FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-24141
FNB Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1791618
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
105 Arbor Drive, Christiansburg, Virginia 24068
(Address of principal executive offices) (Zip Code)
(540) 382-4951
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, 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. X Yes No
3,722,139 shares outstanding as of March 31, 1999
<PAGE>
FNB CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
<PAGE>
FNB CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
The financial statements filed as a part of Item 1 of Part I are as follows:
1. Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited);
2. Unaudited Consolidated Statements of Income for the three-month periods
ended March 31, 1999 and 1998;
3. Unaudited Consolidated Statements of Comprehensive Income for the
three-month periods ended March 31, 1999 and 1998;
4. Unaudited Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 1999 and 1998; and,
5. Unaudited Consolidated Statements of Changes in Stockholders' Equity
for the three-month periods ended March 31, 1999 and 1998.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
March 31, 1999
In Thousands, Except Share and Per Share Data
(Unaudited)
<S> <C>
ASSETS
Cash and due from banks $ 10,582
Federal funds sold 240
Securities available-for-sale, at fair value 55,860
Securities held-to-maturity, at amortized cost
(market value $38,969) 37,771
Mortgage loans held for sale 1,765
Loans:
Commercial 96,591
Consumer 65,638
Real estate - commercial 67,516
Real estate - construction 19,600
Real estate - mortgage 96,130
Total loans 345,475
Less unearned income 0
Loans, net of unearned income 345,475
Less allowance for loan losses 4,936
Loans, net 340,539
Bank premises and equipment, net 13,128
Other real estate owned 30
Other assets 5,488
Total assets $ 465,403
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 40,715
Interest-bearing demand and savings deposits 123,681
Time deposits 172,440
Certificates of deposit of $100,000 and over 52,127
Total deposits 388,963
Federal funds purchased and securities sold under
agreements to repurchase 5,850
Other borrowed funds 21,938
Other liabilities 3,268
Total liabilities 420,019
Stockholders' equity:
Common stock, $5.00 par value, Authorized 10,000,000
shares; issued and outstanding 3,722,139 shares 18,611
Surplus 19,320
Unearned ESOP shares (107,018 shares) (1,934)
Retained earnings 9,284
Accumulated other comprehensive income 103
Total stockholders' equity 45,384
Total liabilities and stockholders' equity $ 465,403
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
December 31, 1998
In Thousands, Except Share and Per Share Data
<S> <C>
ASSETS
Cash and due from banks $ 11,875
Federal funds sold 10,600
Securities available-for-sale, at fair value 57,232
Securities held-to-maturity, at amortized cost
(market value $39,641) 38,352
Mortgage loans held for sale 1,646
Loans:
Commercial 85,536
Consumer 66,526
Real estate - commercial 65,165
Real estate - construction 16,686
Real estate - mortgage 94,686
Total loans 328,599
Less unearned income -
Loans, net of unearned income 328,599
Less allowance for loan losses 4,640
Loans, net 323,959
Bank premises and equipment, net 12,977
Other real estate owned 30
Other assets 5,245
Total assets $ 461,916
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 39,141
Interest-bearing demand and savings deposits 126,204
Time deposits 172,368
Certificates of deposit of $100,000 and over 48,544
Total deposits 386,257
Securities sold under agreements to repurchase 6,650
Other borrowed funds 21,612
Other liabilities 2,996
Total liabilities 417,515
Stockholders' equity:
Common stock, $5.00 par value. Authorized 10,000,000
shares; issued and outstanding 3,722,139 shares 18,611
Surplus 19,320
Unearned ESOP shares (117,660 shares) (2,120)
Retained earnings 8,307
Accumulated other comprehensive income 283
Total stockholders' equity 44,401
Total liabilities and stockholders' equity $ 461,916
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FNB Corporation and subsidiaries
Three Months Ended March 31, 1999 and 1998
In Thousands, Except Share and Per Share Data
(Unaudited)
1999 1998
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 7,656 6,962
Interest on securities:
Taxable 693 895
Nontaxable 605 571
Interest on federal funds sold 71 155
Total interest income 9,025 8,583
Interest expense:
Interest on interest-bearing
demand and savings deposits 686 709
Interest on time deposits 2,336 2,498
Interest on certificates of deposit
of $100,000 and over 807 736
Interest on federal funds purchased
and securities sold under
agreements to repurchase 56 52
Interest on other borrowed funds 314 327
Interest on ESOP debt 0 36
Total interest expense 4,199 4,358
Net interest income 4,826 4,225
Provision for loan losses 289 110
Net interest income after
provision for loan losses 4,537 4,115
Noninterest income:
Service charges on deposit accounts 325 265
Loan origination fees 102 70
Other service charges and fees 159 125
Other income 327 184
Securities gains (losses), net 0 25
Total noninterest income 913 669
Noninterest expense:
Salaries and employee benefits 1,767 1,642
Occupancy and equipment expense, net 601 509
Credit card expense 145 115
Supplies expense 119 124
FDIC assessment expense 22 11
Other expenses 721 570
Total noninterest expense 3,375 2,971
Income before income tax expense 2,075 1,813
Income tax expense 484 404
Net income $ 1,591 1,409
Net income per share (as restated) $ 0.44 0.39
Dividends declared per share
(as restated) $ 0.17 .15
Average number of shares
outstanding (as restated) 3,614,368 3,591,837
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FNB Corporation and subsidiaries
Three Months Ended March 31, 1999 and 1998
In Thousands
(unaudited)
1999 1998
<S> <C> <C>
Net Income $ 1,591 1,409
Other comprehensive income, before tax:
Unrealized holding gains (losses)
arising during period on
securities (273) 51
Less: reclassification adjustment
for (gains) losses included in
net income -- (25)
Other comprehensive income (loss)
before tax (273) 26
Income tax effect of items of other
comprehensive income 93 (9)
Other comprehensive income (loss),
net of tax (180) 17
Comprehensive Income $ 1,411 1,426
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Three Months Ended March 31, 1999 and 1998
In Thousands
(Unaudited) Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,591 1,409
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 289 110
Depreciation and amortization of bank
premises and equipment 250 268
ESOP compensation 186 302
Amortization of premiums and accretion
of discounts, net 108 36
Gain on sale of securities, net -- (25)
Net (gain) loss on sale of fixed assets and
other real estate (9) 4
Net increase in mortgage loans held for sale (119) (2,025)
Increase in other assets (243) (204)
Increase in other liabilities 272 685
Net cash provided by operating activities 2,325 560
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 10,360 (5,320)
Proceeds from calls and maturities of
securities available-for-sale 3,219 13,417
Proceeds from calls and maturities of
securities held-to-maturity 590 790
Purchase of securities available-for-sale (2,019) (4,815)
Net increase in loans (16,847) (9,025)
Proceeds from sale of other real estate owned 30 10
Recoveries on loans previously charged off 37 72
Bank premises and equipment expenditures (401) (418)
Net cash used in investing activities (5,031) (5,289)
Cash flows from financing activities:
Net increase in deposits 2,706 8,221
Net decrease in federal funds purchased and
securities sold under agreements
to repurchase (800) (260)
Net increase (decrease) in other borrowed funds 326 (3,615)
Principal payments on ESOP debt (186) (302)
Dividends paid (614) (551)
Dividends on unallocated ESOP shares (19) (24)
Proceeds from sale of shares to ESOP -- 1,400
Net cash provided by financing
activities 1,413 4,869
Net increase (decrease) in cash and due from banks (1,293) 140
Cash and due from banks at beginning of period 11,875 14,406
Cash and due from banks at end of period $ 10,582 14,546
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 1999 and 1998
In Thousands
(Unaudited)
1999 1998
<S> <C> <C>
Balance, beginning of period $ 44,401 40,213
Net income for period 1,591 1,409
Cash dividends (614) (551)
ESOP shares allocated upon loan repayment 186 302
Change in accumulated other comprehensive income (180) 17
Balance, end of period $ 45,384 41,390
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
March 31, 1999 and 1998
In Thousands, Except Share Data
(Unaudited)
(1) Summary of Significant Accounting Policies
The accompanying financial statements of FNB Corporation and subsidiaries are
unaudited, however, in the opinion of management, all adjustments necessary
for a fair presentation of the financial statements have been included. All
adjustments were of a normal recurring nature, except as otherwise disclosed
herein.
