<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1998
REGISTRATION NO. 333-47203
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FNB FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NORTH CAROLINA 56-1382275
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
202 SOUTH MAIN STREET
REIDSVILLE, NORTH CAROLINA 27320
(336) 342-3346
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ERNEST J. SEWELL, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FNB FINANCIAL SERVICES CORPORATION
202 SOUTH MAIN STREET
REIDSVILLE, NORTH CAROLINA 27320
(336) 342-3346
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
GERALD F. ROACH, ESQ. ANTHONY GAETA, JR., ESQ.
MICHAEL P. SABER, ESQ. W. MARK GRIFFITH, ESQ.
SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL MOORE & VAN ALLEN, PLLC
& JERNIGAN, L.L.P. ONE HANNOVER SQUARE, SUITE 1700
2500 FIRST UNION CAPITOL CENTER RALEIGH, NORTH CAROLINA 27611
RALEIGH, NORTH CAROLINA 27601 (919) 828-4481
(919) 821-1220
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 24, 1998
PROSPECTUS
- --------------
650,000 Shares
(FNB logo)
FNB FINANCIAL SERVICES CORPORATION
COMMON STOCK
FNB Financial Services Corporation (the "Company") hereby offers for sale
650,000 shares of the Company's common stock, par value $1.00 per share (the
"Common Stock").
The Common Stock is currently traded on the Nasdaq National Market
("Nasdaq") of The Nasdaq Stock Market under the symbol "FNBF." On March 18,
1998, the last sale price of the Common Stock as reported on Nasdaq was $24.75
per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<TABLE>
<CAPTION>
==========================================================================================================================
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............. $ $ $
- --------------------------------------------------------------------------------------------------------------------------
Total (3).............. $ $ $
==========================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $300,000, all of which are payable by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 97,500 additional shares of Common Stock at the price to the public, less
underwriting discount, solely to cover over-allotments, if any. If all of
such shares of Common Stock are purchased, the price to the public,
underwriting discount and proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998.
Interstate/Johnson Lane
Corporation
The date of this Prospectus is , 1998
<PAGE> 3
FNB FINANCIAL SERVICES CORPORATION
BANKING OFFICES
[MAP]
---------------------
[On this page, there appears a map showing the State of North Carolina, as well
as the Commonwealth of Virginia and the northern two-thirds of South Carolina.
The map plots the towns and cities in which the Company has banking offices and
also shows other cities in each state in order to orient the reader to the
geography.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THIS OFFERING.
IN ADDITION, IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS ALSO MAY ENGAGE
IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934 (THE "EXCHANGE ACT"). FOR A DESCRIPTION, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto included or
incorporated by reference in this Prospectus. Except as otherwise specified, all
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised and has been adjusted to reflect: (i) a five-for-four
stock split effected as a 25% stock dividend on March 26, 1996 (the "1996 Stock
Split"); and (ii) a four-for-three stock split effected as a 33% stock dividend
on April 30, 1997 and a four-for-three stock split effected as a 33% stock
dividend on September 12, 1997 (the "1997 Stock Splits").
THE COMPANY
FNB Financial Services Corporation (the "Company") is a North Carolina bank
holding company with total assets of $325.2 million, deposits of $272.3 million
and shareholders' equity of $22.5 million, each as of December 31, 1997. The
Company's wholly-owned subsidiary, First National Bank Southeast (the "Bank"),
was chartered in 1918. Historically, the Bank has served the Rockingham County
area of North Carolina through three branches in Reidsville and two in Eden,
North Carolina. In 1995, the Company initiated a strategic growth plan beginning
with the hiring of a new chief executive officer. By the end of 1997, the Bank
increased its number of branches from five to ten by opening new branches in the
Rockingham County towns of Eden, Ruffin and Madison and in the new markets of
Greensboro and Wilmington, North Carolina. As a result of this strategy, between
1995 and 1997, the Company's net interest income, loans and deposits each
increased at compound annual growth rates of 23.0%, 43.1% and 32.8%,
respectively.
The Bank is community oriented and focuses primarily on offering
commercial, real estate and consumer loans, and deposit and other financial
services to individuals, small to medium-sized businesses and other
organizations in its market areas. The Bank emphasizes its individualized
services and community involvement, while at the same time providing its
customers with the financial sophistication and array of products typically
offered by a larger bank. Management believes that the Bank can compete
successfully with larger banks located within and outside of North Carolina by
retaining its personalized approach and community focus.
Under the leadership of Ernest J. Sewell, who became President and Chief
Executive Officer in January 1995, the Company adopted the following three-part
strategy: (i) increase market share and geographic reach through opportunistic
acquisitions in markets where the mix of economic, operational, cultural and
other factors are favorable; (ii) position the Company to manage its planned
growth by adding experienced personnel and upgrading its internal systems and
procedures; and (iii) generate internal growth at its existing banking offices
by offering new and complementary services and products. To accomplish these
objectives, during the past three years the Company has: (i) increased the
number of its branch offices to ten by opening new offices in Eden, Ruffin,
Madison, Greensboro and Wilmington; (ii) expanded by approximately 48% the
number of its full-time personnel by adding 42 new employees, including four new
vice presidents and four new senior vice presidents; (iii) initiated a
systematic review and revision of its loan administration, loan policy and
credit procedures; and (iv) enhanced its mix of products and services by
broadening the scope of its commercial lending activities, updating and
extending its ATM terminals and network and establishing a department to provide
credit and debit cards to its customers.
The Company plans to continue to pursue these objectives by strengthening
its presence in existing markets and opportunistically reaching into new markets
in North Carolina, Virginia and South Carolina. The Company will seek to hire
qualified personnel to help manage its planned growth and to develop new
products that are uniquely consistent with the Company's service orientation.
The Company also plans, where appropriate, to upgrade its systems and procedures
and refine its ability to offer customers sophisticated services without
sacrificing its personalized approach.
The Company's executive offices are located at 202 South Main Street,
Reidsville, North Carolina 27320, and its telephone number is (336) 342-3346.
Unless the context otherwise requires, the term the "Company" refers to FNB
Financial Services Corporation and its wholly-owned subsidiary, First National
Bank Southeast.
3
<PAGE> 5
THE OFFERING
Common Stock offered.................. 650,000 shares
Common Stock to be outstanding after
the offering.......................... 3,147,681 shares(1)
Nasdaq National Market symbol......... FNBF
Use of Proceeds....................... To support internal growth, to
finance de novo branch expansion, to
finance possible future acquisitions
and for other general corporate
purposes, including upgrading
internal policies, systems and
equipment. See "Use of Proceeds."
- ---------------
(1) Based on 2,497,681 shares of Common Stock outstanding on February 1, 1998.
Does not include 468,018 shares issuable upon the exercise of stock options
outstanding as of February 1, 1998.
