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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required, Effective October 7, 1996]
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the transition period from to
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Commission file number 0-13086
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FNB FINANCIAL SERVICES CORPORATION
202 South Main Street
Reidsville, North Carolina 27320
(910) 342-3346
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1382275
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
----
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $1.00 Per Share
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FNB Financial Services Corporation (the "Registrant") has filed all
reports required to be filed by Section 13 of 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and has been subject to such filing
requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and is not contained in the definitive proxy statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The Registrant's revenues for the year ended December 31, 1996 were
$16,612,000.
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The aggregate market value of the Registrant's Common Stock held by
those other than executive officers and directors at March 7, 1997, based on the
closing sales price for the Common Stock on that day, was approximately
$28,563,000.
As of December 31, 1996, the Registrant had outstanding 1,383,105
shares of Common Stock, $1.00 par value.
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1996 are incorporated by reference into parts I
and II of this report.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 8, 1997, filed with the Securities and Exchange
Commission via EDGAR on March 7, 1997, are incorporated by reference into Part
III of this report.
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FORM 10-KSB CROSS REFERENCE INDEX
As indicated below, portions of (i) the Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1996, and (ii) the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
April 8, 1997, filed with the Securities and Exchange Commission via EDGAR on
March 7, 1997, are incorporated by reference into Parts I, II and III of this
report.
Key
- ---
A.R. Annual Report to Shareholders for the fiscal year ended
December 31, 1996
Proxy Proxy Statement for the Annual Meeting of Shareholders to be
held April 8, 1997
10-KSB This Form 10-KSB
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Index Document
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PART I Item 1. Business.....................................................10-KSB, p. 4
Item 2. Properties...................................................10-KSB, p. 5
Item 3. Legal Proceedings............................................10-KSB, p. 5
Item 4. Submission of Matters to a Vote of Security Holders...................N/A
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................................A.R.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................A.R.
Item 7. Financial Statements and Supplementary Data..........................A.R.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................N/A
PART III Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................Proxy
Item 10. Executive Compensation..............................................Proxy
Item 11. Security Ownership of Certain
Beneficial Owners and Management....................................Proxy
Item 12. Certain Relationships and Related Transactions......................Proxy
Item 13. Exhibits and Reports on Form 8-K
(a) Index to Exhibits.....................................10-KSB, p.6
(b) No Reports on Form 8-K were filed for
the three months ended December 31, 1996
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FNB Financial Services Corporation was incorporated on August 19, 1983
under the laws of the State of North Carolina, for the purpose of becoming a one
bank holding company and to acquire all the outstanding stock of the First
National Bank of Reidsville. Effective January 1, 1985, the Company acquired the
outstanding Bank stock through a one-for-one exchange of shares.
The Bank was established in 1918 as a national banking association and
is a full service commercial bank. The services it offers include checking, NOW
accounts, money market rate accounts, savings accounts, certificates of deposit,
individual retirement accounts, loans for business, agriculture, real estate,
personal use, home improvements and automobiles, safe deposit boxes and trust
services. The Bank has no material concentration of deposits from any single
customer or group of customers nor does it have a significant portion of its
loans concentrated in a single industry or group of related industries.
The Bank is in competition with several larger commercial banks in
Rockingham County, as well as savings banks and credit unions. Further
competition is provided by banks located in adjoining counties, together with
other financial intermediaries such as insurance companies, finance companies,
pension funds and brokerage houses.
The Bank, as a national banking association, is subject to regulatory
supervision, including regular bank examinations by the Comptroller of the
Currency. The Bank is a member of the Federal Deposit Insurance Corporation
which insures its deposits, and is a member of the Federal Reserve System.
The Company is registered as a bank holding company with and subject to
the regulations of the Board of Governors of the Federal Reserve System. As
such, it is subject to examination by the Federal Reserve Board, and is required
to file with them annual reports and other information regarding its business
operations and those of its subsidiary.
At December 31, 1996, the Bank had approximately 100 employees. The
Company has no employees who are not also employed by the Bank. The Bank
considers its relationship with employees to be good and provides for them
several employee benefit programs, including an employee retirement plan, a
stock compensation plan for eligible officers, group life and health insurance,
a 401(k) plan, a section 125 flexible spending plan, paid vacations and sick
leave.
Under the Federal Deposit Insurance Corporation Improvement Act, banks
are placed into categories depending upon how well capitalized they are. If a
bank's capital ratios should fall to an undercapitalized status, it becomes
subject to a series of increasingly restrictive actions, such as increased
monitoring, submission and approval of a capital restoration plan, restrictions
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on growth and certain expansion limitations requiring appropriate banking agency
prior approval. Even more serious restrictions may be imposed if capital ratios
should fall to a significantly undercapitalized status.
ITEM 2. DESCRIPTION OF PROPERTY
The corporate offices of the Company and the Bank are located in a two
story building at 202 South Main Street, Reidsville, North Carolina. The
premises consist of approximately 27,000 square feet of office space, adequate
parking and a three lane drive-in teller facility. The Bank also maintains full
service branches on Freeway Drive and adjacent to Pennrose Mall (Turner Drive)
in Reidsville. In Eden the Bank has branches at Highway 14 (Van Buren Road), the
Eden Mall, and on N. Fieldcrest Road in the Draper community. All branch
locations except Draper in Eden and the corporate office in Reidsville include
automated teller machines. The properties are owned free and clear of
encumbrances, except the Draper and Eden Mall locations, which are occupied
under leases expiring in 2008 and 2001 respectively. Additional remote automated
teller machines are maintained in Reidsville on Freeway Drive near Belmont
Square and at Freeway Crossing Shopping Center, under leases expiring in 1998
and 2001. Additional land has been purchased at 605 N. Highway Street in
Madison, North Carolina, for the purpose of building a new office location
scheduled for completion in 1997.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is not a party to any pending legal proceeding, nor is
its property the subject of any pending legal proceeding, other than routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the security holders of
the Registrant during the fourth quarter of the Registrant's fiscal year ending
December 31, 1996.
PART II
ITEMS 5 THROUGH 7.
Incorporated by reference to the Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1996.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS; ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 9 THROUGH 12.
Incorporated by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held April 8, 1997, filed with the
Securities and Exchange Commission via EDGAR on March 7, 1997.
ITEM 13. INDEX TO EXHIBITS.
Index to Exhibits
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Exhibit Sequential
No. Description Page No.
--- ----------- --------
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3(a)(1) Articles of Incorporation and Amendments
thereto.
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3(b)(1) Bylaws of the Registrant filed as Exhibit
3(b) to the Registrant's Form 10-K for
the fiscal year ended December 31,
1988, filed with the Securities and
Exchange Commission, which is
incorporated herein by reference to such
Form 10-K.
3(b)(2) Amendment of Bylaws of the Registrant
filed as Exhibit 3(b)(2) to the
Registrant's Form 10-K for the fiscal
year ended December 31, 1991, filed
with the Securities and Exchange
Commission, which is incorporated
herein by reference to such Form 10-K.
4 Specimen Common Stock Certificate,
filed as Exhibit 4 to the Registrant's
Registration Statement on Form S-14
(File No. 2-90095), filed with the
Securities and Exchange Commission,
which is incorporated herein by reference
to such Form S-14.
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10(a) Stock Compensation Plan of the
Registrant approved April 11, 1989 by
the Shareholders of the Registrant, with
forms of stock option and stock bonus
agreements attached, filed as Exhibit 28
to the Registrant's Form S-8 (No. 33-
33186), filed with the Securities and
Exchange Commission, which is
incorporated herein by reference to such
Form S-8.
10(b) Omnibus Equity Compensation Plan of
the Registrant submitted to the
Shareholders of the Registrant at the
Registrant's Annual Meeting of
Shareholders, scheduled for April 8,
1997.
10(c) Severance Policy for Senior Officers of
the Registrant (employed for five years
or more), filed as Exhibit 10(b) to the
Registrant's Form 10-K for the fiscal
year ended December 31, 1989, filed
with the Securities and Exchange
Commission, which is incorporated
herein by reference to such Form 10-K.
10(d) Revised Severance Policy for Senior
Officers of the Registrant (employed for
five years or more), filed as Exhibit
10(c) to the Registrant's Form 10-KSB
for the fiscal year ended December 31,
1994, filed with the Securities and
Exchange Commission, which is
incorporated herein by reference to such
10-KSB.
10(e) Severance Policy for Senior Officers of
the Registrant (employed for less than
five years).
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10(f) Severance Compensation Agreement
dated December 11, 1986 by and among
FNB Financial Services Corporation,
First National Bank of Reidsville and
Willis Wade Apple, filed as Exhibit 10(c)
to the Registrant's Form 10-K for the
fiscal year ended December 31, 1989,
filed with the Securities and Exchange
Commission, which is incorporated
herein by reference to such Form 10-K.
10(g) Equipment Sale Agreement and related
agreements dated September 24, 1992 by
and among the Registrant and
Information Technology, Inc. filed as
Exhibit 10(d) to the Registrant's Form
10-KSB for the fiscal year ended
December 31, 1992, filed with the
Securities and Exchange Commission,
which is incorporated herein by reference
to such Form 10-KSB.
10(h) Benefit Equivalency Plan effective
January 1, 1994, filed as Exhibit 10 to
the Registrant's Form 10-QSB for the
fiscal quarter ended June 30, 1995, filed
with the Securities and Exchange
Commission, which is incorporated by
reference to such Form 10-QSB.
10(i) Annual Management Incentive Plan filed
as Exhibit 10C to the Registrant's Form
10-QSB for the fiscal quarter ended June
30, 1995, filed with the Securities and
Exchange Commission, which is
incorporated by reference to such Form
10-QSB.
10(j) Long Term Incentive Plan filed as
Exhibit F to the Registrant's Form 10-
QSB for the fiscal quarter ended June 30,
1995, filed with the Securities and
Exchange Commission, which is
incorporated by reference to such Form
10-QSB.
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10(k) Employment Agreement dated May 18,
1995 between the Registrant and First
National Bank of Reidsville, jointly, as
employer, and Ernest J. Sewell,
President and Chief Executive Officer of
the Registrant and the Bank, filed as
Exhibit 10E to the Registrant's Form 10-
QSB for the fiscal quarter ended June 30,
1995, filed with the Securities and
Exchange Commission, which is
incorporated herein by reference to such
Form 10-QSB.
13 Those portions of the Registrant's 1996 *
Annual Report to Shareholders which
have been incorporated by reference into
this Form 10-KSB. (Except for those
portions thereof which are incorporated
herein by reference, such Annual Report
is furnished for the information of the
Commission and is not deemed "filed" as
a part of this Form 10-KSB Annual
Report for the fiscal year ended
December 31, 1996).
21 Subsidiaries of the Registrant. 12
23 Consent of Cherry, Bekaert & Holland, 13
L.L.P.
27 Financial Data Schedule 14
</TABLE>
* Those pages of the Registrant's 1996 Annual Report to Shareholders
which are incorporated by reference into this Form 10-KSB have been
filed with the Securities and Exchange Commission, but are not included
in this printed copy of the Form 10-KSB. Copies of the Annual Report
are available by written request to Robert F. Albright, Senior Vice
President, FNB Financial Services Corporation, P.O. Box 2037,
Reidsville, NC 27323-2037.
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Pursuant to the requirements of Section 13 or 15(d) 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
BY /s/ Ernest J. Sewell
DATE: March 13, 1997 -----------------------------
Ernest J. Sewell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
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<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ (Ernest J. Sewell) President and Director March 13, 1997
- ------------------------------- (Principal Executive Officer)
Ernest J. Sewell
/s/ (Robert F. Albright) Senior Vice President (Principal March 13, 1997
- ------------------------------- Financial & Accounting Officer)
Robert F. Albright
/s/ (W. B. Apple, Jr.) Director March 13, 1997
- -------------------------------
W. B. Apple, Jr.
/s/ (Charles A. Britt) Director March 13, 1997
- -------------------------------
Charles A. Britt
/s/ (O. E. Green) Director March 13, 1997
- -------------------------------
O. E. Green
/s/ (Joseph H. Kinnarney) Director March 13, 1997
- -------------------------------
Joseph H. Kinnarney
/s/ (Phillip J. Lambeth) Director March 13, 1997
- -------------------------------
Phillip J. Lambeth
/s/ (Clifton G. Payne) Director March 13, 1997
- -------------------------------
Clifton G. Payne
/s/ (Elton H. Trent, Jr.) Director March 13, 1997
- -------------------------------
Elton H. Trent, Jr.
/s/ (Kenan C. Wright) Director March 13, 1997
- -------------------------------
Kenan C. Wright
/s/ (B. Z. Dodson) Director March 13, 1997
- -------------------------------
B. Z. Dodson
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EXHIBIT 3(a)(1)
ARTICLES OF INCORPORATION
OF
FNB FINANCIAL SERVICES CORPORATION
I, the undersigned natural person of the age of eighteen years or more,
do hereby organize a business corporation under the laws of the State of North
Carolina, as contained in Chapter 55 of the General Statutes of North Carolina,
entitled "Business Corporation Act", and the several amendments thereto, and to
that end do hereby set forth:
1. The name of the corporation is FNB Financial Services Corporation.
2. The period of duration of the corporation shall be perpetual.
3. The purposes for which the corporation is organized are:
(a) to purchase, own, and hold the stock of other corporations, and to
do every act and thing covered generally by the denomination "bank holding
corporation" or "holding corporation," and especially to direct the corporations
of banks, banking associations or other corporations through the ownership of
stock therein;
(b) to purchase, subscribe for, acquire, own, hold, sell, exchange,
assign, transfer, create security interests in, pledge, or otherwise dispose of
shares of the capital stock, or any bonds, notes, securities, or evidences of
indebtedness created by any other corporation or corporations organized under
the laws of this state or any other state and also bonds or evidences of
indebtedness of the United States or of any state, district, territory or
subdivision or municipality thereof and to issue in exchange therefor shares of
the capital stock, bonds, notes, or other obligations of the Corporation and
while the owner thereof to exercise all the rights, powers and privileges of
ownership including the right to vote on any shares of stock so owned;
(c) to promote, lend money to, and guarantee the dividends, stocks,
bonds, notes, evidences of indebtedness, contracts, or other obligations of, and
otherwise aid in any manner which shall be lawful, any corporation or
association of which any bonds, stocks or other securities or evidences of
indebtedness shall be held by or for this corporation, or in which, on in the
welfare of which, this corporation shall have any interest, and to do any acts
and things permitted by law and designed to protect, preserve, improve, or
enhance the value of any such bonds, stocks, or other securities or evidences of
indebtedness or the property of this Corporation;
(d) to engage in any other lawful act or activity for which
corporations may be organized under Chapter 55 of the General
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Statutes of North Carolina, entitled "Business Corporation Act", including, but
not limited to, manufacturing, purchasing or otherwise acquiring, owning,
mortgaging, pledging, selling, assigning and transferring, or otherwise
disposing of, investing, trading, dealing in and with, goods, wares and
merchandise and property of every class and description, whether real, personal,
mixed, tangible, or intangible; entering into or serving in any kind of
management, investigative, advisory, promotional, protective, insurance,
guarantyship, suretyship, fiduciary or representative relationship or capacity
for any persons or corporations whatsoever; and
(e) To engage in, conduct and operate any other business which may be
deemed adapted, directly or indirectly, to add to the profits of its business or
to increase the value of its property.
In furtherance and not in limitation of the power conferred by the
laws of the State of North Carolina upon corporations organized for the
foregoing purposes, the corporation shall have power to borrow money, to lend
money, to guarantee obligations, to purchase, construct, lease or otherwise
acquire, own, hold, use, maintain, operate or otherwise manage or control, sell,
exchange, lease, mortgage, pledge or otherwise dispose of, property of any kind
or character, real, personal or mixed, tangible or intangible, necessary, useful
or convenient therefor, and to acquire, hold, mortgage, pledge or dispose of
shares, bonds and other evidences of indebtedness and securities of the United
States of America or any state or municipality therein or of any domestic or
foreign corporation.
The foregoing clauses shall be construed as enumerating specific
purposes and powers, but no recitation, expression or declaration of specific
purposes or powers herein enumerated shall be deemed to be exclusive, but it is
hereby expressly declared that all other lawful purposes and powers not
inconsistent therewith are hereby included.
The Board of Directors of the corporation shall have the authority to
adopt resolutions approving the indemnification, to the fullest extent permitted
by Chapter 55 of the North Carolina General Statutes, of any person made a party
to any action or proceeding, whether civil, criminal or administrative, by
reason of the fact that such person was serving as director, officer, employee
or agent of the corporation.
4. The aggregate number of shares which the corporation shall have
authority to issue is 1,000,000 shares of $1.00 par value Capital Stock, of a
single class.
5. The minimum amount of consideration to be received by the
corporation for its shares before it shall commence business
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is Five Hundred Dollars ($500.00) in cash or property of equivalent value.
6. The shareholders of the corporation shall have no preemptive right
to acquire additional or treasury shares of the corporation.
7. The address of the initial registered office of the corporation is
202 South Main Street, Reidsville, Rockingham County, North Carolina, 27320 and
the name of the initial registered agent at such address is W.B. Apple, Jr.
8. The number of directors constituting the initial board of directors
shall be ten, and the names and addresses of the persons who are to serve as
directors until the appropriate annual meeting of shareholders, or until their
successors are elected and qualify are:
Name Address
---- -------
Frank R. Penn 1202 Crescent Drive
Reidsville, N. C. 27320
Elton H. Trent, Jr. 1909 Carpenter Drive
Reidsville, N. C. 27320
W. B. Apple, Jr. 2307 Pine Lane
Reidsville, N. C. 27320
G. L. Arthur 1839 Pennrose Drive
Reidsville, N. C. 27320
J. S. Balsley, Jr. 904 Oakcrest Drive
Reidsville, N. C. 27320
0. E. Green 1205 Cypress Drive
Reidsville, N. C. 27320
Phillip J. Lambeth 6080 Summit Avenue
Brown Summit, N. C. 27214
Clifton G. Payne, M.D. 1872 Pennrose Drive
Reidsville, N. C. 27320
T. Garland Smothers 914 Oakcrest Drive
Reidsville, N. C. 27320
Mrs. Jeanne T. Stanley 705 Parkway Blvd.
Reidsville, N. C. 27320
9. The name and address of the sole incorporator are:
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Name Address
---- -------
W. B. Apple, Jr. 2307 Pine Lane
Reidsville, N. C. 27320
10. The corporation shall not consolidate with, or merge with or into,
any other corporation or convey to any corporation or other person or otherwise
dispose of all or substantially all of the assets or dispose of by any means all
or substantially all of the stock or assets of any major subsidiary of the
Corporation unless such consolidation, merger,, conveyance or disposition is
approved (a) by the affirmative vote of not less than seventy-five percent (75%)
of the aggregate voting power of the outstanding stock entitled to vote thereon,
and (b) by the affirmative vote of not less than seventy-five percent (75%) of
the aggregate voting power of the outstanding stock entitled to vote thereon,
which shall include the affirmative vote of at least fifty percent (50%) of the
voting power of the outstanding stock of shareholders entitled to vote thereon
other than controlling shareholders, (i) if the shareholder entitled to vote
thereon is a person who, including affiliate of such person, is the beneficial
owner (as the terms are defined in the Securities and Exchange Act of 1934 and
in the rules thereunder) of more than twenty percent (20%) of the voting power
of the corporation (a "controlling shareholder") provided that shares held,
voted or otherwise controlled by a person as a trustee, plan administrator,
officer of the corporation or otherwise pursuant to an employee benefit plan of
the corporation or of an affiliate of the corporation shall not be deemed to be
beneficially owned by any person for the purpose of determining whether a person
is a controlling shareholder, and (ii) if, prior to the acquisition of twenty
percent (20%) of the voting power of the corporation by a shareholder, the Board
of Directors of the corporation had not unanimously approved such consolidation,
merger, conveyance or disposition. If there is a controlling shareholder, this
article can be amended only by the affirmative vote of the voting power of the
corporation then required to approve a consolidation, merger, conveyance or
disposition under this article.