Material estimates that are particularly susceptible to significant changes in
the near-term relate to the determination of the allowance for loan losses and
the valuation of other real estate owned acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of other real
estate owned, management obtains independent appraisals for significant
properties.
Management believes that the allowance for loan losses and the valuation of
other real estate owned are adequate. While management uses available
information to recognize loan losses and write-downs of other real estate
owned, future additions to the allowance and write-downs to other real estate
owned may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses and valuation
of other real estate owned. Such agencies may require the Corporation to
recognize additions to the allowance for loan losses and additional write-
downs of other real estate owned based on their judgments of information
available to them at the time of their examination.
The following is a description of the more significant accounting and
reporting policies which conform to general practice within the banking
industry.
(a) Consolidation
The consolidated financial statements include the accounts of FNB
Corporation (the "Registrant" or the "holding company") and its
wholly-owned subsidiaries (collectively, the "Corporation"). The
primary subsidiary is First National Bank (the "Bank"). All
significant intercompany balances and transactions have been
eliminated.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include those amounts in the balance sheet caption cash and due
from banks. Generally, cash and cash equivalents are considered
to have maturities of three months or less.
<PAGE>
(c) Securities
Debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses
included in earnings.
The Corporation had no trading securities at December 31, 1998, or
March 31, 1999. Debt and equity securities not classified as
either held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.
Amortization of premiums and accretion of discounts are computed
on the level yield method. Gains and losses on sales of
investment securities are computed on the basis of specific
identification of the adjusted cost of each security upon
disposition.
(d) Loans
Loans are stated at the amount of funds disbursed plus the
applicable amount, if any, of unearned interest and deferred fees
and costs less payments received. Interest on commercial and real
estate mortgage loans is accrued based on the average loans
outstanding times the applicable interest rates. Interest on
installment loans is recognized on methods which approximate the
level yield method.
Loan origination and commitment fees and certain costs are being
deferred, and the net amount is amortized as an adjustment of the
related loan's yield over the contractual life of the related
loans.
Interest related to nonaccrual loans is recognized on the cash
basis. Loans are generally placed on nonaccrual status when the
collection of principal or interest is 90 days or more past due,
unless the obligation is both well secured and in the process of
collection.
(e) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
charged to expense over the estimated useful lives of the assets,
principally on the straight-line method. Costs of maintenance and
repairs are charged to expense as incurred and improvements are
capitalized.
<PAGE>
(f) Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure or deed taken in lieu of foreclosure. At the time of
acquisition, these properties are recorded at the lower of the
recorded investment in the loan or fair value minus estimated
costs to sell with any write-down being charged to the allowance
for loan losses. Expenses incurred in connection with operating
these properties and subsequent write-downs, if any, are charged
to expense. Gains and losses on the sales of these properties are
credited or charged to income in the year of the sale.
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(h) Net Income Per Share
Net income per share computations are based on the weighted
average number of shares outstanding during each year. The
weighted average shares outstanding do not include unearned shares
held by the Employee Stock Ownership Plan (ESOP). The shares held
by the ESOP are not considered outstanding for net income per
share calculations until the shares are released.
In August 1998, the Corporation declared a 10% stock dividend to
shareholders of record on August 26, 1998. As a result, all share
and per share data have been adjusted retroactively to reflect the
dividend.
(i) Trust Assets
Assets held by the Corporation's trust department in a fiduciary
or agency capacity are not included in the consolidated financial
statements as they are not assets of the Corporation.
(2) Restrictions on Cash
Federal reserve regulations require the Corporation to maintain certain
average balances as cash reserves. The reserve requirements
approximated $1,145 and $1,113 at March 31, 1999 and December 31, 1998,
respectively.
<PAGE>
(3) Securities Available-for-Sale
The following sets forth the composition of securities available-for-
sale, which are reported at fair value, at March 31, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
March 31, 1999 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 6,052 56 -- 6,108
U.S. Government agencies
and corporations 17,241 57 -- 17,298
States and political
subdivisions 11,660 167 -- 11,827
Other securities 20,752 -- (125) 20,627
Totals $ 55,705 280 (125) 55,860
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
December 31, 1998 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,062 102 -- 7,164
U.S. Government agencies
and corporations 19,511 120 (7) 19,624
States and political
subdivisions 11,436 231 (19) 11,646
Other securities 18,794 16 (14) 18,796
Totals $ 56,803 469 (40) 57,232
</TABLE>
The amortized costs and approximate fair values of securities available-
for-sale by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Approx.
Amortized Fair
March 31, 1999 Costs Values
<S> <C> <C>
Due in one year or less $ 6,866 6,888
Due after one year through five years 19,796 19,761
Due after five years through ten years 20,088 20,232
Due after ten years 8,955 8,979
Totals $ 55,705 55,860
</TABLE>
Realized gains and losses on securities available-for-sale were not
material in 1999.
Gross gains of $47 and gross losses of $5 were realized on sales and
calls of securities available-for-sale through March 31, 1998.
<PAGE>
The carrying value of securities available-for-sale pledged to secure
public and trust deposits and securities sold under agreements to
repurchase, and for other purposes as required or permitted by law, was
$18,164 at March 31, 1999 and $17,887 at December 31, 1998.
(4) Securities Held-To-Maturity
The amortized costs, gross unrealized gains and losses, and approximate
fair values of securities held-to-maturity at March 31, 1999 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
March 31, 1999 Costs Gains Losses Values
<S> <C> <C> <C> <C>
States and political
subdivisions $ 37,771 1,198 -- 38,969
Totals $ 37,771 1,198 -- 38,969
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
December 31, 1998 Costs Gains Losses Values
<S> <C> <C> <C> <C>
States and political
subdivisions $ 38,322 1,289 -- 39,611
Other securities 30 -- -- 30
Totals $ 38,352 1,289 -- 39,641
</TABLE>
The amortized costs and approximate fair values of securities held-to-
maturity, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Approx.
Amortized Fair
March 31, 1999 Costs Values
<S> <C> <C>
Due in one year or less $ 4,499 4,528
Due after one year through five years 21,083 21,749
Due after five years through ten years 11,910 12,407
Due after ten years 279 285
Totals $ 37,771 38,969
</TABLE>
Realized gains and losses on securities held-to-maturity were not
material in 1999 or 1998.