---------------------
Information contained or incorporated by reference in this Prospectus
contains "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereon or
comparable terminology. See "Forward Looking Statements." The matters set forth
under the caption "Risk Factors" in this Prospectus constitute cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward looking statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND OTHER
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income........................... $ 10,961 $ 8,598 $ 7,250 $ 6,641 $ 6,747
Provision for loan losses..................... 760 415 260 105 190
Non-interest income........................... 1,354 1,252 1,236 927 1,206
Non-interest expense.......................... 7,903(1) 6,004 5,190 5,333 4,788
Net income.................................... 2,477 2,410 2,170 1,592(2) 2,129
BALANCE SHEET DATA:
Assets........................................ $325,151 $209,796 $177,897 $169,231 $153,541
Loans(3)...................................... 228,715 144,585 111,708 79,787 82,449
Allowance for loan losses..................... 2,331 1,638 1,258 1,052 1,174
Deposits...................................... 272,274 179,380 154,400 132,474 134,121
Other borrowings.............................. 28,720 8,650 3,152 21,130 2,591
Shareholders' equity.......................... 22,518 20,386 18,982 14,920 16,153
PER COMMON SHARE DATA(4):
Net income, basic............................. $ 1.00 $ 0.98 $ 0.89 $ 0.65 $ 0.87
Net income, diluted(5)........................ 0.93 0.96 0.88 0.65 0.87
Cash dividends declared....................... 0.39 0.34 0.30 0.27 0.26
Book value.................................... 9.03 8.29 7.78 6.12 6.61
Tangible book value........................... 8.74 7.98 7.78 6.12 6.61
OTHER DATA:
Branch offices................................ 10 6 5 5 5
Full-time employees........................... 129 95 87 90 91
PERFORMANCE RATIOS:
Return on average assets...................... 0.96% 1.23% 1.27% 1.03% 1.42%
Return on average equity...................... 11.86 12.52 12.91 9.76 13.91
Net interest margin (taxable equivalent)...... 4.57 4.84 4.72 4.84 5.09
Dividend payout............................... 39.00 35.17 33.92 41.30 29.55
Efficiency(6)................................. 63.22 58.93 58.16 66.61 56.86
ASSET QUALITY RATIOS:
Allowance for loan losses to period end
loans....................................... 1.02% 1.13% 1.13% 1.32% 1.42%
Allowance for loan losses to period end non-
performing loans(7)......................... 180 299 2,859 670 136
Net charge-offs to average loans.............. 0.04 0.03 0.06 0.28 0.21
Non-performing assets to period end loans and
foreclosed property(7)...................... 0.58 0.40 0.21 0.43 1.01
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets.............. 8.09% 9.85% 9.80% 10.55% 10.18%
Leverage...................................... 7.02 9.60 10.80 10.11 10.53
Tier 1 risk-based............................. 8.92 13.49 15.80 18.24 17.78
Total risk-based.............................. 9.88 15.10 16.70 19.39 19.03
Average loans to average deposits............. 84.17 76.37 65.64 60.23 64.92
Average loans to average deposits and
borrowings.................................. 79.06 73.81 61.42 58.20 64.15
</TABLE>
- ---------------
(1) Includes approximately $1.4 million of non-interest expense attributable to
the opening of four new branches in 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes: (i) a non-recurring expense of approximately $200,000 resulting
from an acquisition terminated by the Company; (ii) a write-down on
mortgages held for sale of approximately $214,000; and (iii) approximately
$129,000 associated with increased equipment expense.
(3) Loans exclusive of unearned income, before allowance for losses.
(4) Gives effect to the 1996 Stock Split and the 1997 Stock Splits.
(5) Assumes the exercise of outstanding options to acquire Common Stock. See
Note 13 to the Company's Consolidated Financial Statements.
(6) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income.
(7) Non-performing loans and non-performing assets include loans past due 90
days or more that are still accruing interest.
5
<PAGE> 7
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, prospective purchasers should consider the following factors
carefully in evaluating the Company and its business before purchasing the
shares of Common Stock offered hereby. See also "Forward Looking Statements."
MANAGEMENT OF GROWTH
The Company has experienced rapid growth over the past three years. The
growth and expansion of the Company's business have placed, and the Company
believes will continue to place, a strain on its operational, human and
financial resources. In order to manage its growth, the Company must continue to
attract, retain and reward qualified and experienced management, loan and
clerical personnel who possess both the personal affiliations and leadership
traits the Company seeks. In particular, the Company relies on a number of key
executives, including Ernest J. Sewell, its President and Chief Executive
Officer. The Company maintains key man life insurance on Mr. Sewell in the
amount of $1 million. The loss of the services of any key executive could have a
material adverse effect on the Company. Failure to manage growth effectively or
to attract and retain qualified personnel could have a material adverse effect
on the Company's business and could restrain the Company's ability to
successfully implement its business strategy. See "Business -- Strategy" and
"Management."
EXPANSION INTO NEW GEOGRAPHIC MARKETS
In pursuing its growth strategy, the Company may expand its presence into
new geographic markets, including markets outside the State of North Carolina.
When entering new geographic markets, the Company will need to establish, or
have in place, relationships with new or additional well trained local managers
and will be reliant on such managers who have the local affiliations the Company
seeks. Therefore, it will be necessary for the Company to give significant
autonomy to its managers in any new branches. The Company may also be required
to comply with laws and regulations that differ from those currently applicable
to the Company, and may face competitors with greater knowledge of such local
markets. There can be no assurance that the Company will be able to establish
local affiliations, realize management and operating efficiencies or otherwise
establish a presence in these new geographic markets. See
"Business -- Strategy."
POTENTIAL RISKS ASSOCIATED WITH ACQUISITIONS
The Company intends to expand its business through selective de novo branch
openings and possible acquisitions. There can be no assurance that the Company
will be able to consummate, or if consummated, successfully integrate, any
future de novo branch opening or acquisition, and there can be no assurance that
the Company will not incur disruption and unexpected expenses in integrating
such transactions. Although the Company currently has no such agreements or
understandings, either written or oral, in the normal course of business, the
Company evaluates potential transactions that would complement or expand the
Company's business. In doing so, the Company competes with other potential
bidders, many of which have greater financial and operational resources. There
can be no assurance that the Company will be able to successfully negotiate,
finance or integrate any such transactions. Furthermore, the process of
evaluating, negotiating and integrating transactions may divert management time
and resources. There can be no assurance that any given de novo branch opening
or acquisition, when consummated, will not have a material adverse effect on the
Company's business, results of operations or financial condition.
COMPOSITION OF LOAN PORTFOLIO
At December 31, 1997, real estate loans comprised 56.1% of the Company's
total loan portfolio, which includes residential mortgages and construction and
commercial loans secured by real estate. The Company generates a substantial
portion of its real estate mortgage loans in North Carolina. Therefore,
conditions of the real estate markets in North Carolina could strongly influence
the level of the Company's non-performing mortgage loans and the results of
operations and financial condition of the Company. Real estate values and the
demand for mortgages and construction loans are affected by, among other things,
changes in general or
6
<PAGE> 8
local economic conditions, changes in governmental rules or policies, the
availability of loans to potential purchasers and acts of nature. Although the
Company's underwriting standards are intended to protect the Company against
adverse general and local real estate trends, declines in real estate markets
could adversely impact the demand for new real estate loans, the value of the
collateral securing the Company's loans and the business, results of operations
and financial condition of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Lending Activities."
MEMORANDUM OF UNDERSTANDING
On November 13, 1997, the Company and the Office of the Comptroller of the
Currency (the "OCC") entered into a Memorandum of Understanding (the "MOU")
pursuant to which the Company agreed to take certain actions to improve its
infrastructure, primarily necessitated by its rapid growth. In general, the OCC
requested that the Company improve its internal procedures and policies, such as
revising its written loan policy, developing a program to strengthen its loan
administration and taking steps to increase its liquidity commensurate with its
past, and expected future, growth. The Company addressed each of the areas
specified and the OCC has not requested any further action by the Company. As is
customary, the MOU will remain in effect until the next regularly scheduled Bank
examination when the Company expects the MOU to be terminated. An OCC Memorandum
of Understanding is not a formal enforcement procedure recognized by law, but is
an informal mechanism used to monitor compliance by national banks, such as the
Bank, with the OCC's published rules and regulations. An institution's failure
to comply with a Memorandum of Understanding can result in a formal enforcement
proceeding or other remedial action. Management believes that the actions taken
by the Company to address the concerns identified by the OCC in the MOU have not
had a material adverse effect on the business, results of operations or
financial condition of the Company. However, since the MOU has not been formally
terminated, the OCC could request that the Company take additional steps which,
if required, could have a material adverse effect on its business, results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Supervision and
Regulation" and Note 17 to the Company's Consolidated Financial Statements.
COMPETITION WITH OTHER FINANCIAL INSTITUTIONS
Commercial banking in North Carolina is extremely competitive, due in large
part to statewide branching. Currently, many of the Company's competitors in
certain markets are significantly larger and have greater resources than the
Company. The Company encounters significant competition from a number of
sources, including other bank holding companies, commercial banks, thrift
institutions, credit unions and other financial institutions and financial
intermediaries. Among commercial banks, the Bank competes in its market areas
with some of the largest banking organizations in the country. Moreover,
competition is not limited to financial institutions based in North Carolina.
The enactment of federal legislation authorizing nationwide interstate banking
has greatly increased the size and financial resources of some of the Company's
competitors. Consequently, many of the Company's competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers that the Company does not offer. As a
result, the Company is likely to encounter increased competition, especially as
it expands into new markets, that may limit its ability to maintain or increase
its market share or otherwise materially and adversely affect its business,
results of operations and financial condition. See "Business -- Competition."