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ARTICLES OF AMENDMENT OF
FNB FINANCIAL SERVICES CORPORATION
The undersigned corporation hereby executes these Articles of Amendment
for the purpose of amending its charter:
1. The name of the corporation is FNB Financial Services Corporation.
2. The following amendment to the charter of the corporation was
adopted by its shareholders on the 9th day of February, 1984, in the manner
prescribed by law:
Paragraph 8 of the original Articles of Incorporation of FNB Financial
Services Corporation, dated the 17th day of August, 1983, is hereby amended by
substituting the following in lieu thereof, in its entirety:
8 . (a) The board of directors of the corporation shall be and is
divided into three classes, Class 1, Class II and Class III, which shall be as
nearly equal in number as possible. Each director shall serve for a term ending
on the date of the third annual meeting of stockholders following the annual
meeting at which the director was elected; provided, however, that each initial
director named herein shall hold office until the annual meeting of shareholders
shown as follows:
Term of Office Expires
Directors In: With Annual Meeting In:
Class I 1985
Class II 1986
Class III 1987
A director elected to fill a vacancy shall serve for the remainder of
their present term of office of the class to which he was elected.
(b) The number of directors constituting the initial board of directors
shall be ten, and the names and addresses of the persons who are to serve as
directors until the appropriate annual meeting of shareholders, or until their
successors are elected and qualify are:
Name Address
---- -------
CLASS I
Clifton G. Payne, M.D. 1872 Pennrose Drive
Reidsville, N. C. 27320
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W. B. Apple, 2307 Pine Lane
Reidsville, N. C. 27320
0. E. Green 1205 Cypress Drive
Reidsville, N. C. 27320
CLASS II
J. B. Balsley, Jr. 904 Oakcrest Drive
Reidsville, N. C. 27320
T. Garland Smothers 914 Oakcrest Drive
Reidsville, N. C. 27320
Mrs. Jeanne T. Stanley 705 Parkway Blvd.
Reidsville, N. C. 27320
CLASS III
G. L. Arthur 1839 Pennrose Drive
Reidsville, N. C. 27320
Phillip J. Lambeth 6080 Summit Avenue
Brown Summit, N. C. 27214
Elton H. Trent, Jr. 1909 Carpenter Drive
Reidsville, N. C. 27320
Frank R. Penn 1202 Crescent Drive
Reidsville, N. C. 27320
3. The number of shares of the corporation outstanding at
the time adoption was ten (10); and the number of shares entitled
to vote was ten (10).
4. The number of shares voted for such amendment was ten
(10); and the number of shares voted against such amendment was
zero (0).
5. The amendment herein effected does not give rise to dissenter's
rights to payment for the reason that the only effect of such amendment is to
establish staggered terms for the board of directors of FNB Financial Services
Corporation.
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STATE OF NORTH CAROLINA
COUNTY OF ROCKINGHAM
ARTICLES OF AMENDMENT OF
FNB FINANCIAL SERVICES CORPORATION
The undersigned corporation hereby executes these Articles of Amendment
for the purpose of amending its charter:
1. The name of the corporation is FNB Financial Services Corporation.
2. The following amendment to the charter of the corporation was
adopted by its shareholders on the 8th day of March, 1984, in the manner
prescribed by law:
Paragraph 6 of the original Articles of Incorporation of FNB Financial
Services Corporation, dated the 17th day of August, 1983, as first amended on
March 1, 1984 is hereby further amended by substituting the following in lieu
thereof, in its entirety:
6 . The shareholders of the corporation shall have preemptive
rights to acquire additional or treasury shares of the
corporation.
3. The number of shares of the corporation outstanding at the time of
such adoption was ten (10); and the number of shares entitled to vote thereon
was ten (10).
4. The number of shares voted for such amendment was ten (10); and the
number of shares voted against such amendment was zero (0).
5. The amendment herein effected does not give rise to dissenter's
rights to payment for the reason that the only effect of such amendment is to
restore preemptive rights with respect to the shareholders of FNB Financial
Services Corporation and the acquisition of treasury or additional shares
therein.
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STATE OF NORTH CAROLINA
COUNTY OF ROCKINGHAM
ARTICLES OF AMENDMENT OF
FNB FINANCIAL SERVICES CORPORATION
The undersigned corporation hereby executes these Articles of Amendment
for the purpose of amending its charter:
1. The name of the corporation is FNB Financial Services Corporation.
2. The following amendment to the charter of the corporation was
adopted by its shareholders on the 12th day of April, 1988, in the manner
prescribed by law:
The Articles of Incorporation of FNB Financial
Services Corporation, dated the 17th day of August, 1983, as
amended on March 1, 1984 and April 13, 1984, is hereby further
amended to include a new Article 11 to read in its entirety as
follows:
11.
No director of this corporation shall be liable for
monetary damages for breach of his duty as a director arising
out of any legal action whether by or in the right of the
corporation or otherwise, except (i) acts or omissions not
made in good faith that the director at the time of such
breach knew or believed were in conflict with the best
interests of the corporation, (ii) any liability under Section
55-32 of the General Statutes of North Carolina, (iii) any
transaction from which the director derived an improper
personal benefit, or (iv) acts or omissions occurring prior to
the date of the effectiveness of these Articles of Amendment.
3. The number of shares of 14 the corporation outstanding at the time
of such adoption was 741,386; and the number of shares entitled to vote thereon
was 741,386.
4. The number of shares voted for such amendment was 488,088; and the
number of shares voted against such amendment was 7,867, with 1,352 shares
abstaining.
5. The amendment herein affected does not give rise to dissenter's
rights to payment for the reason that the only effect of such amendment is to
limit or eliminate the potential monetary liability of director's to the
corporation or its shareholders under such circumstances as may be permitted by
law pursuant to the enactment of such, a charter amendment.
<PAGE> 9
ARTICLES OF AMENDMENT TO THE CHARTER
FNB FINANCIAL SERVICES CORPORATION
The undersigned Corporation hereby executes these Articles of Amendment
for the purpose amending its charter:
1. The name of the corporation is FNB Financial Services Corporation
2. The following amendment to the charter of the corporation was
adopted by shareholders on April 11, 1989, in the manner prescribed by law.
RESOLVED, that the charter of this corporation shall be
amended by deleting Paragraph 4 in its entirety and inserting therefor
a new Paragraph 4 to read as follows:
4. The aggregate number of shares which the corporation shall
have authority to issue is 3,000,000 shares of Common Stock with a par
value of $1.00 per share.
3. The number of shares of capital stock of the corporation outstanding
at the time of the adoption of such amendment was 741,356 shares of common
stock, par value $1.00 per share; and the number of shares entitled to vote
thereon was 741,356.
4. The number of shares voted for such amendment was 443,745. The
number of shares voted against such amendment was 29,071.
5. The amendment does not give rise to dissenter's rights to payment
pursuant to Section 55-101(b) of the General Statutes of North Carolina, because
the amendment does not change the corporation into a nonprofit corporation or
cooperative organization or affect the shares of any shareholder.
<PAGE> 10
ARTICLES OF AMENDMENT
OF
FNB FINANCIAL SERVICES CORPORATION
Pursuant to ss.55-10-06 of the General Statutes of NortH Carolina, the
undersigned corporation hereby submits the following Articles of Amendment for
the purpose of amending its Articles of Incorporation:
1. The name of the corporation is FNB Financial Services
Corporation (the "Corporation").
2. The text of the amendment adopted is as follows:
Article 6 of the Articles of Incorporation of the Corporation
is hereby amended to read in its entirety as follows:
No holder of any stock or other securities of the
corporation shall be entitled to any preemptive right
to purchase any stock or other securities of
the corporation.
3. The date of adoption of the amendment was April 9,
1996.
4. Shareholder approval for the Articles of Amendment
was obtained as required by Chapter 55 of the
North Carolina General Statutes.
5. These Articles will be effective upon filing.
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<PAGE> 1
EXHIBIT 10(b)
FNB FINANCIAL SERVICES CORPORATION
OMNIBUS EQUITY COMPENSATION PLAN
AS AMENDED AND RESTATED
EFFECTIVE NOVEMBER 14, 1996
<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION
OMNIBUS EQUITY COMPENSATION PLAN
TABLE OF CONTENTS
ARTICLE I - GENERAL PROVISIONS.............................................. 1
ARTICLE II - DEFINITIONS.................................................... 2
ARTICLE III - ADMINISTRATION................................................ 8
ARTICLE IV - INCENTIVE STOCK OPTIONS........................................ 14
ARTICLE V - NONQUALIFIED STOCK OPTIONS...................................... 17
ARTICLE VI - STOCK APPRECIATION RIGHTS...................................... 18
ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS................... 20
ARTICLE VIII - RESTRICTED STOCK............................................. 23
ARTICLE IX - DEFERRED STOCK................................................. 26
ARTICLE X - STOCK AWARDS.................................................... 29
ARTICLE XI - PERFORMANCE SHARES............................................. 31
ARTICLE XII - OTHER STOCK-BASED AWARDS...................................... 33
ARTICLE XIII - ACCELERATION EVENTS.......................................... 35
ARTICLE XIV - AMENDMENT AND TERMINATION..................................... 38
ARTICLE XV - MISCELLANEOUS PROVISIONS....................................... 39
-i-
<PAGE> 3
FNB FINANCIAL SERVICES CORPORATION
OMNIBUS EQUITY COMPENSATION PLAN
ARTICLE I - GENERAL PROVISIONS
1.1 The Plan is designed for the benefit of the directors,
executives and key employees of the Corporation and its
Subsidiaries; to attract and retain for the Corporation and
its Subsidiaries personnel of exceptional ability; to
motivate such personnel through added incentives to make a
maximum contribution to greater profitability; to develop
and maintain a highly competent management team; and to be
competitive with other companies with respect to executive
compensation.
1.2 Awards under the Plan may be made to Participants in the
form of (i) Incentive Stock Options; (ii) Nonqualified Stock
Options; (iii) Stock Appreciation Rights; (iv) Restricted
Stock; (v) Deferred Stock; (vi) Stock Awards; (vii)
Performance Shares; (viii) Other Stock-Based Awards; and
(ix) other forms of equity-based compensation as may be
provided and are permissible under this Plan and the law.
1.3 The Plan shall be effective June 13, 1996 (the "Effective
Date"), as amended and restated effective November 14, 1996,
subject to the approval of the Plan by a majority of the
votes cast by the holders of the Corporation's Common Stock
which may be voted at the next annual or special
stockholders' meeting. Any Awards granted under the Plan
prior to such approval shall be effective when made (unless
otherwise specified by the Committee at the time of grant)
but shall be conditioned on, and subject to, the approval of
the Plan by the Corporation's stockholders.
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<PAGE> 4
ARTICLE II - DEFINITIONS
DEFINITIONS. Except where the context otherwise indicates, the
following definitions apply:
2.1 "Acceleration Event" means the occurrence of an event
defined in Article XIII of the Plan.
2.2 "Act" means the Securities Exchange Act of 1934, as amended,
as now in effect or as hereafter amended. (All citations to
sections of the Act or rules thereunder are to such sections
or rules as they may from time to time be amended or
renumbered.)
2.3 "Agreement" means the written agreement evidencing each
Award granted to a Participant under the Plan.
2.4 "Award" means an award granted to a Participant in
accordance with the provisions of the Plan, including, but
not limited to, a Stock Option, Stock Right, Restricted or
Deferred Stock, Stock Award, Performance Share, Other Stock-
Based Award, or any combination of the foregoing.
2.5 "Board" means the Board of Directors of the Corporation.
2.6 "Board-Approved Change in Control" shall have the meaning
set forth in Section 13.3 of the Plan.
2.7 "Change in Control" shall have the meaning set forth in
Section 13.2 of the Plan.
2.8 "Change in Control Price" shall have the meaning set forth
in Section 13.9 of the Plan.
2.9 "Code" means the Internal Revenue Code of 1986, as amended,
as now in effect or as hereafter amended. (All citations to
sections of the Code are to such sections as they may from
time to time be amended or renumbered.)
2.10 "Committee" means the Compensation Committee or such other
committee as may be appointed by the Board to administer
this Plan pursuant to Article III. Committee members may
also be appointed for such limited purposes as may be
provided by the Board. If no Committee is appointed by the
Board to administer this Plan, or if the Board administers
all or any part of this Plan, the term "Committee" shall
refer to the Board.
2.11 "Corporation" means FNB Financial Services Corporation, a
North Carolina corporation, and its successors and assigns.
"Corporation" also means FNB Financial Services Corporation
2
<PAGE> 5
and its Subsidiaries, unless the context clearly indicates
otherwise.
2.12 "Deferral Period" means the period commencing on the date an Award
of Deferred Stock is granted and ending on such date as the
Committee shall determine.
2.13 "Deferred Stock" means the stock awarded under Article IX of
the Plan.
2.14 "Disability" means disability as determined under procedures
established by the Committee or in any Award.
2.15 "Discount Stock Options" means the Nonqualified Stock Options which
provide for an exercise price of less than the Fair Market Value of
the Stock at the date of the Award.
2.16 "Early Retirement" means retirement from active employment with the
Corporation or any Subsidiary, with the express consent of the
Committee, pursuant to the early retirement provisions established
by the Committee or in any Award.
2.17 "Effective Date" shall have the meaning set forth in Section
1.3 of the Plan.
2.18 "Elective Deferral Period" shall have the meaning set forth
in Section 9.3 of the Plan.
2.19 "Eligible Participant" means any director, executive or key
employee of the Corporation or its Subsidiaries, as shall be
determined by the Committee, as well as any other person
whose participation the Committee determines is in the best
interest of the Corporation, subject to limitations as may
be provided by the Code, the Act or the Committee. For
purposes of Article IV and Incentive Stock Options that may
be granted hereunder, the term "Eligible Participant" shall
be limited to an executive or other key employee meeting the
qualifications for receipt of an Incentive Stock Option
under the provisions of Section 422 of the Code.
2.20 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, as now in effect or as hereafter amended.
2.21 "Fair Market Value" means, with respect to any given day,
the closing price of the Stock reported on the Nasdaq
National Market tier of The Nasdaq Stock Market for such
day, or if the Stock was not traded on the Nasdaq National
Market tier of The Nasdaq Stock Market on such day, then on
the next day on which the Stock was traded, all as reported
by such source as the Committee may select. The Committee
may establish an alternative method of determining Fair
Market Value.
3
<PAGE> 6
2.22 "Incentive Stock Option" means a Stock Option granted under Article
IV of the Plan, and as defined in Section 422 of the Code.
2.23 "Limited Stock Appreciation Rights" means a Stock Right
which is exercisable only in the event of a Change in
Control and/or a Potential Change in Control, as described
in Section 6.8 of this Plan, which provides for an amount
payable solely in cash, equal to the excess of the Stock
Appreciation Right Fair Market Value of a share of Stock on
the day the Stock Right is surrendered over the price at
which a Participant could exercise a related Stock Option to
purchase the share of Stock.
2.24 "Nonqualified Stock Option" means a Stock Option granted
under Article V of the Plan.
2.25 "Normal Retirement" means retirement from active employment with
the Corporation or any Subsidiary on or after age 65, or pursuant
to such other requirements as may be established by the Committee
or in any Award.
2.26 "Option Grant Date" means, as to any Stock Option, the
latest of:
(a) the date on which the Committee grants the Stock Option
to the Participant;
(b) the date the Participant receiving the Stock Option
becomes an employee of the Corporation or its
Subsidiaries, to the extent employment status is a
condition of the grant or a requirement of the Code or the
Act; or
(c) such other date (other than the dates described in (i)
and (ii) above) as the Committee may designate.
2.27 "Other Stock-Based Award" means an Award under Article XII of the
Plan that is valued in whole or in part by reference to, or is
otherwise based on, Stock.
2.28 "Participant" means an Eligible Participant to whom an Award of
equity-based compensation has been granted and who has entered into
an Agreement evidencing the Award.
2.29 "Performance Share" means an Award under Article XI of the
Plan of a unit valued by reference to a designated number of
shares of Stock, which value may be paid to the Participant
by delivery of such property as the Committee shall
determine, including, without limitation, cash, Stock, or
any combination thereof, upon achievement of such
Performance Objectives during the Performance Period as the
4
<PAGE> 7
Committee shall establish at the time of such Award or thereafter.
2.30 "Performance Objectives" shall have the meaning set forth in
Article XI of the Plan.
2.31 "Performance Period" shall have the meaning set forth in
Article XI of the Plan.
2.32 "Potential Change in Control" shall have the meaning set
forth in Section 13.4 of the Plan.
2.33 "Plan" means the FNB Financial Services Corporation Omnibus Equity
Compensation Plan, as amended and restated effective November 14,
1996, and as further amended from time to time.
2.34 "Restricted Stock" means an Award of Stock under Article
VIII of the Plan, which Stock is issued with the restriction
that the holder may not sell, transfer, pledge, or assign
such Stock and with such other restrictions as the
Committee, in its sole discretion, may impose (including,
without limitation, any restriction on the right to vote
such Stock, and the right to receive any cash dividends),
which restrictions may lapse separately or in combination at
such time or times, in installments or otherwise, as the
Committee may deem appropriate.
2.35 "Restriction Period" means the period commencing on the date an
Award of Restricted Stock is granted and ending on such date as the
Committee shall determine.
2.36 "Retirement" means Normal or Early Retirement.
2.37 "Stock" means shares of Common Stock of the Corporation, as
may be adjusted pursuant to the provisions of Section 3.11.
2.38 "Stock Appreciation Right" means a Stock Right, as described
in Article VI of this Plan, which provides for an amount
payable in Stock and/or cash, as determined by the
Committee, equal to the excess of the Fair Market Value of
a share of Stock on the day the Stock Right is exercised
over the price at which the Participant could exercise a
related Stock Option to purchase the share of Stock.
2.39 "Stock Appreciation Right Fair Market Value" means a value
established by the Committee for the exercise of a Stock
Appreciation Right or a Limited Stock Appreciation Right.
2.40 "Stock Award" means an Award of Stock granted in payment of
compensation, as provided in Article X of the Plan.
5
<PAGE> 8
2.41 "Stock Option" means an Award under Article IV or V of the Plan of
an option to purchase Stock. A Stock Option may be either an
Incentive Stock Option or a Nonqualified Stock Option.
2.42 "Stock Right" means an Award under Article VI of the Plan.
A Stock Right may be either a Stock Appreciation Right or a
Limited Stock Appreciation Right.
2.43 "Subsidiary" or "Subsidiaries" means:
(a) for the purpose of an Incentive Stock Option, any
corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation
if, at the time of the granting of the Option, each of
the corporations other than the last corporation in the
unbroken chain owns stock possessing fifty percent
(50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in
such chain; and
(b) for the purposes of all other types of equity-based
compensation provided for under the Plan, any
corporation (or partnership, joint venture, limited
liability company, or other enterprise) of which the
Corporation owns or controls, directly or indirectly,
fifty percent (50%) or more of the outstanding shares
of stock normally entitled to vote for the election of
directors (or comparable equity participation and
voting power).
2.44 "Termination of Employment" means the discontinuance of
employment of a Participant with the Corporation or its
Subsidiaries for any reason other than a Transfer. The
determination of whether a Participant has discontinued
employment shall be made by the Committee in its discretion.
In determining whether a Termination of Employment has
occurred, the Committee may provide that service as a
consultant or service with a business enterprise in which
the Corporation has a significant ownership interest shall
be treated as employment with the Corporation. The
Committee shall have the discretion, exercisable either at
the time the Award is granted or at the time the Participant
terminates employment, to establish as a provision
applicable to the exercise of one or more Awards that during
the limited period of exercisability following Termination
of Employment, the Award may be exercised not only with
respect to the number of shares of Stock for which it is
exercisable at the time of the Termination of Employment but
also with respect to one or more subsequent installments for
which the Award would have become exercisable had the
Termination of Employment not occurred.
6
<PAGE> 9
2.45 "Transfer" means a change of employment of a Participant
within the group consisting of the Corporation and its
Subsidiaries.
7
<PAGE> 10
ARTICLE III - ADMINISTRATION
3.1 This Plan shall be administered by the Committee. Members
of the Committee may vote on any matters affecting the
administration of the Plan or the grant of Awards pursuant
to the Plan, except that no such member shall act upon the
granting of an Award to himself or herself, but any such
member may be counted in determining the existence of a
quorum at any meeting of the Committee or Board during which
action is taken with respect to the granting of an Award to
such member. The Committee, in its discretion, may delegate
to one or more of its members such of its powers as it deems
appropriate. The Committee also may limit the power of any
member to the extent necessary to comply with Rule 16b-3
under the Act or any other law. Members of the Committee
shall be appointed originally, and as vacancies occur, by
the Board, to serve at the pleasure of the Board. The
Board, in its discretion, may serve as the Committee, may
administer all or any part of this Plan, or may require that
all or any final actions or determinations by the Committee
be made by or be subject to approval or ratification by the
Board before becoming effective. To the extent all or any
decisions, actions, or determinations relating to the
administration of the Plan are made by the Board, the Board
shall have all power and authority granted to the Committee
in this Article and otherwise in this Plan, and for these
purposes, all references to the "Committee" herein shall be
deemed to include the Board.