The carrying value of securities held-to-maturity pledged to secure
public and trust deposits and securities sold under agreements to
repurchase, and for other purposes as required or permitted by law, was
$18,796 at March 31, 1999 and $18,386 at December 31, 1998.
<PAGE>
(5) Loans
At March 31, 1999 and December 31, 1998, there were direct loans to
executive officers and directors of $3,866 and $6,167, respectively. In
addition, there were loans of $8,616 and $6,324 at March 31, 1999 and
December 31, 1998, respectively, which directors endorsed or had been
made to companies in which directors had an equity interest.
At March 31, 1999 and December 31, 1998, the Corporation had sold
without recourse, participations in various loans to financial
institutions and other customers of the Corporation in the amount of
$40,120 and $37,994, respectively.
(6) Allowance for Loan Losses and Impaired Loans
A loan is considered impaired when, based on management's judgment, the
Corporation will probably not be able to collect all amounts due
according to the contractual terms of the loan. In making such
assessment, management considers the individual strength of borrowers,
the strength of particular industries, the payment history of individual
loans, the value and marketability of collateral and general economic
conditions. The Corporation's methodology for evaluating the
collectibility of a loan after it is deemed to be impaired does not
differ from the methodology used for nonimpaired loans.
A summary of the changes in the allowance for loan losses (including
allowances for impaired loans) follows:
<TABLE>
<CAPTION>
Quarter Ended
March 31
1999 1998
<S> <C> <C>
Balance at beginning of period $ 4,640 4,291
Provisions for loan losses 289 110
Loan recoveries 37 72
Loan charge-offs (30) (74)
Balance at end of period $ 4,936 4,399
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1999 l998
<S> <C> <C>
Nonaccrual loans $ 1,551 1,109
Other real estate owned 30 30
Total nonperforming assets $ 1,581 1,139
</TABLE>
The following tables show the pro forma interest that would have been
earned on nonaccrual loans if they had been current in accordance with
their original terms and the recorded interest included in income on
these investments:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Proforma interest - nonaccrual loans $ 36 20
Recorded interest - nonaccrual loans 1 -
</TABLE>
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at March 31, 1999.
(7) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
<TABLE>
March 31 December 31,
1999 1998
<S> <C> <C>
Land $ 1,515 1,515
Buildings 9,514 9,355
Furniture and equipment 7,881 7,641
Leasehold improvements 430 428
Construction in progress 613 613
19,953 19,552
Less accumulated depreciation
and amortization 6,825 6,575
Totals $ 13,128 12,977
</TABLE>
(8) Other Borrowed Funds
Other borrowed funds include advances from the Federal Home Loan Bank of
Atlanta totaling $21,388 and $21,304 on March 31, 1999 and December 31,
1998, respectively. The interest rates on the advances range from 5.01
to 6.65 percent and have maturity dates through June 7, 2010. The
advances are collateralized under a blanket floating lien agreement
whereby the Corporation gives a blanket pledge of residential first
mortgage loans for 1-4 units.
(9) Employee Benefit Plans
The Employee Stock Ownership Plan (ESOP) invests primarily in the
Registrant's stock. The ESOP covers substantially all employees. The
purchase of some of the shares has been financed by borrowings by the
ESOP. In February 1998, the Corporation sold 60,215 shares to the ESOP
for $23.25 per share. The ESOP borrowed $1,400 from another financial
institution to finance the purchase. During the third quarter of 1998,
First National Bank purchased all ESOP loans from the outside financial
institution which had originally financed them. Consequently, in the
March 31, 1999 and December 31, 1998 consolidated balance sheets the
<PAGE>
loans and the related liability have been eliminated. The amounts
representing unearned employee benefits have been recorded as reductions
in stockholders' equity. These amounts are reduced as the ESOP debt is
curtailed. The ESOP is repaying the loan (plus interest) using employer
contributions and dividends received on the shares of common stock held
by the ESOP.
In 1997 the Corporation instituted a 401(k) plan that covers
substantially all employees who work at least 1,000 hours per year.
Participants have the option to have up to 12% of their salary withheld
on a pre-tax basis to be contributed to the plan. The Corporation
matches 100% of the first 3% of the participants' contributions.
Participants may choose among several investment options comprised
primarily of mutual funds, but there is no stock of the Corporation in
the plan. Matching contributions totaled $35 and $27 for the three-
month periods ended March 31, 1999 and 1998, respectively.
(10) Income Taxes
The primary reason for the difference between the effective tax rates
and the statutory tax rate is a substantial amount of tax-exempt
interest income.
(11) Restrictions on Payment of Dividends
Under applicable federal laws, the Comptroller of the Currency
restricts, without prior approval, the total dividend payments of the
Corporation's Bank subsidiary in any calendar year to the net profits of
that year, as defined, combined with the retained net profits for the
two preceding years. In effect, this limits total 1999 dividends of the
Bank (unless prior regulatory approval is obtained) to $7,467 plus year-
to-date 1999 net profits as of the declaration date.
(12) Supplemental Cash Flow Information
The Corporation paid $4,343 and $4,355 for interest and it paid $403 and
$325 for income taxes for the three-month periods ended March 31, 1999
and 1998, respectively.
(13) Commitments and Contingencies
The Corporation is involved from time to time in litigation arising in
the normal course of business. Management believes that any resulting
settlements and disposition of these matters will not materially affect
consolidated results of operations or financial position.
(14) Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to
<PAGE>
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk more than the amount
recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in case of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Except for unused home equity lines totaling $27,665 at March 31, 1999,
and $27,008 at December 31, 1998, the Corporation may not require
collateral or other security to support the following financial
instruments with credit risk:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
Contract Amount
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 88,454 86,583
Standby letters of credit and
financial guarantees written 5,586 6,252
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may
include securities, accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held varies but may include securities, accounts
receivable, inventory, property, plant and equipment and income-
producing commercial properties.
Commitments to extend credit, standby letters of credit and financial
guarantees written are not reflected in the financial statements except
to the extent of fees collected, which are generally reflected in
income. The fulfillment of these commitments would normally result in
the recording of a loan at the time the funds are disbursed.
(15) Concentrations of Credit Risk
The Corporation does a general banking business, serving the commercial,
agricultural and personal banking needs of its customers in its trade
territory, commonly referred to as the New River Valley, which consists
of Montgomery County, Virginia and portions of adjacent counties.
Operating results are closely correlated with the economic trends within
this area which are, in turn, influenced by the area's three largest
employers--Virginia Polytechnic Institute and State University, Radford
University and the Radford Arsenal. Other industries include a wide
variety of manufacturing concerns and agriculture-related enterprises.
The ultimate collectibility of the loan portfolios and the recovery of
the carrying amounts of repossessed property are susceptible to changes
in the market conditions of this area. The commercial portfolio is
diversified with no significant concentrations of credit within a single
industry. The consumer loan portfolio includes approximately $43
million of the loans to individuals for household, family and other
personal expenditures. The real estate-mortgage portfolio consists
primarily of loans secured by l-4 family residential properties.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of factors that significantly affected the
financial condition and results of operations of FNB Corporation and
subsidiaries. This discussion should be read in connection with the
consolidated financial statements, statistical disclosures and other financial
information presented herein. All amounts presented are denoted in thousands
except per share and percentage data.