GOVERNMENTAL POLICIES AND REGULATION
The profitability of the Company depends to a large extent upon its net
interest income, which is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The net interest
income of the Company would be adversely affected if changes in market interest
rates caused by governmental fiscal policies or otherwise resulted in the cost
of interest-bearing liabilities increasing faster than the increase in the yield
on the interest-earning assets of the Company. The operating results of the
Company are also affected by credit policies of monetary authorities,
particularly the Federal Reserve Board ("Federal Reserve"). The instruments of
monetary policy employed by the Federal Reserve include open market operations
in
7
<PAGE> 9
U.S. Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company. In addition, the Company and the Bank are subject to extensive
supervision, regulation and control by several federal and state governmental
agencies, including the Federal Reserve, the OCC and the Federal Deposit
Insurance Corporation (the "FDIC"). Certain recently enacted or proposed
legislation or regulations, and future legislation or regulations, could have an
adverse effect on both the costs of doing business and the competitive factors
facing the financial institutions industry. Although the impact of such
legislation and regulation cannot be predicted, future changes may alter the
structure of and competitive relationships among financial institutions and the
cost of doing business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Supervision and
Regulation."
IMPACT OF TECHNOLOGICAL ADVANCES; UPGRADE TO COMPANY'S INTERNAL SYSTEMS
The banking industry is undergoing, and management believes will continue
to undergo, technological changes with frequent introductions of new
technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. The Company's future success will
depend, in part, on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to enhance efficiencies in the Company's operations.
Management believes that keeping pace with technological advances is important
for the Company, as long as its emphasis on personalized services is not
adversely impacted. As a result, the Company intends to continue to upgrade its
internal systems, both through the efficient use of technology (including
software applications) and by strengthening its policies and procedures. Many of
the Company's competitors will have substantially greater resources than the
Company to invest in technological and infrastructure improvements. There can be
no assurance that the Company will be able to effectively implement new
technology-driven products and services consistent with its emphasis on
individualized attention to its customers' needs. See "Use of Proceeds" and
"Business -- Strategy."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Company's, were designed to accommodate a two-digit year. For
example, "98" is stored on the system and represents 1998 and "00" represents
1900. The Bank primarily utilizes a third-party vendor for processing its
primary banking applications. In addition, the Bank also uses third-party vendor
application software for all ancillary computer applications. The third-party
vendor for the Company's banking applications is in the process of modifying,
upgrading or replacing its computer applications to ensure Year 2000 compliance.
To assist in this effort, the Company has been advised by such vendor that the
vendor has hired the services of a consultant to review the plan and assist such
vendor in achieving Year 2000 compliance by December 31, 1998. In addition the
Company has instituted a Year 2000 compliance program whereby the Bank is
reviewing the Year 2000 issues that may be faced by its other third-party
vendors. Under such program, the Company will examine the need for modifications
or replacement of all non-Year 2000 compliant pieces of software. The Company
does not currently expect that the cost of its Year 2000 compliance program will
be material to its financial condition and expects that it will satisfy such
compliance program without material disruption of its operations. In the event
that the Bank's significant vendors do not successfully and timely achieve Year
2000 compliance, the Bank's business, results of operations or financial
condition could be adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
8
<PAGE> 10
USE OF PROCEEDS
Assuming a price per share to the public of $24.75, the net proceeds to be
received by the Company from this offering are estimated to be approximately
$15.0 million ($17.2 million if the Underwriters' over-allotment option is
exercised in full), before the deduction of offering expenses payable by the
Company estimated at $300,000. The Company intends to use the net proceeds from
the sale of the shares of Common Stock offered hereby for general corporate
purposes. Such purposes would include: (i) the contribution of capital to the
Bank to fund the internal growth of earning assets and growth in earning assets
generated by the Bank's de novo branch expansions; (ii) the financing of
possible acquisitions of other financial institutions or their assets and
related liabilities; and (iii) the expansion, upgrade and modification of the
Company's policies, systems, procedures, operations, products and equipment.
Pending such uses, the Company expects that the net proceeds of the
offering will be invested by the Company in a variety of short and
intermediate-term interest-bearing assets, such as obligations of the United
States government and its agencies, and other permitted investments.
The Company from time to time reviews potential acquisitions and de novo
branch expansions and may enter into discussions with third parties regarding
such transactions. The Company currently has no agreements or understandings,
written or oral, regarding any such transactions and no portion of the net
proceeds have been allocated for any such purpose.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded publicly on Nasdaq under the trading
symbol "FNBF" since May 4, 1995. The table below sets forth the high and low
sale prices for the Company's Common Stock for the periods indicated as reported
by Nasdaq. Such prices are adjusted to reflect the 1996 Stock Split and the 1997
Stock Splits.
<TABLE>
<CAPTION>
SALE PRICE
----------------
HIGH LOW
------ ------
<S> <C> <C>
1996
- ----
First quarter............................................... $11.93 $ 9.00
Second quarter.............................................. 13.92 11.25
Third quarter............................................... 13.50 11.53
Fourth quarter.............................................. 13.22 11.53
1997
- ----
First quarter............................................... $15.19 $11.53
Second quarter.............................................. 25.50 13.78
Third quarter............................................... 28.88 21.38
Fourth quarter.............................................. 28.25 24.75
1998
- ----
First quarter (through March 18, 1998)...................... $26.00 $24.25
</TABLE>
On March 18, 1998, the last sale price reported on Nasdaq for the Common
Stock was $24.75 per share. On February 1, 1998, the Company had 2,497,681
shares of Common Stock outstanding and there were approximately 772 holders of
record of the Common Stock.
9
<PAGE> 11
DIVIDENDS
The Company (or the Bank, prior to December 31, 1984 when the Bank
reorganized into the holding company structure) has paid cash dividends on its
Common Stock in virtually every year since its founding in 1918 and has
increased its dividend annually since 1990. The following table sets forth
information concerning dividends per share declared for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997(1) 1996(1)
------- -------
<S> <C> <C>
First quarter............................................... $.09 $.08
Second quarter.............................................. .10 .08
Third quarter............................................... .10 .09
Fourth quarter.............................................. .10 .09
---- ----
Total............................................. $.39 $.34
==== ====
</TABLE>
- ---------------
(1) As adjusted to give effect to the 1996 Stock Split and the 1997 Stock
Splits.
Because the Company's principal operations are conducted through the Bank,
it generates cash to pay dividends primarily through dividends paid to it by the
Bank. However, there are certain regulatory restrictions on the Bank's ability
to transfer funds to the Company in the form of cash dividends. See "Business --
Supervision and Regulation." Pursuant to the regulatory restrictions, as of
December 31, 1997, $4.9 million of the Bank's retained earnings were available
for distribution to the Company without prior regulatory approval.
North Carolina corporate law precludes any distribution to shareholders,
including the payment of a dividend, if, after giving effect to the
distribution, the Company would not be able to pay its debts as they become due
in the usual course of business or the Company's total assets would be less than
the sum of its total liabilities plus the amount that would be needed to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution. The Company has no
shareholders who currently have preferential rights over the holders of the
Common Stock. See "Description of Capital Stock."
Future dividends will be determined by the Company's Board of Directors in
light of circumstances existing from time to time, including the Company's
growth, financial condition and results of operations, the continued existence
of the restrictions described above and other factors that the Company's Board
of Directors considers relevant.
10
<PAGE> 12
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1997, and as adjusted to give effect to the sale by the
Company of the shares of Common Stock offered hereby. This table should be read
in conjunction with the Company's audited consolidated financial statements,
including the notes thereto, elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED(1)
-------- ---------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C>
LONG-TERM DEBT:
Federal Home Loan Bank of Atlanta ("FHLB") advances(2).... $10,000 $10,000
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued(1)............................. 0 0
Common Stock, $1.00 par value, 3,000,000 shares
authorized, 2,493,680 shares issued and outstanding;
40,000,000 shares authorized, 3,143,680 shares issued
and outstanding, as adjusted (1)(3).................... 2,494 3,144
Paid-in capital........................................... 3,287 17,298
Retained earnings (4)..................................... 16,737 16,737
------- -------
Total shareholders' equity............................. 22,518 37,179
------- -------
Total capitalization................................... $32,518 $47,179
======= =======
CAPITAL RATIOS:
Leverage.................................................. 7.02% 11.23%
Tier 1 risk-based......................................... 8.92 14.12
Total risk-based.......................................... 9.88 15.02
</TABLE>
- ---------------
(1) Gives effect to: (i) the sale by the Company of 650,000 shares of Common
Stock offered hereby at an assumed public offering price per share of $24.75
and the application of the net proceeds therefrom, after deducting the
underwriting discount and estimated offering expenses payable by the
Company; and (ii) the proposed amendment to the Company's Articles of
Incorporation to increase its authorized Common Stock to 40,000,000 shares
and to authorize 10,000,000 shares of Preferred Stock. See "Description of
Capital Stock."