3.2 The Committee shall meet at such times and places as it
determines. A majority of its members shall constitute a
quorum, and the decision of a majority of those present at
any meeting at which a quorum is present shall constitute
the decision of the Committee. A memorandum signed by all
of its members shall constitute the decision of the
Committee without necessity, in such event, for holding an
actual meeting.
3.3 The Committee shall have the exclusive right to interpret,
construe and administer the Plan, to select the persons who
are eligible to receive an Award, and to act in all matters
pertaining to the granting of an Award and the contents of
the Agreement evidencing the Award, including, without
limitation, the determination of the number of Stock
Options, Stock Rights, shares of Stock or Performance Shares
subject to an Award and the form, terms, conditions and
duration of each Award, and any amendment thereof consistent
with the provisions of the Plan. All acts, determinations
and decisions of the Committee made or taken pursuant to
grants of authority under the Plan or with respect to any
questions arising in connection with the administration and
8
<PAGE> 11
interpretation of the Plan, including the severability of any and
all of the provisions thereof, shall be conclusive, final and
binding upon all Participants, Eligible Participants and their
beneficiaries.
3.4 The Committee may adopt such rules, regulations and
procedures of general application for the administration of
this Plan, as it deems appropriate.
3.5 Without limiting the foregoing Sections 3.1, 3.2, 3.3 and
3.4, and notwithstanding any other provisions of the Plan,
the Committee is authorized to take such action as it
determines to be necessary or advisable, and fair and
equitable to Participants, with respect to an Award in the
event of an Acceleration Event as defined in Article XIII.
Such action may include, but shall not be limited to,
establishing, amending or waiving the forms, terms,
conditions and duration of an Award and the Award Agreement,
so as to provide for earlier, later, extended or additional
times for exercise or payments, differing methods for
calculating payments, alternate forms and amounts of
payment, an accelerated release of restrictions or other
modifications. The Committee may take such actions pursuant
to this Section 3.5 by adopting rules and regulations of
general applicability to all Participants or to certain
categories of Participants, by including, amending or
waiving terms and conditions in an Award and the Award
Agreement, or by taking action with respect to individual
Participants.
3.6 The aggregate number of shares of Stock which are subject to
an Award under the Plan shall be one hundred fifty thousand
(150,000) shares, plus twenty percent (20%) of any increase,
other than any increase due to Awards under this Plan or any
other similar plan of the Corporation, in the number of
authorized and issued shares of Stock above the number of
authorized and outstanding shares as of the Effective Date.
Such shares of Stock shall be made available from authorized
and unissued shares of the Corporation.
(a) If, for any reason, any shares of Stock or Performance
Shares awarded or subject to purchase under the Plan
are not delivered or purchased, or are reacquired by
the Corporation, for reasons including, but not limited
to, a forfeiture of Restricted Stock or termination,
expiration or cancellation of a Stock Option, Stock
Right or Performance Share, or any other termination of
an Award without payment being made in the form of
Stock (whether or not Restricted Stock), such shares of
Stock or Performance Shares shall not be charged
against the aggregate number of shares of Stock
9
<PAGE> 12
available for Award under the Plan, and shall again be
available for Award under the Plan.
(b) For all purposes under the Plan, each Performance Share
awarded shall be counted as one share of Stock subject to
an Award.
(c) To the extent a Stock Right granted in connection with
a Stock Option is exercised without payment being made
in the form of Stock (whether or not Restricted Stock),
the shares of Stock which otherwise would have been
issued upon the exercise of such related Stock Option
shall not be charged against the aggregate number of
shares of Stock subject to an Award under the Plan, and
shall again be available for Award under the Plan.
3.7 Each Award granted under the Plan shall be evidenced by a
written Award Agreement. Each Award Agreement shall be
subject to and incorporate (by reference or otherwise) the
applicable terms and conditions of the Plan, and any other
terms and conditions (not inconsistent with the Plan)
required by the Committee.
3.8 The Corporation shall not be required to issue or deliver
any certificates for shares of Stock prior to:
(a) the listing of such shares on any stock exchange on
which the Stock may then be listed; and
(b) the completion of any registration or qualification of
such shares of Stock under any federal or state law, or
any ruling or regulation of any government body which the
Corporation shall, in its discretion, determine to be
necessary or advisable.
3.9 All certificates for shares of Stock delivered under the
Plan shall also be subject to such stop-transfer orders and
other restrictions as the Committee may deem advisable under
the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or
state laws, and the Committee may cause a legend or legends
to be placed on any such certificates to make appropriate
reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of
counsel for the Corporation.
3.10 Subject to the restrictions on Restricted Stock, as provided in
Article VIII of the Plan and in the Restricted Stock Award
Agreement, each Participant who receives an Award of Restricted
Stock shall have all of the rights of a stockholder with respect to
such shares of Stock, including
10
<PAGE> 13
the right to vote the shares to the extent, if any, such shares
possess voting rights and receive dividends and other
distributions. Except as provided otherwise in the Plan or in an
Award Agreement, no Participant awarded a Stock Option, Stock
Right, Deferred Stock, Stock Award or Performance Share shall have
any right as a stockholder with respect to any shares of Stock
covered by his or her Stock Option, Stock Right, Deferred Stock,
Stock Award or Performance Share prior to the date of issuance to
him or her of a certificate or certificates for such shares of
Stock.
3.11 If any reorganization, recapitalization, reclassification,
stock split-up, stock dividend, or consolidation of shares
of Stock, merger or consolidation of the Corporation or its
Subsidiaries or sale or other disposition by the Corporation
or its Subsidiaries of all or a portion of its assets, any
other change in the Corporation's or its Subsidiaries'
corporate structure, or any distribution to stockholders
other than a cash dividend results in the outstanding shares
of Stock, or any securities exchanged therefor or received
in their place, being exchanged for a different number or
class of shares of Stock or other securities of the
Corporation, or for shares of Stock or other securities of
any other corporation; or new, different or additional
shares or other securities of the Corporation or of any
other corporation being received by the holders of
outstanding shares of Stock, then equitable adjustments
shall be made by the Committee in:
(a) the limitation of the aggregate number of shares of Stock
that may be awarded as set forth in Sections 3.6, 3.16,
and 4.1(e) (to the extent permitted under Section 422 of
the Code) of the Plan;
(b) the number and class of Stock that may be subject to an
Award, and which have not been issued or transferred
under an outstanding Award;
(c) the purchase price to be paid per share of Stock under
outstanding Stock Options and the number of shares of
Stock to be transferred in settlement of outstanding Stock
Rights; and
(d) the terms, conditions or restrictions of any Award and
Award Agreement, including the price payable for the
acquisition of Stock; provided, however, that all
adjustments made as the result of the foregoing in
respect of each Incentive Stock Option shall be made so
that such Stock Option shall continue to be an
Incentive Stock Option, as defined in Section 422 of
the Code.
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<PAGE> 14
3.12 In addition to such other rights of indemnification as they
may have as directors or as members of the Committee, the
members of the Committee shall be indemnified by the
Corporation against reasonable expenses, including
attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any
action taken or failure to act under or in connection with
the Plan or any Award granted thereunder, and against all
amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected
by the Corporation) or paid by them in satisfaction of a
judgment or settlement in any such action, suit or
proceeding, except as to matters as to which the Committee
member has been negligent or engaged in misconduct in the
performance of his duties; provided, that within sixty (60)
days after institution of any such action, suit or
proceeding, a Committee member shall in writing offer the
Corporation the opportunity, at its own expense, to handle
and defend the same.
3.13 The Committee may require each person purchasing shares of
Stock pursuant to a Stock Option or other Award under the
Plan to represent to and agree with the Corporation in
writing that he is acquiring the shares of Stock without a
view to distribution thereof. The certificates for such
shares of Stock may include any legend which the Committee
deems appropriate to reflect any restrictions on transfer.
3.14 The Committee shall be authorized to make adjustments in a
performance based criteria or in the terms and conditions of
other Awards in recognition of unusual or nonrecurring
events affecting the Corporation (or any Subsidiary, if
applicable) or its financial statements or changes in
applicable laws, regulations or accounting principles. The
Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award
Agreement in the manner and to the extent it shall deem
desirable to carry it into effect. In the event the
Corporation (or any Subsidiary, if applicable) shall assume
outstanding employee benefit awards or the right or
obligation to make future such awards in connection with the
acquisition of another corporation or business entity, the
Committee may, in its discretion, make such adjustments in
the terms of Awards under the Plan as it shall deem
appropriate.
3.15 The Committee shall have full power and authority to determine
whether, to what extent and under what circumstances, any Award
shall be canceled or suspended. In particular, but without
limitation, all outstanding Awards
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<PAGE> 15
to any Participant shall be canceled if (a) the Participant,
without the consent of the Committee, while employed by the
Corporation or any Subsidiary or after termination of such
employment, becomes associated with, employed by, renders services
to, or owns any interest in (other than any nonsubstantial
interest, as determined by the Committee), any business that is in
competition with the Corporation or with any business in which the
Corporation and/or its Subsidiaries have a substantial interest as
determined by the Committee; or (b) is terminated for cause as
determined by the Committee.
3.16 Subject to the limitations of Section 3.6, and pursuant to
the requirements of section 162(m) of the Code and the
regulations promulgated thereunder, and to the extent
required thereunder, the maximum number of shares of Stock
with respect to which an Award or Awards of Stock Options
and/or Stock Rights under the Plan may be granted during any
calendar year to any employee shall be twenty thousand
(20,000) shares; provided, however, that if the number of
shares of Stock with respect to which an Award or Awards of
Stock Options and/or Stock Rights under the Plan are granted
during a calendar year to any employee is less than twenty
thousand (20,000) shares, or if no Award of Stock Options
and/or Stock Rights under the Plan is granted during any
calendar year to such employee, then the amount of such
shortfall shall be carried forward and added to the maximum
number of shares of Stock with respect to which an Award or
Awards of Stock Options and/or Stock Rights under the Plan
may be granted in a subsequent calendar year to such
employee.
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<PAGE> 16
ARTICLE IV - INCENTIVE STOCK OPTIONS
4.1 Each provision of this Article IV and of each Incentive
Stock Option granted hereunder shall be construed in
accordance with the provisions of Section 422 of the Code,
and any provision hereof that cannot be so construed shall
be disregarded. Incentive Stock Options shall be granted
only to Eligible Participants, each of whom may be granted
one or more such Incentive Stock Options at such time or
times determined by the Committee following the Effective
Date until June 12, 2006, subject to the following
conditions:
(a) The Incentive Stock Option price per share of Stock shall
be set in the Award Agreement, but shall not be less than
one hundred percent (100%) of the Fair Market Value of the
Stock at the time of the Option Grant Date.
(b) The Incentive Stock Option and its related Stock Right,
if any, may be exercised in full or in part from time
to time within ten (10) years from the Option Grant
Date, or such shorter period as may be specified by the
Committee in the Award; provided, that in any event,
the Incentive Stock Option and related Stock Right
shall lapse and cease to be exercisable upon, or within
such period following, a Termination of Employment as
shall have been determined by the Committee and as
specified in the Incentive Stock Option Award Agreement
or its related Stock Right Award Agreement; provided,
however, that such period following a Termination of
Employment shall not exceed three (3) months unless
employment shall have terminated:
(i) as a result of death or Disability, in which
event, such period shall not exceed one year
after the date of death or Disability; and
(ii) as a result of death, if death shall have occurred
following a Termination of Employment and while
the Incentive Stock Option or Stock Right was
still exercisable, in which event, such period
shall not exceed one year after the date of death;
provided, further, that such period following a
Termination of Employment shall in no event extend the
original exercise period of the Incentive Stock Option or
any related Stock Right.
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(c) The aggregate Fair Market Value, determined as of the
Option Grant Date, of the shares of Stock with respect to
which Incentive Stock Options are first exercisable during
any calendar year by any Eligible Participant shall not
exceed one hundred thousand dollars ($100,000); provided,
however, to the extent permitted under Section 422 of the
Code:
(i) if a Participant's employment is terminated by
reason of death, Disability or Retirement and the
portion of any Incentive Stock Option that is
otherwise exercisable during the post-termination
period applied without regard to the one hundred
thousand dollar ($100,000) limitation contained
in Section 422 of the Code is greater than the
portion of such option that is immediately
exercisable as an Incentive Stock Option during
such post-termination period under Section 422,
such excess shall be treated as a Nonqualified
Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of an Acceleration Event,
any portion of such Award that is not exercisable
as an Incentive Stock Option by reason of the one
hundred thousand dollar ($100,000) limitation
contained in Section 422 of the Code shall be
treated as a Nonqualified Stock Option.
(d) Incentive Stock Options shall be granted only to an
Eligible Participant who, at the time of the Option
Grant Date, does not own stock possessing more than 10%
of the total combined voting power of all classes of
stock of the Corporation; provided, however, the
foregoing restriction shall not apply if at the time of
the Option Grant Date the option price is at least one
hundred ten percent (110%) of the Fair Market Value of
the Stock subject to the Incentive Stock Option and
such Incentive Stock Option by its terms is not
exercisable after the expiration of five (5) years from
the Option Grant Date.
(e) Subject to the limitations of Section 3.6, the maximum
number of shares of Stock subject to Incentive Stock
Option Awards shall be one hundred fifty thousand
(150,000).
(f) The Committee may adopt any other terms and conditions
which it determines should be imposed for the Incentive
Stock Option to qualify under Section 422 of the Code, as
well as any other terms and conditions not
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inconsistent with this Article IV as determined by the
Committee.
4.2 The Committee may at any time offer to buy out for a payment
in cash, Stock, Deferred Stock or Restricted Stock an
Incentive Stock Option previously granted, based on such
terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer
is made.
4.3 If the Incentive Stock Option Award Agreement so provides,
the Committee may require that all or part of the shares of
Stock to be issued upon the exercise of an Incentive Stock
Option shall take the form of Deferred or Restricted Stock,
which shall be valued on the date of exercise, as determined
by the Committee, on the basis of the Fair Market Value of
such Deferred Stock or Restricted Stock determined without
regard to the deferral limitations and/or forfeiture
restrictions involved.
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ARTICLE V - NONQUALIFIED STOCK OPTIONS
5.1 One or more Stock Options may be granted as Nonqualified
Stock Options to Eligible Participants to purchase shares of
Stock at such time or times determined by the Committee,
following the Effective Date, subject to the terms and
conditions set forth in this Article V.
5.2 The Nonqualified Stock Option price per share of Stock shall
be established in the Award Agreement and may be less than
one hundred percent (100%) of the Fair Market Value at the
time of the grant, or at such later date as the Committee
shall determine.
5.3 The Nonqualified Stock Option and its related Stock Right,
if any, may be exercised in full or in part from time to
time within such period as may be specified by the Committee
or in the Award Agreement; provided, that, in any event, the
Nonqualified Stock Option and the related Stock Right shall
lapse and cease to be exercisable upon, or within such
period following, Termination of Employment as shall have
been determined by the Committee and as specified in the
Nonqualified Stock Option Award Agreement or Stock Right
Award Agreement; provided, however, that such period
following Termination of Employment shall not exceed three
(3) months unless employment shall have terminated:
(a) as a result of Retirement or Disability, in which event,
such period shall not exceed one year after the date of
Retirement or Disability, or within such longer period as
the Committee may specify; and
(b) as a result of death, or if death shall have occurred
following a Termination of Employment and while the
Nonqualified Stock Option or Stock Right was still
exercisable, in which event, such period may exceed one
year after the date of death, as provided by the Committee
or in the Award Agreement.
5.4 The Nonqualified Stock Option Award Agreement may include
any other terms and conditions not inconsistent with this
Article V or in Article VII, as determined by the Committee.
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ARTICLE VI - STOCK APPRECIATION RIGHTS
6.1 A Stock Appreciation Right may be granted to an Eligible
Participant in connection with an Incentive Stock Option or
a Nonqualified Stock Option granted under Article IV or
Article V of this Plan, or may be granted independent of any
related Stock Option.
6.2 A related Stock Appreciation Right shall entitle a holder of
a Stock Option, within the period specified for the exercise
of the Stock Option, to surrender the unexercised Stock
Option (or a portion thereof) and to receive in exchange
therefor a payment in cash or shares of Stock having an
aggregate value equal to the amount by which the Fair Market
Value of each share of Stock exceeds the Stock Option price
per share of Stock, times the number of shares of Stock
under the Stock Option, or portion thereof, which is
surrendered.
6.3 Each related Stock Appreciation Right granted hereunder
shall be subject to the same terms and conditions as the
related Stock Option, including limitations on
transferability, if any, and shall be exercisable only to
the extent such Stock Option is exercisable and shall
terminate or lapse and cease to be exercisable when the
related Stock Option terminates or lapses. The grant of
Stock Appreciation Rights related to Incentive Stock Options
must be concurrent with the grant of the Incentive Stock
Options. With respect to Nonqualified Stock Options, the
grant either may be concurrent with the grant of the
Nonqualified Stock Options, or in connection with
Nonqualified Stock Options previously granted under Article
V, which are unexercised and have not terminated or lapsed.
6.4 The Committee shall have sole discretion to determine in
each case whether the payment with respect to the exercise
of a Stock Appreciation Right will be in the form of all
cash, all Stock, or any combination thereof. If payment is
to be made in Stock, the number of shares of Stock shall be
determined based on the Fair Market Value of the Stock on
the date of exercise. If the Committee elects to make full
payment in Stock, no fractional shares of Stock shall be
issued and cash payments shall be made in lieu of fractional
shares.
6.5 The Committee shall have sole discretion as to the timing of
any payment made in cash, Stock, or a combination thereof,
upon exercise of Stock Appreciation Rights. Payment may be
made in a lump sum, in annual installments or may be
otherwise deferred; and the Committee shall have sole
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discretion to determine whether any deferred payments may bear
amounts equivalent to interest or cash dividends.
6.6 Upon exercise of a Stock Appreciation Right, the number of
shares of Stock subject to exercise under any related Stock
Option shall automatically be reduced by the number of
shares of Stock represented by the Stock Option or portion
thereof which is surrendered.
6.7 The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control and/or a Potential
Change in Control, the amount to be paid upon the exercise
of a Stock Appreciation Right or Limited Stock Appreciation
Right shall be based on the Change in Control Price, subject
to such terms and conditions as the Committee may specify at
grant.
6.8 In its sole discretion, the Committee may grant Limited
Stock Appreciation Rights under this Article VI. Limited
Stock Appreciation Rights become exercisable only in the
event of a Change in Control and/or a Potential Change in
Control, subject to such terms and conditions as the
Committee, in its sole discretion, may specify at grant.
Such Limited Stock Appreciation Rights shall be settled
solely in cash. A Limited Stock Appreciation Right shall
entitle the holder of the related Stock Option to surrender
such Stock Option, or any portion thereof, to the extent
unexercised in respect of the number of shares of Stock as
to which such Limited Stock Appreciation Right is exercised,
and to receive a cash payment equal to the difference
between (a) the Stock Appreciation Right Fair Market Value
(at the date of surrender) of a share of Stock for which the
surrendered Stock Option or portion thereof is then
exercisable, and (b) the price at which a Participant could
exercise a related Stock Option to purchase the share of
Stock. Such Stock Option shall, to the extent so
surrendered, thereupon cease to be exercisable. A Limited
Stock Appreciation Right shall be subject to such further
terms and conditions as the Committee shall, in its sole
discretion, deem appropriate.
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ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS
7.1 Each Stock Option and Stock Right shall be granted subject
to such terms and conditions, if any, not inconsistent with
this Plan, as shall be determined by the Committee,
including any provisions as to continued employment as
consideration for the grant or exercise of such Stock Option
or Stock Right and any provisions which may be advisable to
comply with applicable laws, regulations or rulings of any
governmental authority.