1999 Compared to 1998
Net Interest Income
The principal source of earnings for the Corporation is net interest income.
Net interest income is the net amount of interest earned on interest bearing
assets, less the amount of interest paid on deposits and other interest-
bearing liabilities. Net interest income before provision for loan losses was
$4,826 for the three months ended March 31, 1999, an increase of $601 from the
same period in 1998. The increase in net interest income in the first three
months was primarily the result of growth in average earning assets, partially
offset by growth in interest bearing liabilities. Average earning asset
growth totaled $28,944 (7.11%) for the first three months of 1999 over the
respective prior year period. The largest component of the increase in
earning assets was average loans, reflecting an increase of $42,136 (14.31%)
for the first three months of 1999. Growth in the loan portfolio was
concentrated in commercial and real estate loans. Commercial loans reflected
an increase of $26,182 for the first three months of 1999. Real estate loans
increased $21,746 for the first three months of 1999. Average securities
decreased $7,544 (7.41%) for the first three months of 1999. Average
Federal Funds sold decreased $5,648 (50.22%) for the first three months of
1999. Securities and Federal Funds sold were used as a source of funds as
needed and as an alternative investment for funds in excess of loan demand.
Average interest-bearing liabilities increased $25,815 (7.38%) for the first
three months of 1999 over the respective prior year period. The largest
component of interest-bearing liabilities was average deposits, reflecting an
increase of $25,678 for the first three months of 1999. Growth in the deposit
portfolio was concentrated in certificates of deposit of $100 and over with an
increase of $10,179 for the first three months of 1999 and in demand and
savings deposits with an increase of $18,860 for the first three months of
1999. Increased market penetration in new markets and a concerted effort to
obtain business deposit accounts from our business loan customers accounted
for the increase.
Net interest yield increased to 4.76% from 4.48% for the first three months of
1999 from the comparable prior year period. The yield on average earning
assets decreased 15 basis points, to 8.61% from 8.76% for the first three
months of 1999 from the comparable prior year period. The cost of interest-
bearing liabilities decreased 52 basis points, to 4.47% from 4.99% for the
first three months of 1999. Overall, 92.5% of the net interest income
increase for the first three months of 1999 was attributable to changes in the
<PAGE>
volume of net interest-earning assets and interest-bearing liabilities. The
remaining portions of the changes in net interest income for the first three
months of 1999 were due to a change in average rates.
Provision for Loan Losses
The provision for loan losses was $289 and $110, respectively, for the first
three months ended March 31, 1999 and 1998. Net charge-offs were negligible
for both quarters. The allowance for loan losses was $4,936, 1.43% of
outstanding loans, at March 31, 1999, and $4,640, 1.41% of outstanding loans,
at December 31, 1998. The provision for loan losses was increased in
anticipation of additional write downs relating to one commercial customer.
As a result, the allowance for loan losses reflected a corresponding increase.
Management believes the allowance for loan losses as a percentage of
outstanding loans remains at a prudent level.
Noninterest Income
Noninterest income, including service charges on deposit accounts, loan
origination fees, other service charges, other income and net securities gains
(losses), was $913 and $669, respectively, for the first three months ended
March 31, 1999 and 1998. The increase in noninterest income resulted
primarily from an increase in loan origination fees due to mortgage volume,
non-sufficient fund check charges due to higher pricing and volume, trust
fees, and gain on sale of other real estate. These increases were partially
offset by reductions in other areas, most notably in net gains on the sale of
securities.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
costs, credit cards, supplies, FDIC assessment and other expenses was $3,375
and $2,971, respectively, for the three months ended March 31, 1999 and 1998.
The net increase in noninterest expense resulted from increases in several
categories, primarily personnel costs, occupancy and equipment expense,
advertising and online banking expense. Personnel costs increased primarily
as the result of merit increases, and additional branch personnel. The
increases in occupancy and equipment expense resulted from an increase in
depreciation expense for furniture and fixtures, which was related to a new
telephone system and document imaging system. Leased property expense
increased as a result of the new Wytheville office which opened in May 1998.
These increases were partially offset by reductions in other areas.
Income Taxes
Income tax expense as a percentage of pre-tax income was 23.3% and 22.3%,
respectively, for the three months ended March 31, 1999 and 1998. The
increase in the rate was due to a reduction in the anticipated dividends paid
deduction, and a decline in nontaxable interest as a percent of pre-tax
income.
<PAGE>
Balance Sheet
Total assets of the Corporation at March 31, 1999, were $465,403, compared to
$461,916 at December 31, 1998. Total loans were $345,475 at March 31, 1999,
an increase of $16,876 from December 31, 1998. Loan growth was concentrated
in the commercial, real estate-commercial and construction portfolios and
amounted to $16,320. Federal Funds sold decreased $10,360 and securities
decreased $1,953. Proceeds from both were used to partially fund loan demand.
Total deposits at March 31, 1999, were $388,963, an increase of $2,706 from
December 31, 1998. Certificates of deposit of $100 and over increased $3,583
and noninterest-bearing demand deposits increased $1,574 since year end.
These increases were partially offset by a decrease of $2,523 in interest
bearing demand and savings deposits since year end 1998. New noninterest-
bearing demand deposits account for approximately $1,519 of the increase.
Interest bearing public fund certificates of deposit of $100 and over
increased $2,049. Competition for deposits among local financial institutions
continues to be strong.
Other borrowed funds at March 31, 1999, were $21,938, an increase of $326 from
December 31, 1998. Other borrowed funds is composed primarily of advances
from the Federal Home Loan Bank of Atlanta and is used to provide partial
funding for earning asset growth.
The Employee Stock Ownership Plan (ESOP) debt was $1,975 at March 31, 1998.
This debt, which included an additional $1,400 of new debt issued by the ESOP
in the first quarter of 1998, is not reflected in the balance sheet as of
March 31, 1999, because of the repurchase of the ESOP loans by the banking
subsidiary of FNB Corporation. The ESOP debt and the related loans have been
eliminated in consolidation. The new debt financed the purchase by the ESOP
of $1,400 of newly issued stock of the Corporation.
Stockholders' Equity
Stockholders' equity was $45,384 at March 31, 1999, compared to $44,401 at
December 31, 1998. This increase of $983 was the net result of earnings
retention, a decrease of $180 in net unrealized gains (net of tax) on
securities available-for-sale, a decrease of $186 in unearned ESOP shares
resulting from principal repayments on ESOP debt, and dividends paid to
shareholders.
All financial institutions are required to maintain minimum levels of
regulatory capital. The Federal Reserve and the Office of Comptroller of the
Currency (OCC) have established substantially similar risk-based and leveraged
capital standards for financial institutions they regulate. Under the risk-
based capital requirements of these regulatory agencies, the Corporation is
required to maintain a minimum ratio of total capital to risk-weighted assets
of at least 8%. At least half of the total capital is required to be "Tier 1
capital," which consists principally of common and certain qualifying
preferred shareholders' equity, less certain intangibles and other
adjustments. The remainder, "Tier 2 capital," consists of a limited amount of
<PAGE>
subordinated and other qualifying debt and a limited amount of the general
loan loss reserve.