(2) Includes only FHLB advances that mature in more than one year. A short-term
FHLB advance to the Bank of $5.0 million bears interest of 5.84% per annum
and matures in less than one year.
(3) Excludes 452,918 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding at December 31, 1997.
(4) Includes $196,000 in unrealized gains on Available for Sale securities.
11
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
concerning the Company and is qualified in its entirety by the detailed
information and consolidated financial statements, including notes thereto,
included elsewhere or incorporated by reference herein. The selected data
presented below for and as of the end of each of the years in the five-year
period ended December 31, 1997, are derived from the consolidated financial
statements of the Company, all of which have been audited by Cherry, Bekaert &
Holland, L.L.P., independent auditors. The financial statements as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997 are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income..................................... $ 21,017 $ 15,360 $ 13,383 $ 11,136 $ 11,633
Interest expense.................................... 10,056 6,762 6,133 4,495 4,886
Net interest income................................. 10,961 8,598 7,250 6,641 6,747
Provision for loan losses........................... 760 415 260 105 190
Net interest income after provision................. 10,201 8,183 6,990 6,536 6,557
Non-interest income................................. 1,354 1,252 1,236 927 1,206
Non-interest expense................................ 7,903(1) 6,004 5,190 5,333 4,788
Income before income taxes.......................... 3,652 3,431 3,036 2,130 2,975
Income tax expense.................................. 1,175 1,021 866 538 846
Net income.......................................... 2,477 2,410 2,170 1,592(2) 2,129
BALANCE SHEET DATA:
Assets.............................................. $325,151 $209,796 $177,897 $169,231 $153,541
Loans(3)............................................ 228,715 144,585 111,708 79,787 82,449
Allowance for loan losses........................... 2,331 1,638 1,258 1,052 1,174
Deposits............................................ 272,274 179,380 154,400 132,474 134,121
Other borrowings.................................... 28,720 8,650 3,152 21,130 2,591
Shareholders' equity................................ 22,518 20,386 18,982 14,920 16,153
PER COMMON SHARE DATA(4):
Net income, basic................................... $ 1.00 $ 0.98 $ 0.89 $ 0.65 $ 0.87
Net income, diluted(5).............................. 0.93 0.96 0.88 0.65 0.87
Cash dividends declared............................. 0.39 0.34 0.30 0.27 0.26
Book value.......................................... 9.03 8.29 7.78 6.12 6.61
Tangible book value................................. 8.74 7.98 7.78 6.12 6.61
OTHER DATA:
Branch offices...................................... 10 6 5 5 5
Full-time employees................................. 129 95 87 90 91
PERFORMANCE RATIOS:
Return on average assets............................ 0.96% 1.23% 1.27% 1.03% 1.42%
Return on average equity............................ 11.86 12.52 12.91 9.76 13.91
Net interest margin (taxable equivalent)............ 4.57 4.84 4.72 4.84 5.09
Dividend payout..................................... 39.00 35.17 33.92 41.30 29.55
Efficiency(6)....................................... 63.22 58.93 58.16 66.61 56.86
ASSET QUALITY RATIOS:
Allowance for loan losses to period end loans....... 1.02% 1.13% 1.13% 1.32% 1.42%
Allowance for loan losses to period end
non-performing loans(7)........................... 180 299 2,859 670 136
Net charge-offs to average loans.................... 0.04 0.03 0.06 0.28 0.21
Non-performing assets to period end loans and
foreclosed property(7)............................ 0.58 0.40 0.21 0.43 1.01
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets.................... 8.09% 9.85% 9.80% 10.55% 10.18%
Leverage............................................ 7.02 9.60 10.80 10.11 10.53
Tier 1 risk-based................................... 8.92 13.49 15.80 18.24 17.78
Total risk-based.................................... 9.88 15.10 16.70 19.39 19.03
Average loans to average deposits................... 84.17 76.37 65.64 60.23 64.92
Average loans to average deposits and borrowings.... 79.06 73.81 61.42 58.20 64.15
</TABLE>
- ----------
(1) Includes approximately $1.4 million of non-interest expense attributable to
the opening of four new branches in 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes: (i) a non-recurring expense of approximately $200,000 resulting
from an acquisition terminated by the Company; (ii) a write-down on
mortgages held for sale of approximately $214,000; and (iii) approximately
$129,000 associated with increased equipment expense.
(3) Loans exclusive of unearned income, before allowance for losses.
(4) Gives effect to the 1996 Stock Split and the 1997 Stock Splits.
(5) Assumes the exercise of outstanding options to acquire Common Stock. See
Note 13 to the Company's Consolidated Financial Statements.
(6) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income.
(7) Non-performing loans and non-performing assets include loans past due 90
days or more that are still accruing interest.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of the Company and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.
OVERVIEW
During 1997, management of the Company placed particular emphasis on the
Company's strategic financial objectives of balance sheet growth and improved
earnings performance. Efforts which had begun in 1995 to position the Company
for strong growth, both internally and through opportunistic expansion into
existing, new and contiguous markets, accelerated in 1997 with the openings of
the Wilmington, Greensboro, Ruffin and Madison branch offices.
In 1997, the Company aimed to manage balance sheet risk and reduce credit
risk while, at the same time, increase market share and geographic reach. The
Company's steady improvement in earnings performance occurred even though
significant costs were incurred to add experienced personnel and begin
fundamental improvements to the Company's systems, policies and procedures. In
1998, management expects to incur additional costs in these areas, but views
these costs as investments that will contribute to strengthening the Company's
financial performance, as well as support its growth objectives. See "Use of
Proceeds" and "Business -- Strategy."
RESULTS OF OPERATIONS
During 1997, the Company achieved record earnings despite simultaneously
incurring substantial expenses associated with entering new markets. Net income
was approximately $2.5 million, or $1.00 per share, compared to approximately
$2.4 million, or $0.98 per share, in 1996. This increase of 2.8% in net income
occurred despite (i) a 31.6% increase in non-interest expense from $6.0 million
to $7.9 million principally associated with the opening of four new locations
during 1997 and (ii) an increase in the provision for loan losses from $415,000
to $760,000 related to the growth in the loan portfolio. Of the increase in non-
interest expense, approximately $1.4 million was attributable to expenses
associated with opening the new branches. Net income in 1996 represented an
improvement of 11.1% over the prior year. Strong local economic conditions in
the Company's markets, robust loan demand and excellent asset quality experience
have been among the key factors driving the Company's performance.
The Company's primary source of income is net interest income, which is the
difference between (i) interest income and fees derived from earning assets
(primarily loans and investment securities) and (ii) the cost of funds
(primarily deposits and other borrowings) supporting them. Net interest income
represents the gross profit from the lending and investment activities of a
banking organization and is the most significant factor affecting the earnings
of the Company. Net interest income is affected by changes in interest rates,
volume and the mix of these various components. Net interest income on a fully
taxable equivalent basis was $11.1 million which represented a 24.7% increase
over the previous year. In 1996, taxable equivalent net interest income
increased to approximately $8.9 million from approximately $7.7 million in 1995,
an increase of 16.3%. Actual net interest income was 27.5% higher in 1997,
following an 18.6% improvement in 1996. The following table highlights these
areas.