7.2 An Incentive Stock Option and its related Stock Right, if
any, shall not be transferable by the Participant other than
by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the Participant
only by him or by his guardian or legal representative. A
Nonqualified Stock Option and its related Stock Right, if
any, shall be subject to the transferability and
exercisability restrictions of the immediately preceding
sentence unless otherwise determined by the Committee, in
its sole discretion, and set forth in the applicable Award
Agreement.
7.3 Shares of Stock purchased upon exercise of a Stock Option
shall be paid for in such amounts, at such times and upon
such terms as shall be determined by the Committee, subject
to limitations set forth in the Stock Option Award
Agreement. Without limiting the foregoing, the Committee
may establish payment terms for the exercise of Stock
Options which permit the Participant to deliver shares of
Stock (or other evidence of ownership of Stock satisfactory
to the Corporation) with a Fair Market Value equal to the
Stock Option price as payment.
7.4 No cash dividends shall be paid on shares of Stock subject
to unexercised Stock Options. The Committee may provide,
however, that a Participant to whom a Stock Option has been
granted which is exercisable in whole or in part at a future
time for shares of Stock shall be entitled to receive an
amount per share equal in value to the cash dividends, if
any, paid per share on issued and outstanding Stock, as of
the dividend record dates occurring during the period
between the date of the grant and the time each such share
of Stock is delivered pursuant to exercise of such Stock
Option or the related Stock Right. Such amounts (herein
called "dividend equivalents") may, in the discretion of the
Committee, be:
(a) paid in cash or Stock either from time to time prior
to, or at the time of the delivery of, such Stock, or
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<PAGE> 23
upon expiration of the Stock Option if it shall not
have been fully exercised; or
(b) converted into contingently credited shares of Stock (with
respect to which dividend equivalents may accrue) in such
manner, at such value, and deliverable at such time or
times, as may be determined by the Committee.
Such Stock (whether delivered or contingently credited) shall be
charged against the limitations set forth in Section 3.6.
7.5 The Committee, in its sole discretion, may authorize payment
of interest equivalents on dividend equivalents which are
payable in cash at a future time.
7.6 In the event of death or Disability, the Committee, with the
consent of the Participant or his legal representative, may
authorize payment, in cash or in Stock, or partly in cash
and partly in Stock, as the Committee may direct, of an
amount equal to the difference at the time between the Fair
Market Value of the Stock subject to a Stock Option and the
Option price in consideration of the surrender of the Stock
Option.
7.7 If a Participant is required to pay to the Corporation an
amount with respect to income and employment tax withholding
obligations in connection with exercise of a Nonqualified
Stock Option, and/or with respect to certain dispositions of
Stock acquired upon the exercise of an Incentive Stock
Option, the Committee, in its discretion and subject to such
rules as it may adopt, may permit the Participant to satisfy
the obligation, in whole or in part, by making an
irrevocable election that a portion of the total Fair Market
Value of the shares of Stock subject to the Nonqualified
Stock Option and/or with respect to certain dispositions of
Stock acquired upon the exercise of an Incentive Stock
Option, be paid in the form of cash in lieu of the issuance
of Stock and that such cash payment be applied to the
satisfaction of the withholding obligations. The amount to
be withheld shall not exceed the statutory minimum Federal
and State income and employment tax liability arising from
the Stock Option exercise transaction.
7.8 The Committee may permit the voluntary surrender of all or
a portion of any Stock Option granted under the Plan to be
conditioned upon the granting to the Participant of a new
Stock Option for the same or a different number of shares of
Stock as the Stock Option surrendered, or may require such
voluntary surrender as a condition precedent to a grant of
a new Stock Option to such Participant. Subject to the
provisions of the Plan, such new Stock Option shall be
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<PAGE> 24
exercisable at the same price, during such period and on such other
terms and conditions as are specified by the Committee at the time
the new Stock Option is granted. Upon surrender, the Stock Options
surrendered shall be canceled and the shares of Stock previously
subject to them shall be available for the grant of other Stock
Options.
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ARTICLE VIII - RESTRICTED STOCK
8.1 Restricted Stock Awards may be made to certain Participants
as an incentive for the performance of future services that
will contribute materially to the successful operation of
the Corporation and its Subsidiaries. Awards of Restricted
Stock may be made either alone, in addition to or in tandem
with other Awards granted under the Plan and/or cash
payments made outside of the Plan.
8.2 With respect to Awards of Restricted Stock, the Committee
shall:
(a) determine the purchase price, if any, to be paid for such
Restricted Stock, which may be equal to or less than par
value and may be zero, subject to such minimum
consideration as may be required by applicable law;
(b) determine the length of the Restriction Period;
(c) determine any restrictions applicable to the Restricted
Stock such as service or performance, other than those
set forth in this Article VIII;
(d) determine if the restrictions shall lapse as to all shares
of Restricted Stock at the end of the Restriction Period
or as to a portion of the shares of Restricted Stock in
installments during the Restriction Period; and
(e) determine if dividends and other distributions on the
Restricted Stock are to be paid currently to the
Participant or withheld by the Corporation for the
account of the Participant.
8.3 Awards of Restricted Stock must be accepted within a period
of sixty (60) days (or such shorter periods as the Committee
may specify at grant) after the Award date, by executing a
Restricted Stock Award Agreement and paying whatever price
(if any) is required.
The prospective recipient of a Restricted Stock Award shall not
have any rights with respect to such Award, unless such recipient
has executed a Restricted Stock Award Agreement and has delivered a
fully executed copy thereof to the Committee, and has otherwise
complied with the applicable terms and conditions of such Award.
8.4 Except when the Committee determines otherwise, or as
otherwise provided in the Restricted Stock Award Agreement,
if a Participant terminates employment with the Corporation
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<PAGE> 26
or its Subsidiaries for any reason before the expiration of the
Restriction Period, all shares of Restricted Stock still subject to
restriction shall be forfeited by the Participant and shall be
reacquired by the Corporation.
8.5 Except as otherwise provided in this Article VIII, no shares
of Restricted Stock received by a Participant shall be sold,
exchanged, transferred, pledged, hypothecated or otherwise
disposed of during the Restriction Period.
8.6 To the extent not otherwise provided in a Restricted Stock
Award Agreement, in cases of death, Disability or Retirement
or in cases of special circumstances, the Committee, if it
finds that a waiver would be appropriate, may elect to waive
any or all remaining restrictions with respect to such
Participant's Restricted Stock.
8.7 In the event of hardship or other special circumstances of
a Participant whose employment with the Corporation or any
Subsidiary is involuntarily terminated (other than for
cause), the Committee may waive in whole or in part any or
all remaining restrictions with respect to any or all of the
Participant's Restricted Stock, based on such factors and
criteria as the Committee may deem appropriate.
8.8 The certificates representing shares of Restricted Stock may
either:
(a) be held in custody by the Corporation until the
Restriction Period expires or until restrictions thereon
otherwise lapse, and the Participant shall deliver to the
Corporation a stock power endorsed in blank relating to
the Restricted Stock; and/or
(b) be issued to the Participant and registered in the name of
the Participant, and shall bear an appropriate restrictive
legend and shall be subject to appropriate stop-transfer
orders.
8.9 Except as provided in this Article VIII, a Participant
receiving a Restricted Stock Award shall have, with respect
to the shares of Restricted Stock covered by any Award, all
of the rights of a shareholder of the Corporation, including
the right to vote the shares to the extent, if any, such
shares possess voting rights, and the right to receive any
dividends; provided, however, the Committee may require that
any dividends on such shares of Restricted Stock shall be
automatically deferred and reinvested in additional
Restricted Stock subject to the same restrictions as the
underlying Award, or may require that dividends and other
distributions on Restricted Stock shall be withheld by the
Corporation for the account of the Participant. The
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Committee shall determine whether interest shall be paid on amounts
withheld, the rate of any such interest, and the other terms
applicable to such withheld amounts.
8.10 If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction
Period, unrestricted certificates for such shares shall be
delivered to the Participant.
8.11 In order to better ensure that Award payments actually
reflect the performance of the Corporation and its
Subsidiaries and the service of the Participant, the
Committee may provide, in its sole discretion, for a tandem
performance-based or other Award designed to guarantee a
minimum value, payable in cash or Stock to the recipient of
a Restricted Stock Award, subject to such performance,
future service, deferral and other terms and conditions as
may be specified by the Committee.
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ARTICLE IX - DEFERRED STOCK
9.1 Shares of Deferred Stock (together with cash dividend
equivalents, if so determined by the Committee) may be
issued either alone or in addition to other Awards granted
under the Plan in the discretion of the Committee. The
Committee shall determine the individuals to whom, and the
time or times at which, such Awards will be made, the number
of shares to be awarded, the price (if any) to be paid by
the recipient of a Deferred Stock Award, the time or times
within which such Awards may be subject to forfeiture, and
all other conditions of the Awards. The Committee may
condition Awards of Deferred Stock upon the attainment of
specified performance goals or such other factors or
criteria as the Committee may determine.
9.2 Deferred Stock Awards shall be subject to the following
terms and conditions:
(a) Subject to the provisions of this Plan and the
applicable Award Agreement, Deferred Stock Awards may
not be sold, transferred, pledged, assigned or
otherwise encumbered during the Deferral Period. At the
expiration of the Deferral Period (or the Elective
Deferral Period defined in Section 9.3), share
certificates shall be delivered to the Participant, or
his legal representative, in a number equal to the
number of shares of Stock covered by the Deferred Stock
Award.
Based on service, performance and/or such other factors or
criteria as the Committee may determine, the Committee,
however, at or after grant, may accelerate the vesting of
all or any part of any Deferred Stock Award and/or waive
the deferral limitations for all or any part of such
Award.
(b) Unless otherwise determined by the Committee, amounts
equal to any dividends that would have been payable
during the Deferral Period with respect to the number
of shares of Stock covered by a Deferred Stock Award if
such shares of Stock had been outstanding shall be
automatically deferred and deemed to be reinvested in
additional Deferred Stock, subject to the same deferral
limitations as the underlying Award.
(c) Except to the extent otherwise provided in this Plan or in
the applicable Award Agreement, upon Termination of
Employment during the Deferral Period for a given Award,
the Deferred Stock covered by such Award shall be
forfeited by the Participant; provided, however, the
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Committee may provide for accelerated vesting in the event
of Termination of Employment due to death, Disability or
Retirement, or in the event of hardship or other special
circumstances as the Committee deems appropriate.
(d) The Committee may require that a designated percentage
of the total Fair Market Value of the shares of
Deferred Stock held by one or more Participants be paid
in the form of cash in lieu of the issuance of Stock
and that such cash payment be applied to the
satisfaction of the federal and state income and
employment tax withholding obligations that arise at
the time the Deferred Stock becomes free of all
restrictions. The designated percentage shall be equal
to the income and employment tax withholding rate in
effect at the time under federal and applicable state
laws.
(e) The Committee may provide one or more Participants
subject to the mandatory cash payment with an election
to receive an additional percentage of the total value
of the Deferred Stock in the form of a cash payment in
lieu of the issuance of Deferred Stock. The additional
percentage shall not exceed the difference between
fifty percent (50%) and the designated percentage cash
payment.
(f) The Committee may impose such further terms and conditions
on partial cash payments with respect to Deferred Stock as
it deems appropriate.
9.3 A Participant may elect to further defer receipt of Deferred
Stock for a specified period or until a specified event (the
"Elective Deferral Period"), subject in each case to the
Committee's approval and to such terms as are determined by
the Committee. Subject to any exceptions adopted by the
Committee, such election must generally be made at least
twelve (12) months prior to completion of the Deferral
Period for the Deferred Stock Award in question (or for the
applicable installment of such an Award).
9.4 Each Award shall be confirmed by, and subject to the terms
of, a Deferred Stock Award Agreement.
9.5 In order to better ensure that the Award actually reflects
the performance of the Corporation or its Subsidiaries and
the service of the Participant, the Committee may provide,
in its sole discretion, for a tandem performance-based or
other Award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Deferred Stock Award,
subject to such performance, future service, deferral and
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other terms and conditions as may be specified by the
Committee.
28
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ARTICLE X - STOCK AWARDS
10.1 A Stock Award shall be granted only in payment of compensation that
has been earned or as compensation to be earned, including, without
limitation, compensation awarded concurrently with or prior to the
grant of the Stock Award.
10.2 For the purposes of this Plan, in determining the value of
a Stock Award, all shares of Stock subject to such Stock
Award shall be valued at not less than one hundred percent
(100%) of the Fair Market Value of such shares of Stock on
the date such Stock Award is granted, regardless of whether
or when such shares of Stock are issued or transferred to
the Participant and whether or not such shares of Stock are
subject to restrictions which affect their value.
10.3 Shares of Stock subject to a Stock Award may be issued or
transferred to the Participant at the time the Stock Award
is granted, or at any time subsequent thereto, or in
installments from time to time, as the Committee shall
determine. If any such issuance or transfer shall not be
made to the Participant at the time the Stock Award is
granted, the Committee may provide for payment to such
Participant, either in cash or shares of Stock, from time to
time or at the time or times such shares of Stock shall be
issued or transferred to such Participant, of amounts not
exceeding the dividends which would have been payable to
such Participant in respect of such shares of Stock (as
adjusted under Section 3.11) if such shares of Stock had
been issued or transferred to such Participant at the time
such Stock Award was granted. Any issuance payable in
shares of Stock under the terms of a Stock Award, at the
discretion of the Committee, may be paid in cash on each
date on which delivery of shares of Stock would otherwise
have been made, in an amount equal to the Fair Market Value
on such date of the shares of Stock which would otherwise
have been delivered.
10.4 A Stock Award shall be subject to such terms and conditions,
including, without limitation, restrictions on the sale or
other disposition of the Stock Award or of the shares of
Stock issued or transferred pursuant to such Stock Award, as
the Committee shall determine; provided, however, that upon
the issuance or transfer of shares pursuant to a Stock
Award, the Participant, with respect to such shares of
Stock, shall be and become a shareholder of the Corporation
fully entitled to receive dividends, to vote to the extent,
if any, such shares possess voting rights and to exercise
all other rights of a shareholder except to the extent
otherwise provided in the Stock Award. Each Stock Award
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shall be evidenced by a written Award Agreement in such form as the
Committee shall determine.
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ARTICLE XI - PERFORMANCE SHARES
11.1 Awards of Performance Shares may be made to certain
Participants as an incentive for the performance of future
services that will contribute materially to the successful
operation of the Corporation and its Subsidiaries. Awards
of Performance Shares may be made either alone, in addition
to or in tandem with other Awards granted under the Plan
and/or cash payments made outside of the Plan.
11.2 With respect to Awards of Performance Shares, which may be issued
for no consideration or such minimum consideration as is required
by applicable law, the Committee shall:
(a) determine and designate from time to time those
Participants to whom Awards of Performance Shares are
to be made;
(b) determine the performance period (the "Performance
Period") and/or performance objectives (the
"Performance Objectives") applicable to such Awards;
(c) determine the form of settlement of a Performance
Share; and
(d) generally determine the terms and conditions of each such
Award. At any date, each Performance Share shall have a
value equal to the Fair Market Value, determined as set
forth in Section 2.15.
11.3 Performance Periods may overlap, and Participants may participate
simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
11.4 The Committee shall determine the Performance Objectives of
Awards of Performance Shares. Performance Objectives may
vary from Participant to Participant and between Awards and
shall be based upon such performance criteria or combination
of factors as the Committee may deem appropriate, including
for example, but not limited to, minimum earnings per share
or return on equity. If during the course of a Performance
Period there shall occur significant events which the
Committee expects to have a substantial effect on the
applicable Performance Objectives during such period, the
Committee may revise such Performance Objectives.
11.5 The Committee shall determine for each Participant the number of
Performance Shares which shall be paid to the Participant if the
applicable Performance Objectives are exceeded or met in whole or
in part.
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11.6 If a Participant terminates service with the Corporation or
its Subsidiaries during a Performance Period because of
death, Disability, Retirement or under other circumstances
in which the Committee in its discretion finds that a waiver
would be appropriate, that Participant, as determined by the
Committee, may be entitled to a payment of Performance
Shares at the end of the Performance Period based upon the
extent to which the Performance Objectives were satisfied at
the end of such period and pro rated for the portion of the
Performance Period during which the Participant was employed
by the Corporation or any Subsidiary; provided, however, the
Committee may provide for an earlier payment in settlement
of such Performance Shares in such amount and under such
terms and conditions as the Committee deems appropriate or
desirable. If a Participant terminates service with the
Corporation or its Subsidiaries during a Performance Period
for any other reason, then such Participant shall not be
entitled to any payment with respect to that Performance
Period unless the Committee shall otherwise determine.
11.7 Each Award of a Performance Share shall be paid in whole shares of
Stock, or cash, or a combination of Stock and cash as the Committee
shall determine, with payment to be made as soon as practicable
after the end of the relevant Performance Period.
11.8 The Committee shall have the authority to approve requests
by Participants to defer payment of Performance Shares on
terms and conditions approved by the Committee and set forth
in a written Award Agreement between the Participant and the
Corporation or its Subsidiaries entered into in advance of
the time of receipt or constructive receipt of payment by
the Participant.
32
<PAGE> 35
ARTICLE XII - OTHER STOCK-BASED AWARDS
12.1 Other awards of Stock and other awards that are valued in
whole or in part by reference to, or are otherwise based on,
Stock ("Other Stock-Based Awards"), including, without
limitation, convertible preferred stock, convertible
debentures, exchangeable securities, phantom stock and Stock
awards or options valued by reference to book value or
performance, may be granted either alone or in addition to
or in tandem with Stock Options, Stock Rights, Restricted
Stock, Deferred Stock or Stock Awards granted under the Plan
and/or cash awards made outside of the Plan.
Subject to the provisions of the Plan, the Committee shall have
authority to determine the Eligible Participants to whom and the
time or times at which such Awards shall be made, the number of
shares of Stock subject to such Awards, and all other conditions of
the Awards. The Committee also may provide for the grant of shares
of Stock upon the completion of a specified Performance Period.
The provisions of Other Stock-Based Awards need not be the same
with respect to each recipient.
12.2 Other Stock-Based Awards made pursuant to this Article XII shall be
subject to the following terms and conditions:
(a) Subject to the provisions of this Plan and the Award
Agreement, shares of Stock subject to Awards made under
this Article XII may not be sold, assigned, transferred,
pledged or otherwise encumbered prior to the date on which
the shares are issued, or, if later, the date on which any
applicable restriction, performance or deferral period
lapses.
(b) Subject to the provisions of this Plan and the Award
Agreement and unless otherwise determined by the
Committee at the time of the Award, the recipient of an
Award under this Article XII shall be entitled to
receive, currently or on a deferred basis, interest or
dividends or interest or dividend equivalents with
respect to the number of shares covered by the Award,
as determined at the time of the Award by the
Committee, in its sole discretion, and the Committee
may provide that such amounts (if any) shall be deemed
to have been reinvested in additional Stock or
otherwise reinvested.
(c) Any Award under this Article XII and any Stock covered
by any such Award shall vest or be forfeited to the
33
<PAGE> 36
extent so provided in the Award Agreement, as
determined by the Committee, in its sole discretion.
(d) Upon the Participant's Retirement, Disability or death, or
in cases of special circumstances, the Committee may, in
its sole discretion, waive in whole or in part any or all
of the remaining limitations imposed hereunder (if any)
with respect to any or all of an Award under this Article
XII.
(e) Each Award under this Article XII shall be confirmed
by, and subject to the terms of, an Award Agreement.
(f) Stock (including securities convertible into Stock) issued
on a bonus basis under this Article XII may be issued for
no cash consideration.
12.3 Other Stock-Based Awards may include a phantom stock Award, which
is subject to the following terms and conditions:
(a) The Committee shall select the Eligible Participants who
may receive phantom stock Awards. The Eligible Participant
shall be awarded a phantom stock unit, which shall be the
equivalent to a share of Stock.
(b) Under an Award of phantom stock, payment shall be made on
the dates or dates as specified by the Committee or as
stated in the Award Agreement and phantom stock Awards may
be settled in cash, Stock, or some combination thereof.
(c) The Committee shall determine such other terms and
conditions of each Award as it deems necessary in its sole
discretion.