In addition, the federal regulatory agencies have established a minimum
leveraged capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leveraged capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points
above that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
At March 31, 1999, the Bank's Tier 1 ratio, total capital ratio, and leverage
ratio, exceeded the minimum ratios required by the regulations.
Past Due Loans and Nonperforming Assets
Loans past due 90 days and over at March 31, 1999, totaled $48 compared to
$161 at December 31, 1998. In addition, nonaccrual loans and other real
estate owned totaled $1,581 at March 31, 1999, compared to $1,139 at December
31, 1998. The increase in nonaccrual loans can be attributed to one
commercial customer. The New River Valley economy remains strong.
Liquidity
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Liquidity remains sufficient, as assets are maintained on a short-
term basis to meet the liquidity demands anticipated by management. Funding
sources primarily include customer-based core deposits and cash generated by
operations. Another source of liquidity is additional borrowings from the
Federal Home Loan bank of Atlanta; in excess of $39,000 of the Corporation's
borrowing capacity under an existing agreement with the FHLB remains unused as
of March 31, 1999, based on the level of qualifying portfolio mortgage loans
available for securitization. Secondary sources of liquidity are available
should the need arise, including approximately $35,000 in unused Federal Funds
lines of credit and the ability to liquidate assets held for sale, especially
investment securities.
The only significant source of cash for the holding company is transfers from
its bank subsidiary in the form of dividends, loans, or advances. The most
restrictive regulatory limitation placed on the amount of funds that may be
transferred from the Bank to the holding company is that placed on dividends.
Specifically, the maximum amount of dividends that may be paid by the Bank in
any calendar year without prior regulatory approval is the net profits of that
year, as defined, combined with the retained net profits for the two preceding
years. In effect, this limits total 1999 dividends of the bank (unless prior
regulatory approval is obtained) to $7,467 plus year-to-date 1999 net profits
<PAGE>
as of the declaration date. This limitation is not expected to have any
material impact on the liquidity of the holding company in 1999. During the
first three months of 1999 the bank paid $665 in dividends to the holding
company.
Other Matters
Year 2000 Readiness Disclosure A number of electronic systems utilize a two-
digit field for year references, e.g., "98" for "1998". Such systems may
interpret the year reference "00" as referring to the Year 1900 rather than
the Year 2000. If these systems are not corrected prior to December 31, 1999,
many processing failures could result. This section describes the status of
the Corporation's efforts to correct these systems deficiencies.
State of Readiness. The Corporation has committed personnel and resources
to resolve potential Year 2000 issues, both internally and externally (with
respect to the Corporation's service providers, vendors and customers) for
both information technology assets and non-information technology assets. The
Corporation has identified Year 2000 dependencies in its systems, equipment,
and processes and is implementing changes to such systems, updating or
replacing such equipment, and modifying such processes to make them Year 2000
compliant. The Corporation has completed its assessment of internal Year 2000
issues and is in the process of remediation of the critical systems.
The Corporation does not employ computer programmers and relies heavily on
outside vendors to make the necessary software and hardware changes for Year
2000 compliance. All mission-critical service providers delivered Year 2000
upgrades to the Corporation before December 31, 1998. Plans are in place to
test these systems before June 30, 1999, by entering various critical future
dates into the systems in an off line mode. The Corporation anticipates that
all of its systems will be substantially compliant by June 30, 1999.
The Corporation is also assessing the operability of other devices after 1999,
including vaults, fax machines, stand-alone personal computers, security
systems and elevators and addressing deficiencies, if necessary. These
efforts are currently underway and we anticipate compliance to be achieved in
1999.
Costs. In order to achieve and confirm Year 2000 readiness, significant costs
are being incurred to test and modify or replace computer software and
hardware, as well as a variety of other items, such as automated teller
machines. The Corporation had an estimated capital outlay of $1,000 in 1997
and $800 during 1998 on hardware and software equipment. Approximately $55 in
related expenses has been recognized through December 31, 1998, in the
Statement of Income. Estimated outlays during 1999 for computer hardware and
software approximate $75 with an additional $25 for related expenses.
Risks. If the Corporation's mission-critical applications are not compliant
by 2000, it may not be able to correctly process transactions in a reasonable
period of time. This scenario could result in a wide variety of claims
against the Corporation for improper handling of its assets as well as
deposits and other borrowings from its customers. For example, the
<PAGE>
Corporation's ability to process interest payments on deposits and other
liabilities could be impaired. The Corporation is also at risk if the credit
worthiness of a few of its large borrowers or a significant number of its
small borrowers, were to deteriorate quickly and severely as a result of their
inability to conduct business operations after December 31, 1999, for whatever
reason. Such risks would include a potential negative impact on earnings and
financial position to the extent that a significant amount of loans were not
repaid based on contractual terms. The Corporation is presently monitoring
existing and assessing new large credit customers' Year 2000 plans to
ascertain the sufficiency of their remediation efforts and the implication of
their actions on their credit worthiness. The Corporation explicitly
disclaims, however, any obligation or liability for the completeness, or lack
thereof, of its customers' Year 2000 remediation plans or actions.
Contingency Plans. The Corporation is in the process of developing
contingency plans in the event that the remediation plan is not completed in
time or fails for reasons that are not presently foreseen. In the event of
such a failure, these plans will outline the steps that will be taken to deal
with the situation to minimize the effect on customers and losses to the
Corporation.
<PAGE>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
See index to exhibits
(B) Reports on Form 8-K:
None
<PAGE>
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 Corporation
Date May 12, 1999 By: s/Julian D. Hardy, Jr.
Julian D. Hardy, Jr.
President & Chief Administrative Officer
Date May 12, 1999 By: s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit #
(3)(i) Articles of Incorporation
Registrant's Articles of Incorporation, filed with the Commission
as exhibit 3.1 to the Annual Report on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
(3)(ii) Bylaws
Registrant's Bylaws, filed with the Commission as exhibit 3.2 to
the Annual Report on Form 10-K for the year ended December 31,
1997, is incorporated herein by reference.
(10) Material Contracts
(10)A Employment agreement dated September 11, 1997 between Samuel H.
Tollison, First National Bank, and Registrant, filed with the
Commission as Exhibit(10)A on Form 10-Q for the quarter ended
September 30, 1997, is incorporated herein by reference. This
agreement was terminated under the terms of the Consulting and
Noncompetition Agreement referred to in Exhibit (10)D below.
(10)B Employment agreement dated September 11, 1997 between Julian
D. Hardy, Jr., First National Bank, and Registrant, filed
with the Commission as Exhibit (10)B on Form 10-Q for the
quarter ended September 30, 1997, is incorporated herein by
reference.