13
<PAGE> 15
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
FULLY TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net..................... $185,829 $17,616 9.48% $129,150 $12,092 9.36% $ 94,692 $ 9,067 9.58%
Taxable investment
securities................... 47,669 2,800 5.87 42,214 2,480 5.87 50,859 3,222 6.34
Tax-exempt investment
securities................... 6,135 542 8.83 10,985 995 9.06 13,451 1,284 9.55
Other securities............... 884 63 7.13 756 52 6.88 950 67 7.05
Deposits with FHLB............. 849 47 5.54 485 26 5.36 219 13 5.94
Federal funds sold and
securities purchased under
agreements to resell......... 2,477 133 5.37 1,027 53 5.16 2,815 163 5.79
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning
assets.............. 243,843 21,201 8.69 184,617 15,698 8.50 162,986 13,816 8.48
NON-EARNING ASSETS:
Cash and due from banks........ 6,845 5,201 4,417
Premises and equipment......... 6,166 4,042 3,438
Other assets................... 3,302 2,953 1,752
Less: Allowance for loan
loss......................... (1,882) (1,440) (1,104)
-------- -------- --------
Total assets.......... $258,274 $195,373 $171,489
======== ======== ========
INTEREST BEARING LIABILITIES:
Savings and time deposits...... 195,311 9,287 4.75 148,400 6,449 4.35 125,523 5,508 4.39
Federal funds purchased,
borrowed funds and securities
sold under agreements to
repurchase................... 14,270 769 5.39 5,868 313 5.33 9,920 625 6.29
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing
liabilities......... 209,581 10,056 4.80 154,268 6,762 4.38 135,443 6,133 4.53
-------- -------- --------
OTHER LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits................ 25,474 20,721 18,733
Other liabilities.............. 2,329 1,131 503
Shareholders' equity........... 20,890 19,253 16,810
-------- -------- --------
Total liabilities and
shareholders'
equity.............. $258,274 $195,373 $171,489
======== ======== ========
Net interest income and net
yield on earning assets...... $11,145 4.57% $ 8,936 4.84% $ 7,683 4.72%
======= ==== ======= ==== ======= ====
Interest rate spread........... 3.89% 4.12% 3.95%
==== ==== ====
</TABLE>
Fueling the growth in net interest income in 1997 was a 43.9% increase in
average loans. Average loans outstanding during the year equaled $185.8 million
compared to $129.2 million in 1996, an increase of $56.6 million. This followed
a 36.4% increase in average loans outstanding in 1996. A more aggressive focus
on lending opportunities in the Company's established markets in Rockingham
County, together with the recruitment of experienced, locally-based senior
lenders in the Company's new markets, such as Wilmington and Greensboro, have
generated this loan growth. Also contributing to the increased loan demand has
been a relatively stable interest rate environment, as well as favorable
economic conditions both nationally and in the Company's lending markets. These
factors have resulted in increased economic activity evidenced by the higher
levels of new business formation, expansions by existing businesses and
significant levels of new residential and commercial real estate development.
The average yield on the Company's loan portfolio increased 12 basis points to
9.48% in 1997 compared to 9.36% in 1996. The 1996 average yield fell 22 basis
14
<PAGE> 16
points from 9.58% in 1995. The prime rate which had averaged 8.85% in 1995,
remained at 8.25% in 1996. In 1997, it increased 25 basis points to 8.50% in
March and remained there for the rest of the year. Approximately 62% of the
Company's loan portfolio floats with variable rate indices, such as the prime
rate. When interest rates rise, interest income on this segment of the portfolio
tends to increase. Conversely, interest income from loans generally declines if
interest rates fall and these variable rate loans reprice at lower rates.
Net interest income as a percentage of average earning assets declined 27
basis points in 1997, averaging 4.57% compared to 4.84% in 1996. In 1995, the
net yield on earning assets averaged 4.72%. The decline in 1997 was attributable
to a 42 basis point increase in the cost of interest bearing liabilities. The
average rate on interest bearing liabilities in 1997 was 4.80% compared to 4.38%
in 1996. Although the Company was able to increase average non-interest bearing
demand deposits to $25.5 million in 1997 from $20.7 million in 1996, an increase
of 22.9%, deposit growth was concentrated in the higher cost interest bearing
accounts, primarily certificates of deposit. Average savings and time deposits
in 1997 increased to $195.3 million from $148.4 million in 1996, an increase of
31.6%. Apart from the increase in the average yield on loans in 1997, changes in
the average yields on the other earning assets had a minimal impact on interest
income.
The preceding table summarizes net interest income and average yields and
rates paid for the years indicated on a taxable equivalent basis. The following
table presents the changes in interest income and interest expense attributable
to volume and rate changes between 1997 and 1996, and 1996 and 1995.
VOLUME AND RATE VARIANCE ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, net............ $5,303 $ 221 $5,524 $3,261 $(236) $3,025 $1,307 $ 447 $1,754
Taxable investment
securities.......... 320 0 320 (525) (216) (741) 40 331 371
Tax exempt investment
securities.......... (439) (14) (453) (154) (40) (194) 113 (117) (4)
Other earning
assets.............. 29 3 32 5 (7) (2) 0 13 13
Federal funds sold and
securities purchased
under agreement to
resell.............. 75 5 80 (98) (13) (111) 72 38 110
------ ----- ------ ------ ----- ------ ------ ------ ------
Total interest
income............ 5,288 215 5,503 2,489 (512) 1,977 1,532 712 2,244
------ ----- ------ ------ ----- ------ ------ ------ ------
INTEREST EXPENSE:
Savings and time
deposits............ 2,039 799 2,838 996 (56) 940 322 932 1,254
Federal funds
purchased, borrowed
funds and securities
sold under
agreements to
repurchase.......... 448 8 456 (236) (75) (311) 271 112 383
------ ----- ------ ------ ----- ------ ------ ------ ------
Total interest
expense........... 2,487 807 3,294 760 (131) 629 593 1,044 1,637
------ ----- ------ ------ ----- ------ ------ ------ ------
Inc/(dec) in net
interest income..... $2,801 $(592) $2,209 $1,729 $(381) $1,348 $ 939 $ (332) $ 607
====== ===== ====== ====== ===== ====== ====== ====== ======
</TABLE>
15
<PAGE> 17
NON-INTEREST INCOME AND EXPENSE
Non-interest income of $1.35 million in 1997 was $102,000, or 8.1%, more
than the prior year. Excluding securities gains for each year, non-interest
income increased $371,000, or 39.3%, in 1997 compared to 1996. In 1996,
non-interest income was relatively flat compared to 1995, having increased by
1.3%. Deposit service charges were 20.1% higher in 1997 due principally to
volume. Securities gains were $38,000 in 1997 compared to $307,000 in 1996.
During 1996, the Company restructured its investment portfolio to increase
liquidity and fund growth in loan demand. This presented opportunities to take
gains on the Available for Sale portion of its securities portfolio. While
mortgage lending remains a part of the Company's overall lending program, the
Company is not staffed, nor does it currently intend, to be an aggressive,
volume driven mortgage loan originator. This segment of the market is extremely
competitive and the Company competes with several large companies. The Company
offers a variety of mortgage products on a competitive basis in the markets in
which it operates and generally sells its fixed rate production in the secondary
market.
Non-interest expenses increased $1.9 million, or 31.6%, in 1997 to $7.9
million compared to $6.0 million in 1996. The Company also experienced a
significant increase of 15.7%, or $814,000, in these expenses in 1996 over 1995.
The underlying reason for these increases has been the additional investments,
particularly in adding experienced personnel, which were needed to position the
Company to manage its growth. Personnel costs rose $1.1 million, or 29.7%, in
1997 as the Company hired experienced, senior commercial lenders and branch
personnel to staff the four new locations that were opened in 1997. At December
31, 1997, the Company had approximately 129 full-time and 19 part-time employees
compared to 95 and nine, respectively at December 31, 1996. Also contributing to
the increase in personnel expense for both 1997 and 1996 were salary increases
for existing staff, increased funding for management incentive programs, higher
employment taxes and increased costs associated with the Company's benefit
programs. In 1997, the non-interest expenses associated with opening new
branches equalled approximately $1.4 million, comprised of approximately
$863,000 for personnel, $238,000 for occupancy and equipment and $320,000 for
other expenses.