34
<PAGE> 37
ARTICLE XIII - ACCELERATION EVENTS
13.1 For the purposes of the Plan, an Acceleration Event shall occur in
the event of a "Potential Change in Control," or "Change in
Control" or a "Board-Approved Change in Control", as those terms
are defined below.
13.2 A "Change in Control" shall be deemed to have occurred if:
(a) Any "Person" as defined in Section 3(a)(9) of the Act,
including a "group" (as that term is used in Sections
13(d)(3) and 14(d)(2) of the Act), but excluding the
Corporation and any Subsidiary and any employee benefit
plan sponsored or maintained by the Corporation and any
Subsidiary (including any trustee of such plan acting as
trustee) who:
(i) makes a tender or exchange offer for any shares
of the Corporation's Stock (as defined below)
pursuant to which any shares of the Corporation's
Stock are purchased (an "Offer"); or
(ii) together with its "affiliates" and "associates"
(as those terms are defined in Rule 12b-2 under
the Act) becomes the "Beneficial Owner" (within
the meaning of Rule 13d-3 under the Act) of at
least twenty percent (20%) of the Corporation's
Stock (an "Acquisition");
(b) The stockholders of the Corporation approve a definitive
agreement or plan to merge or consolidate the Corporation
with or into another corporation, to sell or otherwise
dispose of all or substantially all of its assets, or to
liquidate the Corporation (individually, a "Transaction");
or
(c) When, during any period of twenty-four (24) consecutive
months during the existence of the Plan, the
individuals who, at the beginning of such period,
constitute the Board (the "Incumbent Directors") cease
for any reason other than death to constitute at least
a majority thereof; provided, however, that a director
who was not a director at the beginning of such
twenty-four (24) month period shall be deemed to have
satisfied such twenty-four (24) month requirement (and
be an Incumbent Director) if such director was elected
by, or on the recommendation of or with the approval
of, at least two-thirds of the directors who then
qualified as Incumbent Directors either actually
(because they were directors at the beginning of such
35
<PAGE> 38
twenty-four (24) month period) or by prior operation of
this Section 13.2(c).
13.3 A "Board-Approved Change in Control" shall be deemed to have
occurred if the Offer, Acquisition or Transaction, as the case may
be, is approved by a majority of the Directors serving as members
of the Board at the time of the Potential Change in Control or
Change in Control.
13.4 A "Potential Change in Control" means the happening of any
one of the following:
(a) The approval by stockholders of an agreement by the
Corporation, the consummation of which would result in
a Change in Control of the Corporation, as defined in
Section 13.2; or
(b) The acquisition of Beneficial Ownership, directly or
indirectly, by any entity, person or group (other than
the Corporation or any Subsidiary or any Corporation or
Subsidiary employee benefit plan (including any trustee
of such plan acting as such trustee)) of securities of
the Corporation representing five percent (5%) or more
of the combined voting power of the Corporation's
outstanding securities and the adoption by the Board of
a resolution to the effect that a Potential Change in
Control of the Corporation has occurred for the
purposes of this Plan.
13.5 Upon the occurrence of an Acceleration Event, subject to the
approval of the Committee if the Acceleration Event results from a
Board-Approved Change in Control, all then outstanding Performance
Shares with respect to which the applicable Performance Period has
not been completed shall be paid as soon as practicable as follows:
(a) all Performance Objectives applicable to the Award of
Performance Shares shall be deemed to have been satisfied
to the extent necessary to result in payment of one
hundred percent (100%) of the Performance Shares covered
by the Award; and
(b) the applicable Performance Period shall be deemed to
have ended on the date of the Acceleration Event;
(c) the payment to the Participant shall be the amount
determined either by the Committee, in its sole
discretion, or in the manner stated in the Award
Agreement. This amount shall then be multiplied by a
fraction, the numerator of which is the number of full
calendar months of the applicable Performance Period that
have elapsed prior to the date of the Acceleration
36
<PAGE> 39
Event, and the denominator of which is the total number
of months in the original Performance Period; and
(d) upon the making of any such payment, the Award Agreement
as to which it relates shall be deemed canceled and of no
further force and effect.
13.6 Upon the occurrence of an Acceleration Event, subject to the
approval of the Committee if the Acceleration Event results from a
Board-Approved Change in Control, the Committee in its discretion
may declare any or all then outstanding Stock Options not
previously exercisable and vested as immediately exercisable and
fully vested, in whole or in part.
13.7 Upon the occurrence of an Acceleration Event, subject to the
approval of the Committee if the Acceleration Event results
from a Board-Approved Change in Control, the Committee in
its discretion, may declare the restrictions applicable to
Awards of Restricted Stock, Deferred Stock or Other Stock-
Based Awards to have lapsed, in which case the Corporation
shall remove all restrictive legends and stop-transfer
orders applicable to the certificates for such shares of
Stock, and deliver such certificates to the Participants in
whose names they are registered.
13.8 The value of all outstanding Stock Option, Stock Rights,
Restricted Stock, Deferred Stock, Performance Shares, Stock
Awards and Other Stock-Based Awards, in each case to the
extent vested, shall, unless otherwise determined by the
Committee in its sole discretion at or after grant but prior
to any Change in Control, be cashed out on the basis of the
"Change in Control Price," as defined in Section 13.9 as of
the date such Change in Control or such Potential Change in
Control is determined to have occurred or such other date as
the Committee may determine prior to the Change in Control.
13.9 For purposes of Section 13.8, "Change in Control Price"
means the highest price per share of Stock paid in any
transaction reported on the Nasdaq National Market tier of
The Nasdaq Stock Market, or paid or offered in any bona fide
transaction related to a Potential or actual Change in
Control of the Corporation at any time during the sixty (60)
day period immediately preceding the occurrence of the
Change in Control (or, where applicable, the occurrence of
the Potential Change in Control event), in each case as
determined by the Committee except that, in the case of
Incentive Stock Options and Stock Appreciation Rights (or
Limited Stock Appreciation Rights) relating to such
Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee
exercises such Stock Appreciation Rights (or Limited Stock
Appreciation Rights).
37
<PAGE> 40
ARTICLE XIV - AMENDMENT AND TERMINATION
14.1 The Board, upon recommendation of the Committee, or otherwise, at
any time and from time to time, may amend or terminate the Plan as
may be necessary or desirable to implement or discontinue this Plan
or any provision thereof. No amendment, without approval by the
Corporation's stockholders, shall:
(a) alter the group of persons eligible to participate in
the Plan;
(b) except as provided in Sections 3.6 and 3.11, increase the
maximum number of shares of Stock or Stock Options or
Stock Rights which are available for Awards under the Plan
or increase the maximum number of shares with respect to
which Stock Options or Stock Rights may be granted to any
employee under the Plan;
(c) extend the period during which Incentive Stock Option
Awards may be granted beyond June 12, 2006;
(d) limit or restrict the powers of the Board and the
Committee with respect to the administration of this
Plan; or
(e) change any of the provisions of this Article XIV.
14.2 No amendment to or discontinuance of this Plan or any
provision thereof by the Board or the stockholders of the
Corporation shall, without the written consent of the
Participant, adversely affect, as shall be determined by the
Committee, any Award theretofore granted to such Participant
under this Plan; provided, however, the Committee retains
the right and power to:
(a) annul any Award if the Participant competes against the
Corporation or any Subsidiary or is terminated for
cause as determined by the Committee;
(b) provide for the forfeiture of shares of Stock or other
gain under an Award as determined by the Committee for
competing against the Corporation or any Subsidiary;
and
(c) convert any outstanding Incentive Stock Option to a
Nonqualified Stock Option.
14.3 If an Acceleration Event has occurred, no amendment or termination
shall impair the rights of any person with respect to an
outstanding Award as provided in Article XIII.
38
<PAGE> 41
ARTICLE XV - MISCELLANEOUS PROVISIONS
15.1 Nothing in the Plan or any Award granted hereunder shall
confer upon any Participant any right to continue in the
employ of the Corporation or its Subsidiaries (or to serve
as a director thereof) or interfere in any way with the
right of the Corporation or its Subsidiaries to terminate
his or her employment at any time. Unless specifically
provided otherwise, no Award granted under the Plan shall be
deemed salary or compensation for the purpose of computing
benefits under any employee benefit plan or other
arrangement of the Corporation or its Subsidiaries for the
benefit of its employees unless the Corporation shall
determine otherwise. No Participant shall have any claim to
an Award until it is actually granted under the Plan. To
the extent that any person acquires a right to receive
payments from the Corporation under the Plan, such right
shall, except as otherwise provided by the Committee, be no
greater than the right of an unsecured general creditor of
the Corporation. All payments to be made hereunder shall be
paid from the general funds of the Corporation, and no
special or separate fund shall be established and no
segregation of assets shall be made to assure payment of
such amounts, except as provided in Article VIII with
respect to Restricted Stock and except as otherwise provided
by the Committee.
15.2 The Corporation may make such provisions and take such steps
as it may deem necessary or appropriate for the withholding
of any taxes which the Corporation or any Subsidiary is
required by any law or regulation of any governmental
authority, whether federal, state or local, domestic or
foreign, to withhold in connection with any Stock Option or
the exercise thereof, any Stock Right or the exercise
thereof, or in connection with any other type of equity-
based compensation provided hereunder or the exercise
thereof, including, but not limited to, the withholding of
payment of all or any portion of such Award or another Award
under this Plan until the Participant reimburses the
Corporation or its Subsidiaries for the amount the
Corporation or its Subsidiaries is required to withhold with
respect to such taxes, or canceling any portion of such
Award or another Award under this Plan in an amount
sufficient to reimburse itself for the amount it is required
to so withhold, or selling any property contingently
credited by the Corporation for the purpose of paying such
Award or another Award under this Plan, in order to withhold
or reimburse itself for the amount it is required to so
withhold.
39
<PAGE> 42
15.3 The Plan and the grant of Awards shall be subject to all
applicable federal and state laws, rules, and regulations
and to such approvals by any government or regulatory agency
as may be required. Any provision herein relating to
compliance with Rule 16b-3 under the Act shall not be
applicable with respect to participation in the Plan by
Participants who are not subject to Section 16(b) of the
Act.
15.4 The terms of the Plan shall be binding upon the Corporation,
its Subsidiaries, and their successors and assigns.
15.5 Neither a Stock Option, Stock Right, nor any other type of
equity-based compensation provided for hereunder, shall be
transferable except as provided for herein. If any Participant
makes such a transfer in violation hereof, any obligation of the
Corporation shall forthwith terminate.
15.6 This Plan and all actions taken hereunder shall be governed by the
laws of the State of North Carolina, except to the extent preempted
by ERISA.
15.7 The Plan is intended to constitute an "unfunded" plan for
incentive and deferred compensation. With respect to any
payments not yet made to a Participant by the Corporation,
nothing contained herein shall give any such Participant any
rights that are greater than those of a general creditor of
the Corporation. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to
meet the obligations created under the Plan to deliver
shares of Stock or payments in lieu of or with respect to
Awards hereunder; provided, however, that, unless the
Committee otherwise determines with the consent of the
affected Participant, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the
Plan.
15.8 Each Participant exercising an Award hereunder agrees to give the
Committee prompt written notice of any election made by such
Participant under Section 83(b) of the Code, or any similar
provision thereof.
15.9 If any provision of this Plan or an Award Agreement is or
becomes or is deemed invalid, illegal or unenforceable in
any jurisdiction, or would disqualify the Plan or any Award
Agreement under any law deemed applicable by the Committee,
such provision shall be construed or deemed amended to
conform to applicable laws or if it cannot be construed or
deemed amended without, in the determination of the
Committee, materially altering the intent of the Plan or the
Award Agreement, it shall be stricken and the remainder of
40
<PAGE> 43
the Plan or the Award Agreement shall remain in full force
and effect.
FNB FINANCIAL SERVICES CORPORATION
ATTEST: By:
-----------------------------------
Authorized Officer
(Corporate Seal)
- --------------------------
Secretary
41
<PAGE> 1
EXHIBIT 10.e
FIRST NATIONAL BANK
SEVERANCE POLICY FOR SENIOR OFFICERS
(LESS THAN 5 YEARS OF SERVICE)
PURPOSE:
This Severance Policy is being offered because the Bank believes these
officers to be valuable assets and essential to its growth and
prosperity. Additionally, the Policy would have the effect of giving to
each officer a sense of security that would have a positive effect on
their performance and would improve the ability of the Bank to attract
and retain competent, qualified senior officers.
ELIGIBILITY:
The Policy will apply to any officer of the Bank who has attained the
office of Senior Vice President or above, with the prior recommendation
and consent of the President and the Board of Directors.
ENTITLEMENT:
Subject to the provisions under the Effect of Competition and Change In
Control sections stated below, any Senior Officer covered under this
Policy who is terminated from his or her employment with the Bank as a
result of a Change in Control shall be entitled to receive a
continuation of his or her base salary in effect at the time of such
termination, as follows:
A) If the Officer has been employed less than 3 years,
continuation of 6 months salary.
B) If the Officer has been employed more than 3 years
but less than 5 years, continuation of 9 months
salary.
Severance shall be payable in regular installments at the same
intervals as base salary was paid immediately prior to separation over
the relevant period.
<PAGE> 2
EFFECT OF COMPETITION:
In the event that a Senior Officer directly or indirectly becomes an
officer, director, employee, consultant, or owner of any bank or
savings; or loan institution within a 50-mile radius of their principal
office location (other than by reason of owning not more than 1% of the
shares of the publicly traded securities of any such institution), and
in connection with any such position is responsible, directly or
indirectly, for soliciting or servicing depositors, borrowers or other
customers for such institution, all payments to him or her that would
be paid under the Entitlement section above shall immediately cease,
and he or she shall have no farther rights under this Policy.
DEFINITION OF CHANGE IN CONTROL:
If there occurs a Change in Control of FNB Financial Services
Corporation (FNB) and/or the Bank, any Senior Officer covered under
this Policy shall be entitled to the continuation of his or her salary
as specified under the Entitlement section above, if he or she is not
offered a position with FNB or the Bank or its successor, or if offered
a position that is less than his/her current salary, and is more than
25 miles from the location of the existing office.
For purposes of this Policy, a Change in Control shall be deemed to
have occurred if 1) there shall be consummated any consolidation or
merger of FNB or the Bank in which FNB or the Bank is not the
continuing or surviving entity or pursuant to which shares of the
common stock of FNB or the Bank would be converted into cash,
securities or other property, other than a merger of FNB in which the
holders of the common stock of FNB immediately prior to the merger have
the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or 2) any sale, lease
exchange or other transfer (in one transaction or a series of related
transactions of all, or substantially all, of the assets of FNB,
including the sale of the Bank's common stock by FNB, or 3) the
shareholders approve any plan or proposal for the liquidation or
dissolution of both FNB and the Bank, or 4) the shares of common stock
of FNB or the Bank, directly or indirectly, is acquired by any person
(other than by FNB or any person who on the date of this agreement is a
director of FNB or the Bank or whose shares of stock therein are
treated as beneficially owned by any such director) which, when added
to any other shares the beneficial ownership of which is held by such
person, shall give such person fifty percent (50%) or more of the
outstanding common stock of FNB or the Bank, or 5) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors of either FNB or the Bank
shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the shareholders, of each
new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of
the two-year period.
<PAGE> 3
SERVICE YEAR:
A year of service for any Senior Officer shall be deemed as any
accumulation of 12 month periods in which the employee works greater
that 1,000 hours, beginning with his/her date of hire and continuing
until the implementation of this policy for payment of that Senior
Officer.
MISCELLANEOUS:
Pending approval of the President and the Board of Directors, any
Senior Officer with more than 5 years of service will be eligible for
coverage under the existing severance policy in effect.
<PAGE> 1
================================================================================
FINANCIAL HIGHLIGHTS
- -------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------- Percentage
1996 1995 Change
-------- -------- ----------
<S> <C> <C> <C>
Net interest income (tax equivalent)................. $ 8,936 $ 7,687 16.2%
Provision for loan losses............................ 415 260 59.6%
Other income......................................... 1,252 1,236 1.3%
Other expense........................................ 6,004 5,190 15.7%
Net income........................................... 2,410 2,170 11.1%
Return on average assets............................. 1.23% 1.27%
Return on average equity............................. 12.52% 12.91%
Average Balances:
Assets............................................. $195,373 $171,489 13.9%
Loans, net of unearned income...................... 129,150 94,692 36.4%
Deposits........................................... 169,121 144,256 17.2%
Shareholders' equity............................... 19,253 16,810 14.5%
At year end:
Assets............................................. $209,796 $177,897 17.9%
Loans, net of unearned income...................... 144,585 111,708 29.4%
Deposits........................................... 179,380 154,400 16.2%
Shareholders' equity............................... 20,386 18,982 7.4%
Per share data*
Net income......................................... $ 1.75 $ 1.58 10.8%
Dividends.......................................... 0.61 0.54 13.0%
</TABLE>
- ---------------
* Per share amounts have been adjusted for the one-for-four stock split in 1996.
[PASTE-UP NET INCOME GRAPH]
================================================================================
Two
<PAGE> 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 1
SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income...................... $15,360.3 $13,382.7 $11,136.5 $11,633.5 $12,008.1
Interest expense..................... 6,762.3 6,132.8 4,495.8 4,886.2 5,749.5
--------- --------- --------- --------- ---------
Net interest income.................. 8,598.0 7,249.9 6,640.7 6,747.3 6,258.6
Provision for loan losses............ 414.6 260.0 105.0 190.0 340.0
--------- --------- --------- --------- ---------
Net interest income after
provision.......................... 8,183.4 6,989.9 6,535.7 6,557.3 5,918.6
Non interest income.................. 1,252.3 1,235.8 926.7 1,206.1 1,168.5
Non interest expense................. 6,004.1 5,190.3 5,332.4 4,788.7 4,526.2
--------- --------- --------- --------- ---------
Income before income taxes........... 3,431.6 3,035.4 2,130.0 2,974.7 2,560.9
Applicable income taxes.............. 1,021.3 865.6 538.1 845.7 603.8
--------- --------- --------- --------- ---------
Net income........................... $ 2,410.3 $ 2,169.8 $ 1,591.9 $ 2,129.0 $ 1,957.1
========= ========= ========= ========= =========
Per share*...................... $ 1.75 $ 1.58 $ 1.16 $ 1.55 $ 1.42
Dividends declared on common stock... $ 847.7 $ 735.9 $ 657.5 $ 629.2 $ 586.8
Per share*...................... $ 0.61 $ 0.54 $ 0.48 $ 0.46 $ 0.42
Payout ratio.................... 35.17% 33.92% 41.30% 29.55% 29.99%
* Per share amounts have been adjusted for the one-for-four stock split in 1996.