(10)C Change in control agreements with nine senior officers of First
National Bank and one senior officer of Registrant. All
agreements have identical terms and, as such, only a sample copy
of the agreements was filed with the Commission as Exhibit(10)C
on Form 10-Q for the quarter ended September 30, 1997, and is
incorporated herein by reference. The officers covered by the
agreements are as follows:
(1) Daniel A. Becker, Senior Vice President, Chief Financial
Officer, dated April 1, 1999
(2) Carol H. Brockmeyer, Senior Vice President, Director
Relationship Banking, dated July 1, 1998
(3) Keith J. Houghton, Senior Vice President, Manager,
Commercial Banking, dated April 1, 1999
(4) Darlene S. Lancaster, Senior Vice President, Manager,
Mortgage Loan Department, dated August 25, 1997
(5) R. Bruce Munro, Senior Vice President, Chief Credit
Administration Officer, dated August 25, 1997
(6) Woody B. Nester, Senior Vice President, Cashier, dated
August 25, 1997
(7) Fred L. Newhouse, Jr., Senior Vice President, Branch
Administrator, dated August 25, 1997
(8) Peter A. Seitz, Executive Vice President, dated August 25,
1997
(9) Perry D. Taylor, Senior Vice President, Comptroller, dated
August 25, 1997
<PAGE>
(10) Litz H. Van Dyke, Executive Vice President, dated August
25, 1997
The agreements with Mr. Seitz and Mr. Van Dyke were terminated
under the terms of the Employment Agreement referred to in Exhibit
(10)E below.
(10)D Consulting and Noncompetition Agreement With Put Option dated
January 15, 1999, between Samuel H. Tollison and Registrant, filed
with the Commission as Exhibit (10)D on Form 10-K for the year
ended December 31, 1998, is incorporated herein by reference.
(10)E Employment agreement dated March 23, 1999 with two executive
officers and First National Bank. Both agreements have identical
terms and, as such, only a sample copy of the agreement is filed.
The officers covered by the agreement are:
(1) Peter A. Seitz, Executive Vice President
(2) Litz H. Van Dyke, Executive Vice President
(27) Financial Data Schedule
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 23rd day of March, 1999, by
and between FIRST NATIONAL BANK, a national banking association, with
principal offices in Christiansburg, Virginia (sometimes hereinafter referred
to as "Employer" or "FNB"), and________________________________, residing at
_____________________________________(sometimes hereinafter referred to as
"Employee").
WITNESSETH:
WHEREAS, Employee has been a principal executive of Employer for a
number of years, and in such capacity has developed an intimate and thorough
knowledge of Employer's business methods, trade secrets, and operations, as
well as personal relationships with key individual employees of Employer and
other banks and companies with which Employer does business;
WHEREAS, the retention of Employee's services for and on behalf of
Employer and/or its subsidiaries, is of material importance to the
preservation and enhancement of the value of Employer's business;
WHEREAS, Employer recognizes that, as is the case with many publicly
held corporations, the possibility of a change of control may arise and that
such possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of Employer and its shareholders;
<PAGE>
WHEREAS, the Board of Directors of Employer (the "Board") has determined
that appropriate steps should be taken to reinforce and encourage the
continued attention and dedication of members of Employer's management to
their assigned duties without distraction by the possibility of a change of
control; and
WHEREAS, the Board believes it important, should Employer or its
shareholders receive a proposal for transfer of control of Employer, that
Employee be able to assess such proposal and advise the Board thereon, without
being influenced by the uncertainties of Employee's own employment status.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein set forth, Employer and Employee do hereby agree as follows:
I. Active Term
1.1 Employer hereby employs Employee as Executive Vice President to
perform executive services as hereinafter provided, and Employee hereby
accepts said employment and agrees to render such services to the Employer on
the terms and conditions set forth in this Agreement. This Agreement shall be
for a term of one year beginning on the date of execution of this Agreement
and shall automatically renew on the anniversary date of the Agreement for an
additional period of one year on each renewal date until this is a change in
control (as hereinafter defined); and consequently, upon the anniversary date
each year, the Agreement will be automatically extended and have a remaining
term of one year. This Agreement supercedes and replaces in its entirety the
Change in Control Agreement dated August 25, 1997 between Employee and
Employer.
<PAGE>
1.2 During the term of this Agreement, Employee agrees to perform such
duties as are customarily performed by one holding the position of Executive
Vice President, including but not limited to those duties as set forth in a
written job description. In addition, the Employee shall perform such
executive services for Employer as may from time to time be assigned to
Employee by Employer, the Board or any Committee of the Board.
1.3 During the term of this Agreement, Employee shall devote his best
efforts, including such portion of his time and effort as he has customarily
provided in recent years, to the affairs and business of the Employer and its
subsidiaries.
1.4 In the event Employer completes an affiliation with any other
institution in which there is no change in control (as hereinafter defined)
and, as a result of the affiliation, the Employee occupies a position of less
authority than the current position held under the terms of this Agreement and
job responsibilities less than Executive Vice President of First National Bank
the Employee may elect to terminate employment under Section 7.2 of this
Agreement and receive the compensation as provided therein.
1.5 Employee's services shall be rendered principally in Christiansburg,
Virginia but Employee shall travel on behalf of Employer, its subsidiaries or
affiliates, as may be reasonably required.
<PAGE>
II. Competitive Activities
2.1 During the term of this Agreement, Employee shall not, directly or
indirectly engage or participate in, become a director of, or render advisory
or other services for, or in connection with, or make any financial investment
in, any entity primarily engaging in financial or investment services which
competes with FNB in the Employer's trading area (as defined in Paragraph 7.3
of this Agreement). Notwithstanding the foregoing, the Employee may invest in
any such financial or investment firm, corporation, business entity or
enterprise so long as the investment is passive and where (i) such investment
does not exceed the greater of (a) five percent (5%) of the equity in any such
entity or (b) an investment of $100,000 and (ii) excluding any passive
investment in securities of a publicly traded companies, such ownership and
any changes therein which are promptly reported in writing by the Employee to
the Board. Notwithstanding anything to the contrary contained in this
Agreement, while Employee is employed by Employer during the term of this
Agreement, Employee shall have no employment contract or other written or oral
agreement concerning his employment as an officer of the Employer with any
entity or person other than the Employer.
2.2 Employee acknowledges that by virtue of his employment with FNB,
Employee shall be privy to confidential information concerning the activities
and affairs of the Employer, its subsidiaries and affiliates, if any,
including trade secrets and other confidential matters. During the term of
employment, should employee render services to someone else in violation of
Section 2.1 hereof, other than as expressly authorized by the Board, Employer
shall be entitled to immediate equitable relief to restrain such conduct.
Such equitable relief shall be in addition to any other remedies to which
<PAGE>
Employer may be entitled under law. Except for the purpose of carrying out
Employee's duties hereunder, Employee shall not remove or retain, or make
copies or reproductions of any inquiries, calculations, letters, papers, or
information of any type or description relating to the business of Employer,
its subsidiaries or affiliates, if any, and Employee shall not divulge to
others any information or data acquired by him while in Employer's employ
relating to methods, processes, or other trade secrets or confidential
information owned or utilized by FNB. Employer shall acquire the sole and
exclusive rights to any innovations, ideas, and concepts, whether or not
subject to patent or trademark protection, and all copyrightable materials
which are conceived by Employee during his employment, which relate to the
business of Employer or any of its subsidiaries or affiliates, which are
confidential, and which are not readily ascertainable from persons or other
sources outside Employer and its subsidiaries and affiliates.