Similar increases in occupancy and furniture and fixtures expenses occurred
in 1997. Occupancy expense rose $184,000, or 53.3%, in 1997 and furniture and
fixtures expense rose $163,000, or 35.1%. In 1996, the combined increase for
these same items was $89,000 or 12.3% more than 1995. Factors causing the 1997
increase include additional depreciation expense for premises and equipment,
lease expenses, utilities, and general operating expenses associated with the
new branches in Greensboro, Madison, Wilmington and Ruffin, as well as normal
increases in operating the Company's remaining branches. Occupancy and furniture
and fixtures expense in 1996 increased due principally to the addition of a new
main office facility in Eden and the acquisition of a branch in Eden from
another financial institution.
All other non-interest expenses of $2.0 million in 1997 represented an
increase of 30.2% over 1996 and were related to the additional offices opened,
with printing, stationery and supplies, postage, marketing and advertising,
telephone and travel all sharply higher. The efficiency ratio, which measures
non-interest expense as a percentage of net interest income plus non-interest
income, was 63.2% for 1997 versus 58.9% the previous year, with the increase
largely caused by the high level of non-interest expense in 1997.
FINANCIAL CONDITION
The Company's consolidated assets increased 55.0% and 17.9% during 1997 and
1996, respectively. Asset growth occurred primarily in loans and is directly
related to deposit growth, both at existing offices and through new branch
offices. During 1996, the Company completed a branch acquisition in a community
near Eden, North Carolina which included approximately $14.0 million in
deposits. This acquired growth, the internal growth generated with the Company's
existing markets and the anticipated increase in market share for the four new
1997 branches are expected to continue to produce positive results for the
Company.
The Company's commercial loan portfolio has grown significantly over the
past two years. Loans secured by real estate equaled $128.3 million, or 56.1% of
the loan portfolio at December 31, 1997, compared to $88.0 million, or 60.9%, at
December 31, 1996. The tables below provide a five year analysis of the loan
portfolio by major loan type. Management believes the Company is not dependent
on any single customer or group of
16
<PAGE> 18
customers concentrated in a particular industry, the loss of whose deposits or
whose insolvency would have a material adverse effect on operations.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE:
Commercial................ $ 51,022 22.3% $ 30,516 21.1% $ 27,208 24.4% $15,037 18.8% $13,611 16.5%
Residential............... 58,238 25.5 44,109 30.5 36,438 32.6 30,060 37.7 31,026 37.6
Construction and
development............. 19,083 8.3 13,407 9.3 4,531 4.1 681 0.9 1,927 2.4
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total real estate......... 128,343 56.1 88,032 60.9 68,177 61.1 45,778 57.4 46,564 56.5
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
COMMERCIAL, FINANCIAL AND
AGRICULTURAL............ 54,294 23.7 25,175 17.4 18,248 16.3 11,272 14.1 10,916 13.2
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
CONSUMER:
Direct.................... 23,237 10.2 16,766 11.6 15,247 13.6 12,619 15.8 15,130 18.4
Home equity............... 19,740 8.6 13,516 9.3 9,579 8.6 9,708 12.2 9,413 11.4
Revolving................. 3,101 1.4 1,096 0.8 457 0.4 410 0.5 426 0.5
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total consumer............ 46,078 20.2 31,378 21.7 25,283 22.6 22,737 28.5 24,969 30.3
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total............ $228,715 100.0% $144,585 100.0% $111,708 100.0% $79,787 100.0% $82,449 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
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....................... $26,340 $22,006 $ 5,948 $ 54,294 $ 7,689 $20,265
Real estate -- construction.......... 15,031 3,889 163 19,083 0 4,052
Real estate -- mortgage.............. 13,649 44,303 51,308 109,260 52,494 43,117
Consumer............................. 10,584 24,775 10,719 46,078 15,787 19,707
------- ------- ------- -------- ------- -------
$65,604 $94,973 $68,138 $228,715 $75,970 $87,141
======= ======= ======= ======== ======= =======
</TABLE>
The Company's entire securities portfolio has been categorized as Available
for Sale. While the Company has no plans to liquidate a significant amount of
any securities, the securities Available for Sale may be used for liquidity
purposes should management deem it to be in the best interests of the Company.
Due to declines in interest rates, and in order to maintain liquidity, the
majority of the securities purchased have been relatively short-term. United
States government agency securities continue to represent the majority of the
portfolio. At December 31, 1997, securities increased by $26.1 million, or
49.8%, over the prior year, ending the year at $78.7 million compared to $52.6
million at December 31, 1996. As a percentage of total assets, securities were
24.2% in 1997 compared to 25.1% in 1996.
17
<PAGE> 19
The following tables present the composition of the securities portfolio
for the last three years as well as information about cost, fair value and
weighted average yield.
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
--------- ------- -------- --------- ------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ 3,074 $ 3,092 5.98% $13,075 $13,076 5.32% $ 4,220 $ 4,226 5.98%
U.S. government agency...... 68,997 68,973 6.01 31,906 31,760 5.87 38,386 38,217 6.42
State and municipal
obligations(1)............ 4,953 5,281 9.11 6,693 7,093 9.45 13,064 13,993 9.84
Other....................... 1,392 1,392 7.08 643 643 6.93 1,059 1,059 7.06
------- ------- ---- ------- ------- ---- ------- ------- ----
Total investment
securities(1).... $78,416 $78,738 6.22 $52,317 $52,572 6.20 $56,729 $57,495 7.19
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------
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
------ ----- ------- ----- ------ ----- ------ ----- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ 0 -- $ 3,074 5.98% $ 0 -- $ 0 -- $ 3,074 5.98%
U.S. government agency...... 2,001 5.63% 64,979 6.02 2,017 5.89% 0 -- 68,997 6.01
State and municipal
obligations(1)............ 101 12.50 1,057 11.51 3,065 8.49 $ 730 7.85% 4,953 9.11
Other....................... 0 -- 0 -- 0 -- 1,392 7.08 1,392 7.08
------ ----- ------- ----- ------ ----- ------ ----- ------- -----
Total investment
securities(1).... $2,102 5.96 $69,110 6.10 $5,082 7.46 $2,122 7.34 $78,416 6.22
====== ======= ====== ====== =======
</TABLE>
- ---------------
(1) Yields stated on a tax equivalent basis.
As interest rates reflected a flattening of the yield curve during 1996,
customers shortened the terms of their deposits. This allows depositors to react
more quickly to rising interest rates. The marketplace for deposits is extremely
competitive from both traditional financial institutions, such as banks, as well
as other more non-traditional and less regulated financial intermediaries such
as brokerage houses and mutual funds. The Company seeks to attract and retain
retail customers through competitive products and quality service. In the
commercial area, management is focused on building long-lasting relationships
that will foster deposit growth. In addition, the Company offers a broad range
of products including a commercial sweep account. This funding source increased
to $9.6 million at December 31, 1997, up from $5.7 million at December 31, 1996.
Growth in retail deposits was marked by significant increases in
certificates of deposit, with maturities of one year or less up 73.7% to $139.6
million and maturities of more than one year up 72.1% to $48.4 million. Given
its customers' reluctance to lock into current rates for an extended period, the
Company has recently joined an electronic network which allows it to post
interest rates and attract deposits nationally. The Company's early competitive
focus has been in certificates of deposit with a maturity of one year or more,
to achieve a greater balance in its overall certificates of deposit portfolio.
Another funding source the Company employed during 1997 was the FHLB. The
Company has a $40.0 million line of credit and had drawn down $15.0 million at
December 31, 1997. Management believes that this is a cost effective and prudent
funding source as it is able to structure the borrowings to meet its asset and
liability, as well as liquidity, needs.