AVERAGE BALANCES
Loans, net........................... $ 129,150 $ 94,692 $ 80,329 $ 86,191 $ 86,107
Investment securities................ 53,955 65,260 64,478 54,258 48,768
Assets............................... 195,373 171,489 154,663 150,288 145,274
Deposits............................. 169,121 144,256 133,362 132,766 128,057
Shareholders equity.................. 19,253 16,810 16,315 15,304 14,092
RATIOS
Return on average assets............. 1.23% 1.27% 1.03% 1.42% 1.35%
Return on average shareholders
equity............................. 12.52 12.91 9.76 13.91 13.89
Average earning assets to average
total assets....................... 94.49 94.92 94.45 94.33 94.35
Average shareholders equity to
average:
Loans, net......................... 14.91 17.75 20.31 17.76 16.37
Total assets....................... 9.85 9.80 10.55 10.18 9.70
Total deposits..................... 11.38 11.65 12.23 11.53 11.00
</TABLE>
TABLE 2
DEPOSIT MATURITY SCHEDULE
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Time Certificates Other Time
of Deposit Deposits Total
----------------- ---------- -------
<S> <C> <C> <C>
Time Deposits of $100,000 or more
3 months or less............................... $13,997 $ 415 $14,412
Over 3 - 6 months.............................. 2,214 709 2,923
Over 6 - 12 months............................. 1,486 1,458 2,944
Over 12 months................................. 3,519 7,819 11,338
------- ------- -------
Total....................................... $21,216 $10,401 $31,617
======= ======= =======
</TABLE>
================================================================================
Five
<PAGE> 3
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 3
AVERAGE BALANCE AND NET INTEREST INCOME ANALYSIS
FULLY TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------- -------------------------------- --------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance(3) Expense Rate Balance(3) Expense Rate Balance(3) Expense Rate
---------- --------- ------- ---------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net (2)......... $129,150 $12,092.1 9.36% $ 94,692 $ 9,066.7 9.57% $ 80,329 $ 7,312.4 9.09%
Taxable Investment
securities........... 42,214 2,480.3 5.82 50,859 3,224.8 6.14 51,194 2,880.1 5.53
Tax-exempt Investment
securities........... 10,985 994.9 9.06(1) 13,451 1,284.3 9.99(1) 12,588 1,288.2 10.92(1)
Other securities....... 756 52.4 6.93 950 67.0 7.06 696 41.3 5.93
Deposits with Federal
Home Loan Bank....... 485 26.1 5.38 219 13.4 6.11
Federal funds sold and
securities purchased
under agreements to
resell............... 1,027 52.8 5.14 2,815 163.1 5.80 1,276 52.4 4.11
-------- --------- ---- -------- --------- ---- -------- --------- -----
Total earning
assets............. 184,617 15,698.6 8.50% 162,986 13,819.3 8.42% 146,083 11,574.4 7.91%
NON-EARNING ASSETS:
Cash and due from
banks................ 5,201 4,417 4,468
Premises and equipment,
net.................. 4,042 3,438 3,545
Other assets........... 2,953 1,752 1,686
Less allowance for loan
losses............... (1,440) (1,104) (1,119)
-------- -------- --------
Total Assets......... $195,373 $171,489 $154,663
======== ======== ========
INTEREST BEARING LIABILITIES:
Savings and time
deposits............. $148,400 6,448.9 4.35% $125,523 5,508.5 4.39% $116,683 4,254.5 3.65%
Federal funds
purchased, borrowed
funds and securities
sold under agreements
to repurchase........ 5,868 313.4 5.34 9,920 624.3 6.29 4,672 241.3 5.16
-------- --------- ---- -------- --------- ---- -------- --------- -----
Total interest
bearing
liabilities........ 154,268 6,762.3 4.38% 135,443 6,132.8 4.52% 121,355 4,495.8 3.70%
OTHER LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits........ 20,721 18,733 16,679
Other liabilities...... 1,131 503 314
Shareholders' equity... 19,253 16,810 16,315
-------- -------- --------
Total liabilities and
equity............. $195,373 $171,489 $154,663
======== ======== ========
Net interest income and
net yield on earning
assets(3)(4)......... $ 8,936.3 4.84% $ 7,686.5 4.72% $ 7,078.6 4.84%
========= ==== ========= ==== ========= =====
Interest rate
spread(5)............ 4.12% 3.90% 4.21%
==== ==== =====
</TABLE>
- ---------------
(1)The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2)The average loan balances include non-accruing loans.
(3)The average balances for all years include market adjustments to fair value
for securities and loans available/held for sale, with such adjustments
excluded for purposes of computing average yield.
(4)Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5)Earning asset yield minus interest bearing liabilities rate.
================================================================================
Six
<PAGE> 4
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
Average earning assets increased 13.3% this
year, with average loans equaling 70.0% of
average earning assets in 1996, compared with
58.2% last year. Just as in 1995, the more
favorable mix of higher-yielding loans more than
offset the effect of lower interest rates, as
the gross yield on earning assets improved 8
basis points this year, following a 51 basis
point increase in 1995.
The weighted yield on loans this year
declined to 9.36% from 9.57%, as an 8.25% prime
[PASTE-UP NET INCOME GRAPH] rate held for all of 1996, while the average in
1995 was approximately 8.85%. Investment
portfolio yields were 30 basis points lower to
9.36%, which followed the lower interest rate
pattern in 1996. Yields on overnight federal
funds sold to other banks and deposits with the
Federal Home Loan Bank were both about 70 basis
points lower, in conformance with overall rates.
Interest-bearing deposit cost averaged
4.35% in 1996, compared with 4.39% last year and
3.65% in 1994. Growth in deposits this year has
been principally in higher cost certificates of
deposit, but that effect was marginally offset
by the lower interest rate structure this year. Another favorable outcome is
that certificates of deposit have fixed maturities, which gives the deposit base
a higher degree of stability.
Both the net yield on earning assets and the interest rate spread improved
in 1996, as indicated in Table 3, while Table 7 provides an analysis of the
variances in interest income and interest expense attributable to both volume
and rate for the last two calendar years.
NONINTEREST INCOME AND EXPENSE
Noninterest income of $1,252,300 in 1996 was just $16,500 or 1.3% more than
the prior year. The investment portfolio was re-structured to become more
liquid, which presented opportunities to take gains on the sale and reinvestment
of bonds and resulted in a favorable variance of $217,800 over 1995. Conversely,
net gains from mortgage banking operations were $195,700 lower, as income in
1995 was fortified by the recovery of significant write-downs taken in 1994,
caused by changes in interest rates. Deposit service charges were 7.6% more this
year, because of volume and pricing changes, while all other fees declined
slightly.
In 1995, noninterest income increased $309,000 or 33.3%, with the
previously mentioned gains from mortgage banking operations a principal cause.
In addition, both deposit service charges and net securities gains were higher
in 1995 than 1994.
Noninterest expense of $6,004,100 in 1996 was $813,900 or 15.7% more than
the previous year, following a 2.7% reduction in 1995. Personnel expense
increased 17.8% or $548,000, because of salary increases for existing staff and
additional employees to accompany our growth strategy, increased funding for
management incentive programs, higher employment taxes and increased cost for
insurance benefit programs. Occupancy/furniture and equipment expense was
$88,400 or 12.3% more than 1995, which included higher costs for building and
equipment depreciation, premises and equipment rental, maintenance and repairs
and utilities. All other expense was $177,400 higher, or 12.9%; line items which
exceeded last year by at least $10,000 and 10% were dues and subscriptions,
printing, stationery and supplies, directors fees, travel and entertainment,
postage, contributions, checkbook expense and conventions. Insurance cost
(principally FDIC) was down $152,000, and marketing expense was 12% lower than
1995.
The 1995 noninterest expense decrease from 1994 included $201,000 less in
branch acquisition expense and $149,000 less in FDIC insurance, while
occupancy/equipment expense declined 2.2%. Personnel expense was 10.6% higher,
as well as increases for professional fees, checkbook expense, conventions,
auditors fees, postage and miscellaneous.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses, which is utilized to absorb actual losses in
the portfolio, is maintained at a level deemed sufficient to provide for
estimated potential write-offs of noncollectible loans. Management
================================================================================
Seven
<PAGE> 5
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
periodically reviews the adequacy of the allowance, taking into consideration
current and future economic conditions, the growth and composition of the loan
portfolio, historical loss experience and current levels of nonaccrual, past due
and other potential problem loans. The provision for loan losses represents a
charge against income, in an amount necessary to maintain the allowance at an
appropriate level.
The 1996 provision of $414,600 compares
with $260,000 in 1995 and $105,000 in 1994. Net
charge offs were just $35,000 in 1996, or .03%
of average annual loans outstanding, compared
with $54,000 in 1995 and $227,000 in 1994. Over
the last two years, charged off and
nonperforming loans have declined precipitously
to their lowest levels in memory. At the same
time, outstanding loans have surged ahead and
necessitated increased funding to maintain our
reserves at an appropriate level. The ratio of
allowance for loan losses to year end loans was
1.32%, 1.13% and 1.13% for 1994, 1995 and 1996,
respectively.
[PASTE-UP NET INCOME GRAPH] INCOME TAXES
Income tax expense was $1,021,300 in 1996,
compared with $865,600 in 1995 and $538,100 in
1994. The effective tax rate as a percentage of
pretax income was 29.8% in 1996, 28.5% in 1995
and 25.3% in 1994. These tax rates are lower
than the statutory federal and state tax rates,
primarily due to investment in municipal
securities earning interest which is exempt from
federal taxes and, for in-state bonds, state
taxes as well.
Although the effective tax rate has been
rising over the last few years, primary emphasis
is given to the level of after-tax income and
less attention to how much is actually paid in
taxes. A more comprehensive analysis of income
taxes for the last three years is contained in
Note 9 on Page 25.
CAPITAL RESOURCES
A strong capital position is vital to the
continued profitability of the Company because
it promotes depositor and investor confidence
and provides a solid foundation for the future
growth of the organization. Shareholders equity
was up 7.4% at December 31, 1996, over one year
ago, following an increase of 27.2% the previous
year. More volatility has been introduced into
equity balances with the approval of Financial
Accounting Standard 115, which specifies that
investments which are categorized as available
for sale must be periodically marked to market,
with the adjustment included in equity, net of
[PASTE-UP NET INCOME GRAPH] applicable taxes. Since we have elected to
categorize all investment securities as
available for sale, which provides maximum
flexibility in their management, our equity
balances are subject to a relatively greater
incidence of volatility.
Under current risk-based capital
guidelines, total qualifying capital is
categorized into two components: Tier 1 and Tier
2. These ratios are expressed as a percentage of
risk-adjusted assets, which include various
risk-weighted percentages of off-balance sheet
exposures, as well as assets on the balance
sheet. By year end 1992, a minimum Tier 1
capital ratio of 4% and total capital ratio of
8% were required. At December 31, 1996, the Company had a Tier 1 capital ratio
of 13.4% and a total capital ratio of 15.1%, both of which are significantly in
excess of the required minimum level. A final regulatory measure is the leverage
ratio, which expresses Tier 1 capital as a percentage of total assets. The
regulatory minimum is 3%, whereas the Company ratio at December 31, 1996, was
9.6%.
================================================================================
Eight
<PAGE> 6
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AND LIQUIDITY MANAGEMENT
The primary objective of interest rate sensitivity management is to plan
and control the composition and maturities of interest earning assets and
interest bearing liabilities, in order to maximize net interest income while
attempting to ensure the stability of earnings. Rate sensitive assets and
liabilities have interest rates which are adjustable within a specific time
period, due either to their maturity or to contractual agreements which allow
repricing of the instrument. Interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates in
a similar time frame, thereby minimizing to some degree, the effect of interest
rate movements on net interest income.
A change in the mix of earning assets or interest paying liabilities may
either increase or decrease the net interest margin, without affecting interest
rate sensitivity. Additionally, the interest rate spread between an asset and
its supporting liability may vary significantly, while the timing of repricing
for both the asset and liability remain the same, thus impacting net interest
income. Because of these factors, management of the Company uses computerized
interest rate simulation to model the effect of possible changes, in addition to
the interest sensitivity analysis report. Management also periodically evaluates
the condition of the economy, the pattern of market interest rates and other
economic data, to determine the appropriate mix and repricing characteristics of
assets and liabilities required to produce the optimal net interest margin.
Table 6 on Page 11 indicates a ratio of interest sensitive assets to
interest sensitive liabilities within one year of 87%, compared with 59% and 62%
for the two prior years end. This ratio is an indication that net interest
income would decline in a rising rate environment, since a greater amount of
liabilities than assets would reprice at the higher rates. This effect is
mitigated to some extent by the inclusion of all regular savings and NOW account
balances as subject to immediate rate change, since they have not exhibited rate
variation to the same degree as other deposit products. Over the past several
years, we have normally experienced a greater degree of liability sensitivity,
but in the last two years have been successful in increasing our level of
variable rate assets (loans tied to the prime rate) and fixed rate, longer term
deposits. These two factors are clearly evident and will serve to reduce
interest spread volatility during periods of rapid interest rate changes.
The interest sensitivity analysis provides only a general indication of
interest sensitivity at a specific point in time, whereas an ongoing computer
simulation model incorporates the dynamics of balance sheet and interest rate
changes and reflects the related effect on net interest income. This latter
analysis is more informative and useful in enabling us to measure and respond to
interest rate movement.
Liquidity management involves the ability to meet day-to-day cash flow
requirements of the Company's customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs.
Liquidity is provided from sources such as investment security maturities and
sales, principal and interest payments on loans, deposit growth and access to
borrowed funds. Over the last several years, growth experienced in deposits has
been more than adequate to fully fund the increase in loans with the excess
funds being used to build liquidity by purchasing investment securities and
other short term investments. Based upon our loan growth in 1995 and 1996,
however, and expectations for further increases, our funds gathering process has
become more aggressive and will be accompanied by some further reduction in the
level of investment securities. Longer term funding is also available to us as a
member of the Federal Home Loan Bank system, with several credit programs
accessible at competitive rates.
The Company is not aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, will have or are reasonably
likely to have a material effect on our liquidity, capital resources or
operations.
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 interest margins as a major
source of earnings. Noninterest expenses, such as salaries and wages, occupancy
and equipment costs are also negatively impacted by inflation.
================================================================================
Nine
<PAGE> 7
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 4
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........................ $1,258 $1,052 $1,174 $1,161 $ 958
Charge-offs:
Commercial, financial and agricultural.............. -- -- -- 28 118
Real estate -- construction......................... -- -- -- -- --
Real estate -- mortgage............................. -- -- 15 -- --
Consumer............................................ 89 128 332 214 95
------ ------ ------ ------ ------
89 128 347 242 213
Recoveries:
Commercial, financial and agricultural.............. -- 2 52 5 44
Real estate -- construction......................... -- -- -- -- --
Real estate -- mortgage............................. -- -- -- -- --
Consumer............................................ 54 72 68 60 32
------ ------ ------ ------ ------
54 74 120 65 76
Net charge-offs....................................... 35 54 227 177 137
------ ------ ------ ------ ------
Additions charged to operations....................... 415 260 105 190 340
------ ------ ------ ------ ------
Balance at end of period.............................. $1,638 $1,258 $1,052 $1,174 $1,161
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
loans outstanding during the period................. 0.03% 0.06% 0.28% 0.21% 0.16%
====== ====== ====== ====== ======
Ratio of allowance for loan losses to year end
loans............................................... 1.13% 1.13% 1.32% 1.42% 1.35%
====== ====== ====== ====== ======
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ -----
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Each Each Each Each
Category Category Category Category
to Total to Total to Total to Total
Amt. Loans Amt. Loans Amt. Loans Amt. Loans Amt.
----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial................ 826 15% 512 16% 546 11% 611 9% 622
Real
estate -- construction.. 13 9 9 2 -- 0 1 2 1
Real estate -- mortgage... 151 54 131 60 50 61 51 60 67
Consumer.................. 386 22 320 22 224 28 164 29 211
Unallocated............... 262 0 286 0 232 0 347 0 260
----- --- ----- --- ----- --- ----- --- -----
Total allocation............ 1,638 100% 1,258 100% 1,052 100% 1,174 100% 1,161
===== === ===== === ===== === ===== === =====
<CAPTION>
1992
----------
Percent of
Loans in
Each
Category
to Total
Loans
----------
<S> <C>
Balance at end of period
applicable to:
Commercial................ 39%
Real
estate -- construction.. 1
Real estate -- mortgage... 19
Consumer.................. 41
Unallocated............... 0
---
Total allocation............ 100%
===
</TABLE>
================================================================================
Ten
<PAGE> 8
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 5
AVERAGE DEPOSITS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing..................... $ 20,721 $ 18,733 $ 16,679
Interest bearing:
Savings accounts...................... 17,408 2.24% 15,895 2.24% 16,461 2.36%
NOW accounts.......................... 17,704 1.50 16,550 1.67 16,859 1.80
Money market investment............... 13,330 3.19 11,634 3.07 12,243 2.56
Certificates of deposit, $100,000 or
more............................... 8,839 5.42 13,062 5.86 7,373 4.08
Other time deposits................... 91,119 5.37 68,382 5.49 63,747 4.63
-------- -------- --------
Total deposits..................... $169,121 $144,256 $133,362
======== ======== ========
</TABLE>
TABLE 6
INTEREST SENSITIVITY ANALYSIS(1)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total Total
Sensitive Sensitive
1-90 91-180 181-365 Within Over
Day Day Day One One
Sensitive Sensitive Sensitive Year Year Total
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans, net of non accruals....... $ 63,466 $ 3,864 $ 8,813 $ 76,143 $67,895 $144,038
Taxable investment securities.... 6,014 6,115 17,073 29,202 15,779 44,981
Tax-exempt investment
securities..................... 200 96 101 397 6,296 6,693
Other investment securities...... 643 643 643
Deposits with Federal Home Loan
Bank........................... 49 49 49
-------- ------- ------- -------- ------- --------
Total interest earning
assets...................... $ 70,372 $10,075 $25,987 $106,434 $89,970 $196,404
Interest bearing liabilities:
Savings deposits................. 17,945 $ 17,945 $ 17,945
Other time deposits.............. 62,197 18,231 14,984 95,412 44,109 139,521
Short term borrowings............ 8,650 8,650 8,650
-------- ------- ------- -------- ------- --------
Total interest bearing
liabilities................. $ 88,792 $18,231 $14,984 $122,007 $44,109 $166,116
======== ======= ======= ======== ======= ========
Interest sensitivity gap......... $(18,420) $(8,156) $11,003 $(15,573)
Ratio of interest sensitive
assets to interest sensitive
liabilities.................... .79 .55 1.73 .87
</TABLE>
- ---------------
(1) A comprehensive discussion of interest rate sensitivity is included at page
9.
================================================================================
Eleven
<PAGE> 9
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 7
VOLUME AND RATE VARIANCE ANALYSIS
YEAR ENDED DECEMBER 31, 1996 AND 1995
FULLY TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
Volume(2) Rate(2) Total Volume(2) Rate(2) Total
Variance Variance Variance Variance Variance Variance
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans, net............................... $3,261.0 $(235.6) $3,025.4 $1,307.0 $ 447.3 $1,754.3
Taxable investment securities............ (525.1) (216.4) (741.5) 39.9 330.5 370.3
Tax exempt investment securities(1)...... (154.4) (39.6) (194.0) 112.7 (116.6) (3.9)
Other earning assets..................... 4.8 (6.8) (2.0) 13.4 13.4
Federal funds sold and securities
purchased under agreements to resell... (97.7) (12.6) (110.3) 72.3 38.3 110.8
-------- ------- -------- -------- -------- --------
Total interest income.................. $2,488.6 $(511.0) $1,977.6 $1,531.9 $ 712.9 $2,244.9
Interest expense:
Savings and time deposits................ 995.9 (55.6) 940.3 322.2 931.8 1,254.1
Federal funds purchased, borrowed funds
and securities sold under agreements to
repurchase............................. (235.8) (75.1) (310.9) 271.1 111.9 383.0
-------- ------- -------- -------- -------- --------
Total interest expense................. $ 760.1 $(130.7) $ 629.4 $ 593.3 $1,043.7 $1,637.1
-------- ------- -------- -------- -------- --------
Increase (decrease) in net interest
income................................. $1,728.5 $(380.3) $1,348.2 $ 938.6 $(330.8) $ 607.8
======== ======= ======== ======== ======== ========
</TABLE>
- ---------------
(1)The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2)Changes attributable to both volume and rate have been allocated
proportionately.
TABLE 8
INVESTMENT SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Amortized Market Average Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield Cost Value Yield
--------- ------- -------- --------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities....... $13,075 $13,076 5.32% $ 4,220 $ 4,226 5.98% $ 4,037 $ 3,905 4.55%
U.S. Government Agency
obligations.................. 31,906 31,760 5.87 38,386 38,218 6.42 63,552 59,964 6.01
State, county and municipal
obligations.................. 6,693 7,093 9.45(1) 13,064 13,992 9.84(1) 12,428 12,637 11.09(1)
Other securities............... 643 643 6.93 1,059 1,059 7.06 1,110 1,110 5.93
------- ------- ------- ------- ------- -------
Total investment
securities................. $52,317 $52,572 6.20(1) $56,729 $57,495 7.19(1) $81,127 $77,616 6.71(1)
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------
After One After Five
Within Year to Years to After
One Year Five Years Ten Years Ten Years Weighted
--------------- -------------- -------------- --------------- Average
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield(1)
------- ----- ------ ----- ------ ----- ------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............ $13,075 5.32 $13,075 5.32
U.S. Government Agency
obligations........... 16,127 5.44 $7,999 6.45 $ 7,780 6.18 31,906 5.87
State, county and
municipal
obligations........... 397 12.61(1) 1,279 12.39(1) $3,376 8.67(1) 1,641 8.05(1) 6,693 9.45(1)
Other securities........ 643 6.93 643 6.93
------- ------ ------ ------- -------
Total investment
securities.......... $29,599 5.48(1) $9,278 7.27(1) $3,376 8.67(1) $10,064 6.53(1) $52,317 6.20(1)
======= ====== ====== ======= =======
</TABLE>
- ---------------
(1)The fully tax equivalent basis is computed using a federal tax rate of 34%.