III. Compensation
3.1 Employer shall compensate and pay Employee for his services as
follows:
a. Employee shall be paid a salary at an annual rate set by the
Board from time to time. At a minimum, the base salary shall equal or exceed
the base salary paid Employee at the time of the execution of this agreement.
b. Employee shall be reimbursed, in a manner consistent with
policies of Employer presently or later established for executive personnel,
for all reasonable expenses directly incurred by the Employee in the discharge
of any duties hereunder;
c. Employee shall receive the use of an Employer's car (or a
monthly allowance toward the purchase or lease of a automobile for business
use) and memberships at country clubs and civic clubs; provided, however, that
<PAGE>
expenses for meetings and conferences shall not exceed $5,000
annually(excluding VBA) and memberships and club charges shall not exceed
$4,000. Fringe benefits shall not be considered to include health, life,
disability and dental insurance provided to the Employee through group welfare
benefit plans sponsored by FNB nor to retirement benefits provided to Employee
through retirement plans sponsored by FNB. Fringe benefits in excess of the
amount specified herein shall be subject to Board approval.
d. Employee shall receive all FNB sponsored welfare and
retirement plan benefits as shall be made generally and proportionally
available to other executive employees of Employer. Employer shall receive an
annual complete physical examination to be performed by a physician of
Employee's choice with a report of the results provided to Employer.
e. Employee shall receive the number of paid vacation days in
each calendar year determined by Employer from time to time for its executive
officers, but not less than four weeks in any calendar year (prorated in any
calendar year during which the Employee is employed hereunder for less than
the entire year in accordance with the number of days in such calendar year
during which he is employed).
All payments made payable to Employee under this Agreement shall be
subject to withholding for applicable taxes, social security or other
governmental levies and to any other deductions authorized by or for
Employee's benefit, under any welfare or retirement plan established for or
made generally available to employees of Employer.
<PAGE>
3.2 Nothing in this Agreement shall prevent the Board from, at any time,
increasing the compensation and fringe benefits to be paid to Employee in the
event the Board, in its sole discretion, shall deem it advisable so to do in
order to compensate Employee for his services.
3.3 The Employer shall not reduce or eliminate any fringe benefit
available to the Employee immediately prior to the execution of this Agreement
unless the Employer pays the Employee a cash allowance in an amount equal to
the value to the Employee of such reduced or eliminated fringe benefit.
IV. Termination Prior to Change, Including
Termination for Cause, and Related Provisions
4.1 Employer shall have the right, at any time prior to a change of
control of Employer(as hereinafter defined) upon written notice of not less
than thirty (30) days, to terminate the Employee's employment hereunder.
4.2 In the event that, prior to a change of control of Employer (as
hereinafter defined), employment is terminated for cause (as hereinafter
defined), Employee shall have no right to compensation or other benefits for
any period after such termination. For purpose of this subsection, the term
"cause" shall mean personal dishonesty, incompetence, willful misconduct,
willful breach of fiduciary duty, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses), willful
violation of a final cease and desist order, willful or intentional breach or
neglect of Employee's duties hereunder, persistent negligence, or misconduct
in the performance of Employee's duties.
<PAGE>
V. Change in Control
5.1 For purposes of this Agreement, a "change in control" of Employer
shall have occurred at such time as (a) the closing of a corporate
reorganization in which the Bank becomes a subsidiary of a holding company,
the majority of the common stock of which is owned by persons who did not the
majority of the common stock of FNB Corporation (or its successor) immediately
prior to the reorganization; (b) individuals who constitute the Board on the
date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof; provided that any person becoming a director
subsequent to the date hereof whose nomination for election was approved by a
vote of at least three-quarters (3/4) of the directors comprising the
Incumbent Board shall be considered as though such person were a member of the
Incumbent Board for purposes of this subsection; (c) the closing of the merger
of Employer with or into another person; or (d) the closing of the sale,
conveyance or other transfer of substantially all of the assets of Employer to
another person.
5.2 For purposes of this Agreement, the term "person" shall include any
individual, corporation, partnership, group, association or other "person", as
such term is used in section 14(d) of the Exchange Act, other than Employer,
any entity in which the Employer owns a majority of the voting interest or any
employee benefit plan(s) sponsored by Employer.
VI. Termination Following Change in Control
6.1 Employer recognizes that a change in control as defined in Section V
may directly affect the direction and philosophy of FNB. A change in control
may also affect Employee's responsibilities and position with the Employer.
<PAGE>
Should a change in control occur after March 23, 2000, Employee shall be
entitled to a lump sum payment of $25,000 due and payable within thirty (30)
days after the change in control. Employee will be entitled also to the
compensation provided in subsection 7.2 of Section VII hereof, upon Employee's
determination to terminate his employment with Employer or upon termination by
Employer or upon termination by Employer of Employee's employment with
Employer.
6.2 Any termination by Employer or by Employee following a change in
control shall be communicated by written notice of termination ("Notice of
Termination") to the other party hereto. Such Notice of Termination shall
specify the date as of which employment shall terminate ("Date of
Termination"), which Date of Termination shall not be more than sixty (60)
days from the date of the Notice of Termination.
VII. Compensation Upon Termination; Other Agreements
7.1 During any period following a change in control that Employee fails
to perform his duties as a result of incapacity due to physical or mental
illness, Employee shall continue to receive a salary which, when added to
insurance benefits received as compensation and social security benefits, will
equal the Employee's rate of compensation immediately prior to the illness.
Any benefits or awards under any plans shall continue to accrue during such
period of illness, to the extent not inconsistent with such Plans, until
Employee's employment is terminated pursuant to and in accordance with Section
VI hereof. Thereafter, Employee's compensation and benefits shall be
determined in accordance with subsection 7.2 hereof and the plans then in
effect.
<PAGE>
7.2 Subject to Section X hereof, Employee's employment with Employer
shall be terminated by the Employer or by Employee, then Employee shall be
entitled, without regard to any contrary provisions of any Plan, to the
following benefits:
(A) For the period which the greater of (i) the remaining term of
employment provided in this Agreement or (ii) twelve (12) months, commencing
on the Date of Termination, Employer shall continue to provide Employee with
membership in a country club (the payment of dues and assessments to be paid
by Employer and all other charges such as for food or special member events to
be paid by Employee), and shall make provisions so that Employee's medical
insurance benefits, life insurance and accident insurance plan coverage and
all other welfare and retirement plan and fringe benefits associated with
Employee's employment will continue to be on terms and at levels substantially
the same as those existing on the day prior to the Date of Termination;
(B) Employer shall transfer to Employee title to the automobile
which has been furnished (if any) to Employee for his use immediately prior to
Termination. The transfer of ownership of the vehicle shall be at no expense
(excluding any income tax consequences) to Employee. If the Employee
receives a monthly allowance instead of the use of a furnished automobile, the
Bank shall continue the monthly allowance for the period which the greater of
(i) the remaining term of employment provided in this Agreement or (ii) twelve
(12) months, commencing on the Date of Termination.
(C) For the period which is the greater of (i) the remaining term
of employment provided for in this Agreement or (ii) twelve (12) months,
<PAGE>
commencing on the Date of Termination, Employee the Annual Compensation
theretofore received by Employee from Employer. Payment shall be made each
month when the Employer's payroll is customarily paid unless Employee
irrevocably elects to receive all salary compensation due hereunder in a lump
sum which shall be paid within thirty (30) days of the Employee's election.