18
<PAGE> 20
ASSET QUALITY
Management considers the Company's asset quality to be of primary
importance. The allowance for loan losses, which is utilized to absorb actual
losses in the loan portfolio, is maintained at a level sufficient to provide for
estimated potential charge-offs of non-collectible loans. The loan portfolio is
analyzed periodically in an effort to identify potential problems before they
actually occur. The Company's allowance for loan losses is also analyzed
quarterly by management. This analysis includes a methodology that segments the
loan portfolio by selected loan types and considers the current status of the
portfolio, historical charge-off experience, current levels of delinquent,
impaired and non-performing loans, as well as economic and inherent risk
factors. The provision for loan losses represents a charge against income in an
amount necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
The following table depicts the allocation of the allowance for loan losses at
December 31, 1997, 1996, 1995, 1994, and 1993. The allocation is based on
management's grading of the loan portfolio with the remaining portion allocated
to the general category, although the entire allowance is available to be used
for write-offs in any category.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
$ CATEGORY $ CATEGORY $ CATEGORY $ CATEGORY $ CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT END OF PERIOD
APPLICABLE TO:
Commercial.................... $1,190 24% $ 826 17% $ 512 16% $ 546 14% $ 611 13%
Real estate -- construction... 8 8 13 9 9 4 0 1 1 2
Real estate -- mortgage....... 154 48 151 52 131 57 50 57 51 55
Consumer...................... 298 20 386 22 320 23 224 28 164 30
General....................... 681 0 262 0 286 0 232 0 347 0
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total allocation...... $2,331 100% $1,638 100% $1,258 100% $1,052 100% $1,174 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
The 1997 provision of $760,000 compares with $415,000 in 1996 and $260,000
in 1995, which represented an 83.1% increase in 1997 and a two year increase of
192.3%. The Company has continued to increase the dollar level of the reserve
due to the growth in loans despite the fact that asset quality indicators such
as net charge-offs and non-performing loans remain at very low levels. Net
charge-offs were $67,000 in 1997, or .04% of average loans outstanding, compared
with $35,000 in 1996 and $54,000 in 1995. The following table contains a five
year analysis of the allowance for loan losses including the amount of
charge-offs and recoveries by loan type. At December 31, 1997, the allowance for
loan losses as a percent of year-end loans was 1.02% compared to 1.13% at
year-end for both 1996 and 1995.
19
<PAGE> 21
SUMMARY OF ALLOWANCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period.................. $1,638 $1,258 $1,052 $1,174 $1,161
CHARGE-OFFS:
Commercial.................................... 16 0 0 0 28
Real estate -- construction................... 0 0 0 0 0
Real estate -- mortgage....................... 13 0 0 15 0
Consumer...................................... 131 89 128 332 214
------ ------ ------ ------ ------
160 89 128 347 242
RECOVERIES:
Commercial.................................... 10 0 2 52 5
Real estate -- construction................... 0 0 0 0 0
Real estate -- mortgage....................... 0 0 0 0 0
Consumer...................................... 83 54 72 68 60
------ ------ ------ ------ ------
93 54 74 120 65
Net charge-offs............................... 67 35 54 227 177
------ ------ ------ ------ ------
Provision charged to operations............... 760 415 260 105 190
------ ------ ------ ------ ------
Balance, end of period........................ $2,331 $1,638 $1,258 $1,052 $1,174
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans..... 0.04% 0.03% 0.06% 0.28% 0.21%
====== ====== ====== ====== ======
Ratio of allowance to year-end loans.......... 1.02% 1.13% 1.13% 1.32% 1.42%
====== ====== ====== ====== ======
</TABLE>
Non-performing assets include non-accrual loans, accruing loans
contractually past due 90 days or more, restructured loans, other real estate,
and other real estate under contract for sale. Loans are placed on non-accrual
when management has concerns relating to the ability to collect the loan
principal and interest, and generally when such loans are 90 days or more past
due. While non-performing assets represent potential losses to the Company,
management does not anticipate any aggregate material losses since most loans
are believed to be adequately secured. Management believes the allowance for
loan losses is sufficient to absorb known risks in the portfolio. No assurance
can be given that economic conditions will not adversely affect borrowers and
result in increased losses. The following table summarizes non-performing assets
by type for each of the last five years. Other than the amounts listed, there
were no other loans that (i) represent or result from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity or capital resources or (ii) represent material credits about
which management has information that causes them to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
SCHEDULE OF NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual(1)...................................... $1,263 $547 $ 44 $154 $634
Past due 90 days or more and still accruing
interest.......................................... 29 0 0 3 231
Other real estate................................... 31 48 192 191 240
Renegotiated troubled debt.......................... 0 0 0 0 243
</TABLE>
- ---------------
(1) If non-performing loans outstanding at December 31, 1997 had been performing
in accordance with their terms, $90,202 more in interest income would have
been recorded in 1997. Actual interest income recorded on such loans in 1997
was $30,022.
20
<PAGE> 22
CAPITAL RESOURCES
Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The OCC and the Federal Reserve, the primary
regulators for the Bank and the Company, respectively, have adopted minimum
capital regulations or guidelines that categorize components and the level of
risk associated with various types of assets. Financial institutions are
expected to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with the guidelines. As shown in the
following table, in 1996, the Company and the Bank both maintained capital
levels exceeding the minimum levels for "well capitalized" banks and bank
holding companies, and in 1997, for "adequately capitalized" banks and bank
holding companies. See "Capitalization" and "Business -- Supervision and
Regulation."
REGULATORY CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
Consolidated........................... $23,938 9.88% $21,868 15.10% $19,773 16.70%
Bank................................... 23,248 9.59 21,442 14.80 19,439 25.20
Tier 1 capital to risk weighted assets
Consolidated........................... 21,607 8.92 19,464 13.40 18,515 15.80
Bank................................... 20,917 8.63 19,039 13.10 18,180 23.60
Tier 1 capital to average assets
Consolidated........................... 21,607 7.02 19,464 9.60 18,515 10.80
Bank................................... 20,917 6.79 19,039 9.40 18,180 10.40
</TABLE>
INTEREST RATE SENSITIVITY AND LIQUIDITY MANAGEMENT
A primary objective of interest rate sensitivity management is to ensure
the stability and quality of the Company's primary earning component, net
interest income. This process involves monitoring the Company's balance sheet in
order to determine the potential impact that changes in the interest rate
environment would have on net interest income. Rate sensitive assets and
liabilities have interest rates which are subject to change within a specific
time period, due to either maturity or contractual agreements which allow the
instruments to reprice prior to maturity. Interest rate sensitivity management
seeks to ensure that both assets and liabilities react to changes in interest
rates within a similar time period, thereby minimizing the risk to net interest
income.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
TOTAL TOTAL OVER
1-90 DAYS 91-180 DAYS 181-365 DAYS ONE YEAR ONE YEAR TOTAL
--------- ----------- ------------ -------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net of non-accruals...... $134,281 $ 5,389 $ 15,104 $154,774 $ 72,679 $227,452
Taxable investment securities... 5,750 7,000 12,365 25,115 46,957 72,072
Tax exempt investment
securities.................... 0 100 0 100 4,853 4,953
Other investment securities..... 1,392 0 0 1,392 0 1,392
Due from FHLB................... 242 0 0 242 0 242
Federal funds sold.............. 0 0 0 0 0 0
-------- --------- -------- -------- -------- --------
Total interest earning
assets.............. 141,665 12,489 27,469 181,623 124,489 306,111
-------- --------- -------- -------- -------- --------
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
TOTAL TOTAL OVER
1-90 DAYS 91-180 DAYS 181-365 DAYS ONE YEAR ONE YEAR TOTAL
--------- ----------- ------------ -------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING LIABILITIES:
Savings/NOW/MMI................. 10,555 0 0 10,555 42,218 52,773
Other time deposits............. 57,483 28,661 57,281 143,425 44,612 188,037
Overnight borrowings............ 13,720 0 0 13,720 0 13,720
Other borrowings................ 0 0 5,000 5,000 10,000 15,000
-------- --------- -------- -------- -------- --------
Total interest bearing
liabilities......... 81,758 28,661 62,281 172,700 96,830 269,530
-------- --------- -------- -------- -------- --------
Interest sensitivity gap........ $ 59,907 $ (16,172) $(34,812) $ 8,923
======== ========= ======== ========
Ratio of interest sensitive
assets to interest sensitive
liabilities................... 1.73 0.44 0.44 1.05
</TABLE>
The measurement of the Company's interest rate sensitivity, or "gap," is a
technique traditionally used in asset/liability management. The interest
sensitivity gap is the difference between repricing assets and repricing
liabilities for a particular time period. The preceding table indicates a ratio
of rate sensitive assets to rate sensitive liabilities within one year at
December 31, 1997 of 105%. This ratio indicates that net interest income would
decline in a falling interest rate environment, since a greater amount of assets
than liabilities would reprice more rapidly over the one year period. Included
in rate sensitive liabilities are certain deposit accounts (savings, NOW and
MMI) that are subject to immediate withdrawal and repricing, yet have no stated
maturity. These balances are presented in the category that management believes
best identifies their actual repricing patterns. This analysis assumes 20% of
these deposits reprice within one year and the remaining 80% reprice after one
year. The schedule also includes $36.5 million of securities which are callable
within the one year sensitivity time period. While these securities have
contractual maturities beyond one year, management believes these securities
will be called on the specified dates based upon the difference in the coupon
rate of the securities and the current level of interest rates. Furthermore, the
overall risk to net interest income is further mitigated by the Company's
increased level of variable rate loans. These are loans with a contractual
interest rate tied to an index, such as the prime rate. A portion of these loans
may reprice on multiple occasions during a one year period due to changes in the
underlying rate index. Approximately 62% of the total loan portfolio have
variable rates, and reprice in accordance with the underlying rate index subject
to terms of individual note agreements.