================================================================================
Twelve
<PAGE> 10
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 9
LOAN PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995 1994 1993(1) 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural......... $ 21,350 $ 16,773 $ 9,075 $ 9,089 $33,586
Real estate -- construction.................... 12,965 2,147 0 445 582
Real estate -- mortgage........................ 77,979 67,505 48,336 48,896 16,176
Consumer....................................... 32,291 25,283 22,376 24,019 35,956
-------- -------- ------- ------- -------
Total loans, net of unearned income*......... $144,585 $111,708 $79,787 $82,449 $86,300
======== ======== ======= ======= =======
</TABLE>
- ---------------
* The bank has no foreign loan activity.
(1) During the second quarter in 1993, the bank reclassified these loans to more
accurately reflect their collateral and purpose by balance sheet
classification. This reclassification was accomplished during a computer
hardware and software conversion with greater loan reporting capabilities.
Previous year's reporting reflects loan volume based on collateral, purpose
and the ability to process loans by less sophisticated application software.
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------
Rate Structure for Loans
Maturity Maturing Over One Year
----------------------------------------- ---------------------------
One Over One Over Predetermined Floating or
Year or Year to Five Interest Adjustable
Less Five Years Years Total Rate Rate
------- ---------- ------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................. $ 8,492 $ 9,644 $ 3,214 $ 21,350 $ 8,298 $ 4,560
Real estate -- construction.... 7,543 5,422 0 12,965 2,021 3,401
Real estate -- mortgage........ 8,614 26,438 42,927 77,979 46,193 23,172
Consumer....................... 6,405 13,648 12,238 32,291 11,974 13,912
------- ------- ------- -------- ------- -------
$31,054 $55,152 $58,379 $144,585 $68,486 $45,045
======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Nonaccrual (1)............................................ $547 $ 44 $154 $634 $363
Past due 90 days or more and still accruing interest...... 0 0 3 231 32
Other real estate......................................... 34 192 191 240 491
Renegotiated troubled debt................................ 0 0 0 243 338
</TABLE>
- ---------------
(1) If nonperforming loans outstanding at December 31, 1996 had been performing
in accordance with their terms, $25,501 more in interest income would have
been recorded in 1996. Actual interest income recorded in 1996 was $39,501.
Refer to Note 1 -- Loans on page 21 for a discussion of discontinuance of
accruals on loans.
Other than amounts listed above, there were 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.
================================================================================
Thirteen
<PAGE> 11
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
TABLE 10
STOCK PRICES AND DIVIDENDS DECLARED(1)
On May 4, 1995, the stock of the Company was listed on the National Market
tier of The NASDAQ Stock Market under the symbol: FNBF. Prior to that time, the
stock of the Company was not listed or traded on any exchange or established
over-the-counter market; however, J.C. Bradford & Co., Inc. of Reidsville, North
Carolina provided an informal match market for persons desiring to buy or sell
stock of the Company. The following table sets forth the range of high and low
dollar price for shares of the Company's stock traded during the last two
calendar years (but does not reflect any retail mark-up, mark-down or
commissions related to such trades). Prior to May 4, 1995, the quotations are
from J.C. Bradford & Co., Inc., with regard to trades in which that firm acted
as agent. After May 4, 1995, the quotations are from NASDAQ.
<TABLE>
<CAPTION>
1996 1995
Price Range Price Range
--------------- ---------------
High/Low High/Low
--------------- ---------------
<S> <C> <C>
First Quarter................................. $21.20 / $16.00 $13.40 / $12.40
Second Quarter................................ $23.00 / $20.00 $14.40 / $12.40*
Third Quarter................................. $23.50 / $20.50 $15.20 / $12.80
Fourth Quarter................................ $23.50 / $20.50 $17.60 / $14.40
</TABLE>
- ---------------
*The price range during the Second Quarter of 1995, prior to the Company's
affiliation with NASDAQ on May 4, 1995, was a high of $12.60 and a low of
$12.40. From May 4, 1995 to the end of the Second Quarter, the price range was
a high of $14.40 and a low of $13.40.
There were approximately 679 record holders of the Company stock at January
1, 1997. The following table shows the frequency and amount of cash dividends
(on a per share basis) declared on stock of the Company for the two most recent
calendar years.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
Calendar Quarter 1996 1995
---------------- ---- ----
<S> <C> <C>
First....................................................... $.14 $.13
Second...................................................... $.15 $.13
Third....................................................... $.16 $.14
Fourth...................................................... $.16 $.14
---- ----
Total Annual Dividends................................. $.61 $.54
==== ====
</TABLE>
- ---------------
(1)The stock prices and dividends declared have been adjusted for the
one-for-four stock split in 1996.
================================================================================
Fourteen
<PAGE> 12
================================================================================
INDEPENDENT AUDITORS' REPORT
- -----------------------------------------------
The Board of Directors
FNB Financial Services Corporation
and Subsidiary
Reidsville, North Carolina
We have audited the accompanying consolidated balance sheets of FNB
Financial Services Corporation and Subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
FNB Financial Services Corporation and Subsidiary as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, FNB
Financial Services Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," on January 1, 1994.
Cherry, Bekart & Holland, L.L.P.
Reidsville, North Carolina
January 22, 1997
================================================================================
Fifteen
<PAGE> 13
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 6,467 $ 4,647
Investment securities:
Available for sale (cost of $51,674 in 1996 and $55,670
in 1995).............................................. 51,929 56,436
Other (market value of $643 in 1996 and $1,059 in
1995)................................................. 643 1,059
Loans, net of allowance for credit losses of $1,638 in 1996
and $1,258 in 1995........................................ 142,947 110,450
Property and equipment, net................................. 4,686 3,434
Accrued income and other assets............................. 3,124 1,871
-------- --------
Total assets...................................... $209,796 $177,897
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing.................................... $ 21,914 $ 19,329
Interest-bearing....................................... 157,466 135,071
-------- --------
Total deposits.................................... 179,380 154,400
Federal funds purchased..................................... 2,920 2,985
Retail repurchase agreements................................ 5,730 167
Accrued expenses and other liabilities...................... 1,380 1,363
-------- --------
Total liabilities................................. 189,410 158,915
-------- --------
Commitments and contingent liabilities
Shareholders' equity
Common stock, $1.00 par value; Authorized -- 3,000,000
shares Outstanding -- 1,383,105 in 1996 and 1,098,450
in 1995............................................... 1,383 1,098
Paid-in-capital........................................ 2,728 2,580
Retained earnings...................................... 16,119 14,837
-------- --------
20,230 18,515
Net unrealized appreciation on securities available for
sale.................................................. 156 467
-------- --------
Total shareholders' equity........................ 20,386 18,982
-------- --------
Total liabilities and shareholders' equity........ $209,796 $177,897
======== ========
</TABLE>
See notes to consolidated financial statements.
================================================================================
Sixteen
<PAGE> 14
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income
Loans.............................................. $ 12,092 $ 9,067 $ 7,312
Federal funds sold................................. 53 163 52
Investment securities:
Taxable....................................... 2,480 3,222 2,880
Tax exempt.................................... 657 851 850
Other.............................................. 78 80 42
---------- ---------- ----------
Total interest income......................... 15,360 13,383 11,136
---------- ---------- ----------
Interest expense
Deposits........................................... 6,449 5,508 4,254
Federal funds purchased and other borrowings....... 288 38 33
Long-term debt..................................... 25 587 208
---------- ---------- ----------
Total interest expense........................ 6,762 6,133 4,495
---------- ---------- ----------
Net interest income..................................... 8,598 7,250 6,641
Provision for credit losses............................. 415 260 105
---------- ---------- ----------
Net interest income after provision for credit losses... 8,183 6,990 6,536
---------- ---------- ----------
Other income
Service charges on deposit accounts................ 746 694 662
Other service charges and fees..................... 183 243 217
Net gain on sales of loans......................... 16 211 --
Net gain on securities available for sale.......... 307 88 48
---------- ---------- ----------
Total other operating income.................. 1,252 1,236 927
---------- ---------- ----------
Other expenses
Salaries and employee benefits..................... 3,630 3,082 2,787
Occupancy expense.................................. 345 297 328
Furniture and equipment expense.................... 465 424 410
Insurance expense, including FDIC assessment....... 35 187 335
Net loss on sales of loans......................... -- -- 211
Marketing expense.................................. 97 110 146
Printing and supply expenses....................... 205 160 168
Merger and acquisition expenses.................... -- -- 200
Other expenses..................................... 1,227 930 748
---------- ---------- ----------
Total other expenses.......................... 6,004 5,190 5,333
---------- ---------- ----------
Income before income taxes.............................. 3,431 3,036 2,130
Income tax expense...................................... 1,021 866 538
---------- ---------- ----------
Net income.............................................. $ 2,410 $ 2,170 $ 1,592
========== ========== ==========
Net income per share of common stock.................... $ 1.75 $ 1.58 $ 1.16
========== ========== ==========
Weighted average shares outstanding, as restated........ 1,380,110 1,370,714 1,369,666
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
================================================================================
Seventeen
<PAGE> 15
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Common stock
Balance at beginning of year........................... $ 1,098 $ 1,097 $ 1,099
Stock split effected in the form of a stock dividend... 275 -- --
Treasury stock canceled................................ -- -- (5)
Exercise of stock options.............................. 7 -- 3
Dividend reinvestment plan............................. 3 -- --
Employee stock awards.................................. -- 1 --
------- ------- -------
Balance at end of year................................. 1,383 1,098 1,097
------- ------- -------
Paid-in-capital
Balance at beginning of year........................... 2,580 2,562 2,514
Dividend reinvestment plan............................. 60 -- --
Exercise of stock options.............................. 84 -- 45
Employee stock awards.................................. 4 18 3
------- ------- -------
Balance at end of year................................. 2,728 2,580 2,562
------- ------- -------
Retained earnings
Balance at beginning of year........................... 14,837 13,403 12,539
Net income for years................................... 2,410 2,170 1,592
Cash paid for fractional shares........................ (5) -- --
Cash dividend paid ($.61 per share in 1996, $.54 in
1995, and $.48 in 1994).............................. (848) (736) (657)
Stock split effected in the form of a stock dividend... (275) -- --
Treasury stock canceled................................ -- -- (71)
------- ------- -------
Balance at end of year................................. 16,119 14,837 13,403
------- ------- -------
Net unrealized appreciation (depreciation) on available for
sale securities, net of tax effect
Balance at beginning of year........................... 467 (2,142) --
Net change............................................. (311) 2,609 (2,142)
------- ------- -------
Balance at end of year................................. 156 467 (2,142)
------- ------- -------
Treasury stock
Balance at beginning of year........................... -- -- --
Cost of shares of common stock acquired for treasury,
5,000 shares in 1994 and 6,711 shares in 1993........ -- -- (76)
Treasury stock sold or canceled........................ -- -- 76
------- ------- -------
Balance at end of year................................. -- -- --
------- ------- -------
Total shareholders' equity........................ $20,386 $18,982 $14,920
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
================================================================================
Eighteen
<PAGE> 16
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received......................................... $ 14,685 $ 13,335 $ 11,552
Fees and commission received.............................. 1,627 1,209 1,013
Interest paid............................................. (6,660) (6,162) (4,311)
Noninterest expense paid.................................. (5,264) (4,365) (4,934)
Income taxes paid......................................... (1,493) (983) (417)
Proceeds from mortgage loans sold......................... 3,122 2,685 719
-------- -------- --------
Net cash provided by operating activities............... 6,017 5,719 3,622
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale...... 43,707 44,183 6,548
Proceeds from maturities of securities available for
sale.................................................... 7,887 14,474 11,742
Purchases of securities................................... (47,933) (34,858) (38,239)
Capital expenditures...................................... (1,532) (303) (249)
(Increase) decrease in other real estate owned............ 158 (1) 49
Net (increase) decrease in loans.......................... (36,268) (34,132) 1,502
-------- -------- --------
Net cash used in investing activities................... (33,981) (10,637) (18,647)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and interest
checking accounts....................................... 4,217 3,013 (2,844)
Net increase (decrease) in time deposits.................. 20,764 18,914 1,195
Net increase (decrease) in federal funds purchased........ 5,498 2,022 (1,461)
(Repayments of) proceeds from long-term debt............. -- (20,000) 20,000
Purchase of common stock.................................. (5) -- (71)
Proceeds from issuance of common stock.................... 158 -- 47
Dividends paid............................................ (848) (736) (657)
-------- -------- --------
Net cash provided by financing activities............... 29,784 3,213 16,209
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1,820 (1,705) 1,184
Cash and cash equivalents, beginning of year................ 4,647 6,352 5,168
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 6,467 $ 4,647 $ 6,352
======== ======== ========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate........ $ 24 $ 135 $ 94
======== ======== ========
Investment securities transferred to available for sale... $ 0 $ -- $ 17,552
======== ======== ========
Change in unrealized appreciation (depreciation) of
securities available for sale (net of tax effect of
$(199), $1,669 and $1,370).............................. $ (311) $ 2,609 $ (2,142)
======== ======== ========
Employee stock awards..................................... $ 4 $ 19 $ 3
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income................................................ $ 2,410 $ 2,170 $ 1,592
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses........................... 415 260 105
Depreciation.......................................... 376 346 345
Accretion and amortization............................ 288 324 482
Gain on sale of securities available for sale......... (307) (88) (48)
(Gain) loss on sale of mortgage loans................. (16) (211) 211
Provision for loss on other real estate............... -- 64 47
Proceeds from mortgage loans sold..................... 3,122 2,685 719
(Gain) loss on other assets........................... 84 -- --
Deferred tax (benefit) provision...................... (384) (122) 113
(Increase) decrease in accrued income and other
assets............................................... (631) (257) 28
Increase (decrease) in accrued expenses and other
liabilities.......................................... 660 548 28
-------- -------- --------
Net cash provided by operating activities................... $ 6,017 $ 5,719 $ 3,622
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
================================================================================
Nineteen
<PAGE> 17
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
FNB Financial Services Corporation (the Company) and its wholly-owned
subsidiary, First National Bank of Reidsville (the Bank). All significant
intercompany balances and transactions have been eliminated in consolidation.
Nature of operations
The Bank provides a variety of financial services to individual and
corporate customers through its seven branches in Reidsville, Madison, and Eden,
North Carolina. A majority of the Bank's customers are located in Rockingham
County and portions of Guilford County. The Bank's primary deposit products are
interest-bearing checking accounts, certificates of deposit and individual
retirement accounts. Its primary lending products are commercial, consumer and
real estate loans.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and their reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans. A
majority of the Bank's loan portfolio consists of loans in the Reidsville-Eden
area. The local economy depends heavily on the manufacturing and agricultural
industries. Accordingly, the ultimate collectibility of a large portion of the
Bank's loan portfolio would be affected by changes in local economic conditions.
Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption cash and due from banks.
Investment Securities
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115 , "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have a
readily determinable fair value and all investments in debt securities. These
investments are to be classified into three categories as follows:
-- held-to-maturity -- reported at amortized cost,
-- trading securities -- reported at fair value with unrealized gains and
losses included in earnings, or
-- securities available-for-sale -- reported at fair value with unrealized
gains and losses reported as a separate component of shareholders' equity
(net of tax effect).
On January 1, 1994, the Bank adopted the provisions of SFAS No. 115 and
classified the balance of its portfolio of U.S. treasury notes, U.S. government
and agency securities, and state and municipal obligations as securities
available for sale. The Bank intends to hold these securities for an indefinite
period of time but may sell them prior to maturity. Other securities include
stock in the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta.
Gains and losses on sales of securities are recognized when realized on a
specific identification basis. Premiums and discounts are amortized into
interest income using a level yield method.
================================================================================
Twenty
<PAGE> 18
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
Loans
Effective January 1, 1995, the Bank adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures". SFAS No. 114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. SFAS No. 118
addresses the recognition of interest income on impaired loans. Adopting these
new accounting pronouncements had no material effect on the Bank's financial
position or results of operation.
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements, calculated on the aggregate loan basis.
Allowance for credit losses
The allowance for credit losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based upon reviews of
individual credits, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant risk
factors. Losses are charged and recoveries are credited to the allowance for
credit losses at the time the loss or recovery is incurred.
While management uses the best available information to evaluate the
adequacy of the allowance for credit losses, future additions to the allowance
may be necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for credit losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize changes
to the allowance based on their judgements about information available to them
at the time of their examination.
Other real estate
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair market value, less estimated costs to
sell, which becomes the property's new basis. At the date of acquisition, losses
are charged to the allowance for loan losses, subsequent write downs are charged
to expense in the period they are incurred.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed
principally by the straight-line method over the estimated useful lives of the
assets.
Expenditures for maintenance and repairs are charged to operations, and the
expenditures for major replacements and betterments are added to the property
and equipment accounts. The cost and accumulated depreciation of the property
and equipment retired or sold are eliminated from the property accounts at the
time of retirement or sale and the resulting gain or loss is reflected in
current operations.
Income taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable income such as interest on
state and municipal securities) and deferred taxes on temporary differences
between the tax bases of assets and liabilities and their reported amounts in
financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax asset and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
================================================================================
Twenty-One
<PAGE> 19
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
Net income per share of common stock
Net income per share of common stock is computed by dividing net income by
the weighted average number of shares of common stock outstanding during each
year. Outstanding stock options have no material dilutive effect.
Loan origination fees and costs
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan.
Sales of mortgage loans
Gains and losses on the sale of loans are accounted for by imputing gain or
loss on those sales where a yield rate guaranteed to the buyer is more or less
than the contract interest rate being collected. Such gains or losses are
recognized in the financial statements during the year of sale. The Bank
continues to service certain loans that have been sold. Such loan balances are
not included in the accompanying consolidated balance sheets.
Pension costs
Pension costs are charged to salaries and employee benefits expense.
Off balance sheet financial instruments
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
Reclassification
Certain items for 1994 and 1995 have been reclassified to conform with the
1996 presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
NOTE 2 -- RESTRICTION ON CASH AND DUE FROM BANKS
The Bank maintains average reserve balances with the Federal Reserve Bank.
The average amounts of these reserve balances for the years ended December 31,
1996 and 1995 were $625,000 and $270,000, respectively.
================================================================================
Twenty-Two
<PAGE> 20
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE 3 -- INVESTMENT SECURITIES
Investment securities consists of the following (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Available for sale:
U.S. treasury notes................ $13,075 $ 4 $ 3 $13,076
U.S. government agency
securities...................... 24,126 -- 21 24,105
Mortgage-backed securities......... 7,780 14 139 7,655
State and municipal obligations.... 6,693 400 -- 7,093
------- ------ ---- -------
51,674 418 163 51,929
------- ------ ---- -------
Other securities..................... 643 -- -- 643
------- ------ ---- -------
Total investment securities..... $52,317 $ 418 $163 $52,572
======= ====== ==== =======
DECEMBER 31, 1995
Available for sale:
U.S. treasury notes................ $ 4,220 $ 16 $ 10 $ 4,226
U.S. government agency
securities...................... 16,771 28 79 16,720
Mortgage-backed securities......... 21,615 70 188 21,497
State and municipal obligations.... 13,064 933 4 13,993
------- ------ ---- -------
55,670 1,047 281 56,436
------- ------ ---- -------
Other securities..................... 1,059 -- -- 1,059
------- ------ ---- -------
Total investment securities..... $56,729 $1,047 $281 $57,495
======= ====== ==== =======
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturities, are shown below (in thousands).
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>
Securities available for sale
-----------------------------
Amortized Estimated
Cost Market Value
---------- -------------
<S> <C> <C>
Due in one year or less................................... $29,599 $29,583
Due after one through five years.......................... 9,278 9,424
Due after five through ten years.......................... 3,376 3,585
Due after ten years....................................... 1,641 1,682
Mortgage-backed securities................................ 7,780 7,655
------- -------
$51,674 $51,929
======= =======
</TABLE>
Proceeds from the sale of investment securities available for sale, gross
realized gains, gross realized losses, and the related income taxes on net
realized gains were as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31
----------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Proceeds from sales...................................... $43,707 $44,183 $6,548
Gross realized gains..................................... 376 163 53
Gross realized losses.................................... 69 75 5
Applicable income tax on net realized gains.............. 120 34 19
</TABLE>
At December 31, 1996 and 1995, investment securities with a carrying value
of approximately $14,442,000 and $10,994,000 respectively, were pledged as
collateral to secure public deposits and for other purposes.