Should Employee elect to receive a lump sum settlement instead of monthly
payments, the amount payable shall be reduced to the present value of monthly
payments by using the one year certificate of deposit rate then in effect at
FNB. For purposes of this Agreement, "Annual Compensation" shall mean
Employee's current annual base salary immediately preceding the change in
control in accordance with Section 3.1(a) hereof.
(D) The Employee shall be fully vested under the Bank's ESOP Plan
and retain all of his rights under the ESOP Plan as of the date when the last
compensation under this Agreement is due to paid to Employee.
7.3 The amount of any payment provided for in this Section VII shall not
be reduced, offset or subject to recovery by the Employer by reason of any
compensation earned by Employee as a result of subsequent employment by
another employer, other than employment with a banking institution whose
headquarters are located in any county in Virginia whose county seat lies
within fifty (50) miles by highway from Christiansburg, Virginia.
7.4 Notwithstanding the other provisions of this Section VII, should
Employer terminate Employee for cause as defined in subsection 4.2, no further
compensation shall be paid to Employee after the Date of Termination.
<PAGE>
Otherwise, Employee shall be entitled to the full compensation provided for
herein after his Termination, whether such Termination is initiated by
Employee or Employer.
VIII. Successors; Binding Agreement
8.1 This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of Employer which shall result from a change in
control of Employer as defined in Section V hereof. Employer shall require
any such successor, by an agreement in form and substance satisfactory to
Employee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent as Employer would be required to perform if no
such succession had taken place.
8.2 This Agreement shall inure to the benefit and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should
die while any amount would still be payable to Employee hereunder at the time
of death of Employee, such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to Employee's devisee,
legatee or the devisee's or legatee's designee; or if there be no such
devisee, legatee or designee, to Employee's estate.
IX. Fees and Expenses
9.1 Both Employer and the Employee covenant and agree that in the event
of a breach or default of either party of any of the terms of this agreement,
then the defaulting party shall reimburse the non-defaulting party for any and
all legal expenses incurred to enforce the contract, including reasonable
attorney's fees.
<PAGE>
X. Taxes
10.1 All payments to be made to Employee under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
10.2 Notwithstanding anything to the contrary in this Agreement, in the
event that mutually satisfactory independent auditors (the "Auditors") shall
determine that any payment or distribution by Employer to or for Employee's
benefit (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be a "parachute
payment" as defined in Section 280G of the Code, then the aggregate present
value of amounts payable or distributable to or for Employee's benefit
pursuant to this Agreement (such payments or distributions pursuant to this
Agreement are hereinafter referred to as "Agreement Payments") shall be
reduced (but not below zero) to the Reduced Amount. For purposes of this
subsection 10.2 of this Section X, the "Reduced Amount" shall be an amount
expressed in present value which maximizes the aggregate present value of
Agreement Payments such that the aggregate present value of Payments does not
constitute a parachute payment.
10.3 If the Auditors determine that any Payment would be a "parachute
payment" as defined in Section 280G of the Code, Employer shall promptly give
Employee notice to that effect and a copy of the detailed calculation thereof
and of the Reduced Amount. Employee may then elect, in his sole discretion,
which and how much of Agreement Payments shall be eliminated or reduced (as
long as after such election the aggregate present value of the Agreement
Payments equals the Reduced Amount), and the Employee shall advise Employer in
<PAGE>
writing of Employee's election within ten (10) days of Employee's receipt of
notice. If no such election is made by Employee, Employer may elect which and
how much of the Agreement Payments shall be eliminated or reduced (as long as
after such election the aggregate present value of the Agreement Payments
equals the Reduced Amount) and shall notify Employee promptly of such
election. For purposes of this subsection 10.3 of this Section X, present
value shall be determined in accordance with Section 280G(D)(4) of the Code.
All determinations made by the Auditors under this paragraph shall be made
within sixty (60) days of the Notice of Termination. In accordance with
Section VII hereof and as promptly as practicable following such determination
and the elections hereunder, Employer shall pay or distribute to or for the
Employee's benefit in the future such amounts as become due to Employee under
this Agreement.
10.4 As a result of the uncertainty in the application of Section 280G
of the Code at the time of the initial determination by the Auditors
hereunder, it is possible the Agreement Payments will have been made by
Employer which should not have been made ("Overpayment") or that additional
Agreement Payments which will have not been made by Employer should have been
made ("Underpayment"), in each case consistent with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against Employer or
Employee which the Auditor believes has a high probability of success,
determines that an Overpayment has been made and such Overpayment shall be
treated for all purposes as a loan to Employee which Employee shall repay to
<PAGE>
Employer together with interest at the applicable federal rate for short-term
obligations provided for in Section 7872(f)(2) of the Code; provided, however,
that no amount shall be payable by Employee to Employer if and to the extent
such payment would not be considered for federal income tax purposes to reduce
the amount of Payments which are considered to be "parachute payments" within
the meaning of Section 280G of the Code. In the event that the Auditors,
based upon controlling precedent, determine that an Underpayment has occurred,
any such underpayment shall be promptly paid by Employer to or for Employee's
benefit together with interest at the applicable federal rate for short-term
obligations provided for in Section 7872(f)(2) of the Code.
10.5 All determinations made by the Auditors pursuant to Section X shall
be binding upon Employer and Employee.
XI. Survival
11.1 The respective obligations of, and benefits accorded, Employer and
Employee as provided in Sections III, VII, VIII, IX ,X ,XI, XII, XIII, XIV,
XV, XVI, XVII of this Agreement shall survive termination of this Agreement.
XII. Notices
12.1 For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid and addressed to
the addresses set forth on the first page of this Agreement, provided that all
notices to Employer shall be directed to the attention of the Chairman of the
Board, or to such other addresses either party may have furnished to the other
<PAGE>
in writing in accordance herewith; except that notice of change of address
shall be in effect only upon receipt.
XIII. Miscellaneous
13.1 No provision of this Agreement may be modified, waived or
discharged unless such modification, waiver or discharge is agreed to in
writing signed by Employee and the Chairman of the Board or President of
Employer (or highest ranking executive officer of FNB other than Employee, if
applicable). No waiver by either party hereto at any time of any breach by
the other party hereto of, or of compliance with, any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made
by either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the Commonwealth of Virginia.
XIV. Validity
14.1 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
XV. Related Agreements
15.1 To the extent that any provision of any other agreement between
Employer or any of its subsidiaries and Employee shall limit, qualify or be
<PAGE>
inconsistent with any provision of this Agreement, then for purposes of this
Agreement, while the same shall remain in force, the provision of this
Agreement shall control and such provision of such other agreement shall be
deemed to have been superseded, and to be of no force or effect, as if such
other agreement had been formally amended to the extent necessary to
accomplish such purpose.
XVI. Counterparts
16.1 This Agreement may be executed in one or more counterparts which
shall be construed together as one constituted agreement.
XVII.Governing Law
17.1 This Agreement shall be governed according to the laws of the
Commonwealth of Virginia. Should either party bring suit to enforce the
provisions hereof, Employer and Employee expressly consent to the exclusive
jurisdiction and venue of the Circuit Court of Montgomery County, Virginia to
resolve such dispute.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first written above.
Employer:
First National Bank
J. Daniel Hardy, President/CEO
Employee:
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