels the Company
would be able to operate until the problems are resolved. However, this may
result in delays of updating records and the Company may incur additional
expenses operating under such conditions.

Effects of Inflation

Inflation affects financial institutions in ways that are different from most
commercial and industrial companies, which have significant investments in fixed
assets and inventories. The effect of inflation on interest rates can materially
impact bank operations, which rely on net interest margins as a major source of
earnings. Non-interest expenses, such as salaries and wages, occupancy and
equipment cost are also negatively impacted by inflation.

Recent Events

On May 28, 1999 The Company announced the signing of a definitive merger
agreement with Black Diamond Savings Bank, F.S.B., a savings bank headquartered
in Norton, Virginia. Black Diamond is a federally chartered savings bank
operating a main office and three branch offices. Black Diamond has total assets
of approximately $131 million at March 31, 1999.

Under terms of the agreement, the Company will acquire Black Diamond by
exchanging 1.3333 shares of the Company's stock for each share of Black Diamond
stock, or a total of 1,113,397 shares of FNB stock. The transaction is valued at
approximately $17.9 million.

On July 14, 1999, the Company filed a registration statement with the SEC in
connection with the Black Diamond transaction and mailed to its shareholders on
July 30, 1999 a joint proxy statement-prospectus seeking shareholder approval of
the shares to be issued at a special meeting of shareholders scheduled for
August 31, 1999.

In April 1999, the Bank received regulatory approval from the Commissioner and
the Federal Reserve to close a branch located in Eden, North Carolina. The Bank
will continue to serve these customers through two other branches in the same
city located less than three miles from the closing branch. The branch was
closed on July 30, 1999.



                                                                              12
<PAGE>   15

PART 1 - 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
         spread 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.



PART II - OTHER INFORMATION

ITEM 1.
Legal proceedings

                           None.

ITEM 2.
Changes in Securities and Use of Proceeds

                           None.

ITEM 3.
Defaults Upon Senior Securities

                           Not applicable.



                                                                              13
<PAGE>   16

ITEM 4.
Submission of Matters to a Vote of Security Holders.

                           On April 13, 1999, at the annual meeting of the
                           Company's shareholders, the following proposals were
                           voted on by shareholders.

                           Proposal One

                           To elect three nominees to serve as Class III
                           Directors, each to serve a three-year term until the
                           Annual Meeting of Shareholders in 2002.

                           Directors elected were Joseph H. Kinnarney, Elton H.
                           Trent, Jr., and Kenan C. Wright. Votes for each
                           nominee were as follows:

                                 NOMINEE                FOR             WITHHELD
                           -------------------       ---------          --------
                           Joseph H. Kinnarney       2,532,898           69,598
                           Elton H. Trent, Jr.       2,523,881           78,615
                           Kenan C. Wright           2,534,443           68,053

                           The following directors continue in office after the
                           meeting: Ernest J. Sewell, Charles A. Britt, Barry Z.
                           Dodson, Willard B. Apple, Jr., O. Eddie Green and
                           Clifton G. Payne.


                           Proposal Two

                           To ratify the selection by the Board of Directors of
                           PricewaterhouseCoopers LLP as the Company's
                           independent auditors for the 1999 fiscal year.

                           For - 2,594,190
                           Against - 3,309
                           Abstain - 4,997

ITEM 5.
Other Information.
                           None.

ITEM 6.
Exhibits and Reports on Form 8-K.

                           (a)      Exhibits

                                    27.01    Financial Data Schedule

                           (b)      Reports on Form 8-K.



                                                                              14
<PAGE>   17

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                     FNB FINANCIAL SERVICES CORPORATION
                            ----------------------------------------------------
                                               (Registrant)


Date      8/12/99                       /s/ Robert F. Albright
                            ----------------------------------------------------
                                            Robert F. Albright
                            (Executive Vice President & Chief Financial Officer)



                                                                              15