================================================================================
Twenty-Three
<PAGE> 21
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE 4 -- LOANS
Major classifications of loans are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
-------- --------
<S> <C> <C>
Commercial and agricultural................................. $ 21,350 $ 18,110
Consumer.................................................... 32,291 24,569
Real estate -- construction................................. 12,965 2,147
Real estate -- mortgage
Loans held in portfolio................................... 77,979 66,295
Loans held for sale....................................... 0 587
-------- --------
Total.................................................. $144,585 $111,708
======== ========
</TABLE>
At December 31, 1996, the Bank had no impaired loans as defined by SFAS No.
114, as amended by SFAS No. 118. Loans on nonaccrual status, not considered
impaired, amounted to approximately $547,400 at December 31, 1996 and $44,000 at
December 31, 1995.
NOTE 5 -- LOAN SERVICING
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation are
not included in the accompanying consolidated balance sheets. The unpaid
principal balances of those loans at December 31, 1996, 1995 and 1994 were
$14,852,000, $14,491,000 and $11,806,000, respectively.
NOTE 6 -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for the three years ended
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year............................... $1,258 $1,052 $1,174
Provision for credit losses................................ 415 260 105
Recoveries................................................. 54 74 120
Loans charged off.......................................... (89) (128) (347)
------ ------ ------
Balance at end of year..................................... $1,638 $1,258 $1,052
====== ====== ======
</TABLE>
NOTE 7 -- PROPERTY AND EQUIPMENT
Properties and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Land........................................................ $ 870 $ 650
Building and leasehold improvements......................... 3,690 2,767
Equipment................................................... 3,544 3,057
Construction in progress.................................... 39 39
------ ------
8,143 6,513
Less accumulated depreciation and amortization.............. 3,457 3,079
------ ------
$4,686 $3,434
====== ======
</TABLE>
================================================================================
Twenty-Four
<PAGE> 22
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE 8 -- DEPOSITS
The aggregate amount of jumbo CDS, each with a minimum denomination of
$100,000, was approximately $21,200,000 and $18,800,000 in 1996 and 1995,
respectively.
At December 31, 1996 the scheduled maturities of CDs and IRAs are as
follows (in thousands):
<TABLE>
<S> <C>
Less than 1 year............................................ $ 80,365
1-3 years................................................... 25,385
Greater than 3 years........................................ 2,735
--------
$108,485
========
</TABLE>
NOTE 9 -- INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- ----
<S> <C> <C> <C>
Current tax expense
Federal................................................... $1,212 $ 787 $317
State..................................................... 193 201 107
------ ----- ----
Total current.......................................... 1,405 988 424
------ ----- ----
Deferred tax expense (benefit)
Federal................................................... (308) (98) 91
State..................................................... (76) (24) 23
------ ----- ----
Total deferred......................................... (384) (122) 114
------ ----- ----
Total income tax expense.................................... $1,021 $ 866 $538
====== ===== ====
</TABLE>
The sources of deferred tax assets and liabilities and the tax effect of
each are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................... $ 484 $ 334
Non-qualified deferred compensation plans................. 255 --
Other..................................................... -- 26
----- -----
Total.................................................. 739 360
----- -----
Deferred tax liabilities:
Depreciable basis of property and equipment............... 248 280
Net unrealized gain on securities available for sale...... 99 299
Other..................................................... 28 --
----- -----
Total.................................................. 375 579
----- -----
Net deferred tax assets (liabilities)....................... $ 364 $(219)
===== =====
</TABLE>
There is no valuation allowance for deferred tax assets as it is
management's contention that realization of the deferred tax assets is more
likely than not based upon the Bank's history of taxable income and estimates of
future taxable income.
================================================================================
Twenty-Five
<PAGE> 23
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34% as indicated in the following
analysis (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Tax based on statutory rates................................ $1,166 $1,032 $ 724
Increase (decrease) resulting from:
Effect of tax-exempt income............................... (223) (289) (284)
Provision for credit losses............................... 130 70 31
Interest and other nondeductible expenses................. 29 82 36
Other, net................................................ (81) (29) 31
------ ------ -----
$1,021 $ 866 $ 538
====== ====== =====
</TABLE>
NOTE 10 -- LEASE COMMITMENTS
The minimum annual lease commitments under noncancelable operating leases
in effect at December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ------
<S> <C>
1997........................................................ $ 55
1998........................................................ 51
1999........................................................ 46
2000........................................................ 46
2001........................................................ 42
Thereafter.................................................. 181
----
$421
====
</TABLE>
Rental expense was $71,000 in 1996, $38,000 in 1995 and $38,000 in 1994.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to principal officers and directors and
their affiliated companies of approximately $3,382,000 and $3,950,000 at
December 31, 1996 and 1995, respectively. During 1996, additions to such loans
were $3,197,000 and repayments totaled $3,765,000. Such loans were made
substantially on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other borrowers
and do not involve more than the normal risks of collectibility.
NOTE 12 -- SHAREHOLDERS' EQUITY
STOCK SPLIT
On February 8, 1996, the Board of Directors declared a one-for-four split
of the common stock in the form of a 25% stock dividend to holders of record on
March 8, 1996 to be issued on March 29, 1996. As a result $275,194 ($1 for each
share issued pursuant to the stock split) was transferred from retained earnings
to the common stock account. Cash was paid in lieu of fractional shares from
retained earnings of $5,345. All per share data in the financial statements have
been adjusted to reflect the split.
STOCK GRANTS
During 1996, 1995, and 1994, stock grants to employees amounted to 85,
1,130, and 145 common shares, respectively.
STOCK OPTION PLANS
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of accounting
for an employee stock option or similar equity instrument. This statement gives
entities a choice of recognizing related compensation expense by adopting the
new fair value method or to continue to measure compensation using the intrinsic
value approach under Accounting Principals Board (APB) Opinion No. 25, the
former standard. If the former standard for measurement is elected, SFAS No. 123
requires supplemental disclosure to show the effects of using the new
measurement criteria. This statement is effective for the Company's 1996 fiscal
year. The Company intends to
================================================================================
Twenty-Six
<PAGE> 24
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
continue using the measurement prescribed by APB Opinion No. 25, and
accordingly, this pronouncement will not affect the Company's financial position
or results of operations.
The Company has issued stock under both incentive and non-qualified stock
options. The Company granted stock options under plans approved in 1996, 1995,
1992, and 1989 which authorize the granting of options with respect to 216,486
shares of the Company's common stock.
The following is a summary of stock option activity and related information
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- Beginning
of year............... 86,371 $12.37 52,674 $12.10 56,660 $12.09
Granted............... 137,528 22.75 33,697 12.80 --
Exercised............. (7,413) 12.24 -- -- (3,986) $12.00
Forfeited............. -- -- --
------- ------ ------
Outstanding -- End of
year.................. 216,486 $18.97 86,371 $12.37 52,674 $12.10
======= ====== ======
Exercisable -- End of
year.................. 45,194 $12.24 30,254 $12.25 22,077 $12.36
Weighted average fair
value of options
granted during the
year.................. $ 6.66 $ 3.65 $ --
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$12 to $23. The weighted average remaining contractual life of those options is
8.93 years.
Because the Company has adopted the disclosure-only provisions of SFAS No.
123, no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date of the awards consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net earnings -- as reported................................ $2,410,000 $2,170,000
Net earnings -- pro forma.................................. 2,153,000 2,145,000
Earnings per share -- as reported.......................... 1.75 1.58
Earnings per share -- pro forma............................ 1.56 1.56
</TABLE>
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995: dividend yield of 3.20%, expected
volatility of 34.0%, risk-free interest rates of 6.20% for 1996 and 5.40% for
1995, and expected lives of 4 years for 1996 options and 5 years for 1995
options.
These plans provide that shares granted come from the Company's authorized
but unissued or reacquired common stock. The price of the options granted
pursuant to these plans will not be less than 100 percent of the fair market
value of the shares on the date of grant. The options granted in 1989, 1992, and
1995 vest ratably over a five year period, and the options granted in 1996 vest
ratably over a four year period; however, no option will be exercisable after
ten years from the date granted.
================================================================================
Twenty-Seven
<PAGE> 25
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE 13 -- FNB FINANCIAL SERVICES CORPORATION (PARENT COMPANY)
The parent company's principal asset is its investment in its subsidiary,
the Bank. The significant source of income of the parent company is dividends
received from its subsidiary.
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS) ------- ------- -------
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Assets
Cash and due from banks........................... $ 374 $ 316 $ 249
Securities........................................ 13 12 12
Investment in wholly-owned subsidiary............. 19,960 18,647 14,588
Other assets...................................... 39 7 71
------- ------- -------
$20,386 $18,982 $14,920
======= ======= =======
Shareholders' equity.............................. $20,386 $18,982 $14,920
======= ======= =======
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiary........................... $ 835 $ 731 $ 1,021
Amortization and other expenses..................... (74) (18) (209)
------- ------- -------
Income before tax benefit........................... 761 713 812
Income tax benefit.................................. 25 6 71
------- ------- -------
Income before equity in undistributed net income of
subsidiary........................................ 786 719 883
Equity in undistributed net income of subsidiary.... 1,624 1,451 709
------- ------- -------
Net income.......................................... $ 2,410 $ 2,170 $ 1,592
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received from subsidiary................ $ 835 $ 731 $ 1,021
Cash paid for franchise tax, registration cost,
acquisition cost and other..................... (74) (18) (135)
Refundable income taxes........................... 6 71 1
------- ------- -------
Net cash provided by operating activities...... 767 784 887
------- ------- -------
CASH USED IN INVESTING ACTIVITIES
Purchase of real estate........................... (14)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid, net of DRIP....................... (785) (736) (657)
Proceeds from employee stock awards............... 4 19 3
Exercise of stock options......................... 91 -- 48
Purchase of common stock.......................... (5) -- (76)
------- ------- -------
Net cash used in financing activities.......... (695) (717) (682)
------- ------- -------
Net increase (decrease) in cash..................... 58 67 205
Cash at beginning of year........................... 316 249 44
------- ------- -------
Cash at end of year................................. $ 374 $ 316 $ 249
======= ======= =======
RECONCILIATION OF NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES
Net income.......................................... $ 2,410 $ 2,170 $ 1,592
Adjustments to reconcile net income to net cash
provided by operating activities
(Increase) decrease in other assets............ (19) 64 4
Equity in undistributed net income of
subsidiary................................... (1,624) (1,450) (709)
------- ------- -------
Net cash provided by operating activities........... $ 767 $ 784 $ 887
======= ======= =======
</TABLE>
================================================================================
Twenty-Eight
<PAGE> 26
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE 14 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit.
A summary of the Bank's commitments and contingent liabilities at December
31, are as follows (in thousands):
<TABLE>
<CAPTION>
Contract or
Notional Amount
--------------------
1996 1995
------- -------
<S> <C> <C>
Commitments to extend credit................................ $27,272 $19,669
Standby letters of credit................................... 216 191
------- -------
$27,488 $19,860
======= =======
</TABLE>
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
NOTE 15 -- EMPLOYEE BENEFIT PLANS
The Company's non-contributory defined benefit pension plan covers
substantially all of its employees. The plan calls for benefits to be paid to
eligible employees at retirement based primarily upon years of service with the
Company and a percentage of qualifying compensation during final years of
employment. Contributions to the plan are based upon the projected unit credit
actuarial funding method and comply with the funding requirements of the
Employee Retirement Income Security Act. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future. Plan assets consists primarily of cash and cash
equivalents, U. S. government securities, and common stocks.
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Net pension cost included the following components (in
thousands):
Service cost of the current period........................ $ 60 $ 55
Interest cost on the projected benefit obligation......... 158 137
Actual return on assets held in the plan.................. (148) (124)
Net amortization of prior service......................... 11 11
----- -----
Pension expense........................................... $ 81 $ 79
===== =====
</TABLE>
================================================================================
Twenty-Nine
<PAGE> 27
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
The following sets forth the funded status of the plan and the amounts
shown in the accompanying balance sheet at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $1,439,658 in 1996 and $1,629,000 in 1995........... $2,116 $1,685
Effect of anticipated future compensation levels.......... 293 291
------ ------
Projected benefit obligation.............................. 2,409 1,976
Fair value of assets held in the plan..................... 2,289 1,838
------ ------
Plan assets less than projected benefit obligation........ (120) (138)
Unrecognized prior service cost being recognized over 15
years.................................................. 132 142
Net unrecognized (loss) gain from past experience
different from that assumed and effects of changes in
assumption............................................. 58 75
------ ------
Pension liability......................................... $ 70 $ 79
====== ======
</TABLE>
The weighted average discount rate used to measure the projected benefit
obligation is 7.00% for 1996 and 1995, the rate of increase in future
compensation levels is 5.00% for 1996 and 1995, and the expected long-term rate
of return on assets is 7.00% for 1996 and 1995. The Company uses the
straight-line method of amortization for prior service cost and unrecognized
gains and losses.
In 1994 the Company adopted a Supplemental Executive Retirement Plan
("SERP"). The SERP allows the Company to supplement the level for certain
executives' retirement income over that which is obtainable through the
tax-qualified retirement plan sponsored by the Bank. Contributions to the SERP
totaled $44,000 for 1996 and $39,000 for 1995.
The Bank also has a contributory 401(K) savings plan covering substantially
all employees. The plan allows eligible employees to contribute up to a fixed
percentage of their compensation, with the Bank matching a portion of each
employee's contribution. The Bank's contributions were $49,000, $45,000, and
$35,000 for 1996, 1995 and 1994, respectively.
A deferred compensation plan allows the directors and certain senior
officers of the Company and the Bank to defer the compensation they earn for
performance of their appointed duties for the Company and the Bank. Each
director elects annually to either receive that year's compensation currently or
to defer receipt until his death, disability or retirement as a director. Each
officer elects annually to either receive that year's compensation currently or
to defer receipt of a portion of his compensation until his death, disability or
retirement as an officer. The total liability for deferred compensation under
the plan was $207,000 and $55,000 at December 31, 1996 and 1995, respectively.
NOTE 16 -- REGULATORY MATTERS
The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years. The dividends, as of
December 31, 1996 that the bank could declare without the approval of the
Comptroller of the Currency, amounted to approximately $3,783,000.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possible additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as
================================================================================
Thirty
<PAGE> 28
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
defined). Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
Total Capital (To Risk Weighted
Assets)
Consolidated................... $21,868,000 15.1% $11,609,000 M8.0% N/A
Subsidiary Bank................ $21,442,000 14.8% $11,628,000 M8.0% $14,535,000 M10.0%
Tier I Capital (To Risk Weighted
Assets)
Consolidated................... $19,464,000 13.4% $ 5,805,000 M4.0% N/A
Subsidiary Bank................ $19,039,000 13.1% $ 5,814,000 M4.0% $ 8,721,000 M6.0%
Tier I Capital (To Average Assets)
Consolidated................... $19,464,000 9.6% $ 8,087,000 M4.0% N/A
Subsidiary Bank................ $19,039,000 9.4% $ 8,086,000 M4.0% $10,108,000 M5.0%
December 31, 1995:
Total Capital (To Risk Weighted
Assets)
Consolidated................... $19,773,000 16.7% $ 9,355,000 M8.0% N/A
Subsidiary Bank................ $19,439,000 25.2% $ 6,161,000 M8.0% $ 7,701,000 M10.0%
Tier I Capital (To Risk Weighted
Assets)
Consolidated................... $18,515,000 15.8% $ 4,677,000 M4.0% N/A
Subsidiary Bank................ $18,180,000 23.6% $ 3,080,000 M4.0% $ 4,620,000 M6.0%
Tier I Capital (To Average Assets)
Consolidated................... $18,515,000 10.8% $ 6,860,000 M4.0% N/A
Subsidiary Bank................ $18,180,000 10.4% $ 7,003,000 M4.0% $ 8,754,000 M5.0%
</TABLE>
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
for each class of financial instruments.
Cash and cash equivalents. For cash on hand and amounts due from banks the
carrying value is considered to be a reasonable estimate of fair value.
Investment securities. The fair value of investment securities is based on
quoted market prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. The
fair value of equity investments in the restricted stock of the Federal Reserve
and Federal Home Loan Bank equals the carrying value.
Loans. The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of residential mortgage loans held for sale is based on quoted
market prices and the fair value of variable rate loans with frequent repricing
and negligible credit risk approximates book value.
================================================================================
Thirty-One
<PAGE> 29
================================================================================
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
Deposits. The fair value of noninterest-bearing demand deposits and NOW,
savings and money market deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
Other interest-bearing liabilities. The carrying value of federal funds
purchased and retail repurchase agreements is considered to be a reasonable
estimate of fair value.
Commitments. The fair value of commitments to extend credit is considered
to approximate carrying value, since the large majority of these commitments
would result in loans that have variable rates and/or relatively short terms to
maturity. For other commitments, generally of a short-term nature, the carrying
value is considered to be a reasonable estimate of fair value. The various
commitment items were disclosed in Note 14.
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents........... $ 6,467 $ 6,467 $ 4,647 $ 4,647
Investment securities
Available for sale............. 51,929 51,929 56,436 56,436
Other equity securities........ 643 643 1,059 1,059
Loans............................... 144,585 144,267 111,709 111,663
FINANCIAL LIABILITIES
Deposits............................ 179,380 179,630 154,400 154,668
Federal funds purchased and retail
repurchase agreements............. 8,650 8,650 3,152 3,152
</TABLE>
The fair value estimates are made at a specific point in time based on
relevant market and other information about the financial instruments. Because
no market exists for a significant portion of the Company's financial
instruments, fair value estimates are current economic conditions, risk
characteristics of various financial instruments, and such other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.
NOTE 18 -- BRANCH ACQUISITION
During March, 1996, the Bank completed its purchase of a branch located in
Eden, North Carolina from NationsBank of North Carolina. The principal amounts
acquired included deposits of approximately $14,000,000, loans of approximately
$2,500,000 and net cash of approximately $11,500,000. The acquisition was
accounted for using the purchase method of accounting.
================================================================================
Thirty-Two
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The registrant's sole subsidiary is First National Bank of Reidsville, a
national bank, which is wholly owned by the Registrant
12 OF 15
<PAGE> 1
EXHIBIT 23
CONSENT OF CHERRY, BEKAERT & HOLLAND, L.L.P.
We consent to the incorporation by reference in the Form 10-KSB of FNB
Financial Services Corporation of our report dated January 22, 1997, relating
to the consolidated balance sheets of FNB Financial Services Corporation and
Subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
appears in the 1996 Annual Report of FNB Financial Services Corporation.
(Cherry, Bekaert & Holland, L.L.P.)
Reidsville, North Carolina
March 20, 1997
13 OF 15
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996
ANNUAL REPORT OF FNB FINANCIAL SERVICES AND IS QUALIFIED IN ITS ENTIRETY TO
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,467
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,929
<INVESTMENTS-CARRYING> 643
<INVESTMENTS-MARKET> 643
<LOANS> 144,585
<ALLOWANCE> 1,638
<TOTAL-ASSETS> 209,796
<DEPOSITS> 179,380
<SHORT-TERM> 8,650
<LIABILITIES-OTHER> 1,380
<LONG-TERM> 0
0
0
<COMMON> 1,383
<OTHER-SE> 19,003
<TOTAL-LIABILITIES-AND-EQUITY> 209,796
<INTEREST-LOAN> 12,092
<INTEREST-INVEST> 3,137
<INTEREST-OTHER> 131
<INTEREST-TOTAL> 15,360
<INTEREST-DEPOSIT> 6,449
<INTEREST-EXPENSE> 6,762
<INTEREST-INCOME-NET> 8,598
<LOAN-LOSSES> 415
<SECURITIES-GAINS> 307
<EXPENSE-OTHER> 6,004
<INCOME-PRETAX> 3,431
<INCOME-PRE-EXTRAORDINARY> 3,431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,410
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.84
<LOANS-NON> 547
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,258
<CHARGE-OFFS> 89
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 1,638
<ALLOWANCE-DOMESTIC> 1,376
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 262
</TABLE>