In addition to the traditional gap analysis, the Company also utilizes a
computer based interest rate risk simulation model. This comprehensive model
includes rate sensitivity gap analysis, rate shock net interest margin analysis,
and asset/liability term and rate analysis. The Company uses this model to
monitor interest rate risk on a quarterly basis and to detect trends that may
affect the overall net interest income for the Company. This simulation
incorporates the dynamics of balance sheet and interest rate changes and
reflects the related effect on net interest income. As a result, this analysis
more accurately projects the risk to net interest income over the upcoming
twelve month period. The Company has a policy establishing the maximum allowable
risk to net interest income caused by changes in interest rates. The modeling
results indicate that the Company is within the established parameters of the
interest rate risk policy.
Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawals, loan funding, and general corporate
activity create a need for liquidity for the Company. Liquidity is derived from
sources such as deposit growth, maturity/calls/sales of investment securities,
principal and interest payment on loans, access to borrowed funds or lines of
credit, and profits.
The Company's primary source of funds has been derived from increased
deposit and sweep account balances. Liquidity is further enhanced by a $40.0
million line of credit with the FHLB collateralized by FHLB stock and qualifying
one to four family residential mortgage loans. There are unsecured overnight
borrowing lines available through several financial institutions. The Company
also has the ability to access the
22
<PAGE> 24
certificate of deposit market on a national basis. Access to this market will
complement local market activity and focus on longer term deposits. The Company
is able to survey and monitor interest rates in both the local and national
deposit markets, which assists in developing rational pricing for all deposit
products. Internal liquidity analysis indicates the Company is well positioned
to fund earning assets in the twelve month period analyzed.
Interest rate risk management and liquidity management are both a part of
the Company's overall asset/ liability management process. The primary oversight
of asset/liability management rests with the Company's Asset and Liability
Committee, which is comprised of senior management and members of the Bank's
Board of Directors. The committee meets on a regular basis to review the asset
liability management activities of the Company and monitor compliance with
established policies. A member of the Board of Directors chairs the committee
and reports on its activities to the full Board.
OTHER MATTERS
On November 13, 1997, the Company and the OCC entered into the MOU under
which the Company agreed to take certain actions to improve its infrastructure,
primarily necessitated by its rapid growth. In February 1998, the OCC informed
the Company that no further action was being requested and the Company believes
that it is in compliance with the MOU. See "Risk Factors -- Memorandum of
Understanding," "Business -- Supervision and Regulation" and Note 17 to the
Company's Consolidated Financial Statements.
A critical issue affecting companies that rely extensively on electronic
data processing systems, such as the Company, is the Year 2000 issue. This issue
deals with the Company's ability to process year-date data accurately beyond the
year 1999. The Year 2000 issue has been a well publicized, but nevertheless
continually evolving issue. The Company is dependent upon electronic data
processing for nearly all of its major activities. During 1997, the Company
formed an internal task force chaired by the Senior Vice President, Operations
to address the Year 2000 issue, conduct a comprehensive review of the Company's
systems and ensure that the Company takes any necessary measures. See "Risk
Factors -- Year 2000 Compliance."
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," which establishes standards for computing and presenting earnings
per share. This new accounting standard applies to entities with publicly held
common stock or potential common stock, such as the Company. SFAS No. 128
simplifies the standards for computing earnings per share previously found in
other accounting standards, requires dual presentation of basic and diluted
earnings per share on the face of the income statement for entities with complex
capital structures such as the Company, and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation. The
Company adopted this new accounting standard at December 31, 1997 and restated
all prior period earnings per share data presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Company's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.
23
<PAGE> 25
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pension and other post-retirement benefit plans. The statement
does not change the measurement or recognition of those plans, but requires
additional information on changes in benefits obligations and fair values of
plan assets, and eliminates certain disclosures previously required by SFAS Nos.
87, 88 and 106. This statement is effective for fiscal years beginning after
December 15, 1997.
EFFECTS OF INFLATION
Inflation affects financial institutions in ways that are different from
most commercial and industrial companies, which have significant investments in
fixed assets and inventories. The effect of inflation on interest rates can
materially impact bank operations, which rely on net interest margins as a major
source of earnings. Non-interest expenses, such as salaries and wages, occupancy
and equipment cost are also negatively impacted by inflation.
24
<PAGE> 26
BUSINESS
GENERAL
FNB Financial Services Corporation (the "Company") is a North Carolina bank
holding company with total assets of $325.2 million, deposits of $272.3 million
and shareholders' equity of $22.5 million, each as of December 31, 1997. The
Company's wholly-owned subsidiary, First National Bank Southeast (the "Bank"),
was chartered in 1918. Historically, the Bank has served the Rockingham County
area of North Carolina through three branches in Reidsville and two in Eden,
North Carolina. In 1995, the Company initiated a strategic growth plan beginning
with the hiring of a new chief executive officer. By the end of 1997, the Bank
increased its number of branches from five to ten by closing a branch in Eden
and opening new branches in the Rockingham County towns of Eden, Ruffin and
Madison and in the new markets of Greensboro and Wilmington, North Carolina. As
a result of this strategy, between 1995 and 1997, the Company's net interest
income, loans and deposits each increased at compound annual growth rates of
23.0%, 43.1% and 32.8%, respectively.
The Bank is community oriented and focuses primarily on offering
commercial, real estate and consumer loans, and deposit and other financial
services to individuals, small to medium-sized businesses and other
organizations in its market areas. The Bank emphasizes its individualized
services and community involvement, while at the same time providing its
customers with the financial sophistication and array of products typically
offered by a larger bank. Management believes that the Bank can compete
successfully with larger banks located within and outside of North Carolina by
retaining its personalized approach and community focus.
Under the leadership of Ernest J. Sewell, who became President and Chief
Executive Officer in January 1995, the Company adopted the following three-part
strategy: (i) increase market share and geographic reach through opportunistic
acquisitions in markets where the mix of economic, operational, cultural and
other factors are favorable; (ii) position the Company to manage its planned
growth by adding experienced personnel and upgrading its internal systems and
procedures; and (iii) generate internal growth at its existing banking offices
by offering new and complementary services and products. To accomplish these
objectives, during the past three years the Company has: (i) increased the
number of its branch offices to ten by opening new offices in Eden, Ruffin,
Madison, Greensboro and Wilmington; (ii) expanded by approximately 48% the
number of its full-time personnel by adding 42 new employees, including four new
vice presidents and four new senior vice presidents; (iii) initiated a
systematic review and revision of its loan administration, loan policy and
credit procedures; and (iv) enhanced its mix of products and services by
broadening the scope of its commercial lending activities, updating and
extending its ATM terminals and network and establishing a department to provide
credit and debit cards to its customers.
The Company plans to continue to pursue these objectives by strengthening
its presence in existing markets and opportunistically reaching into new markets
in North Carolina, Virginia and South Carolina. The Company will seek to hire
qualified personnel to help manage its planned growth and to develop new
products that are uniquely consistent with the Company's service orientation.
The Company also plans, where appropriate, to upgrade its systems and procedures
and refine its ability to offer customers sophisticated services without
sacrificing its personalized approach.
STRATEGY
Expand Banking Operations. Throughout most of its 80-year history, the
Company's banking activities were centered in Reidsville, North Carolina,
located in Rockingham County in the north central part of the State. Beginning
in 1995, however, the Company initiated a growth strategy to further penetrate
markets in which it has an existing market share and expand into and develop new
and contiguous markets, such as Wilmington and Greensboro. Management selects
its target markets based on a number of factors, including market size and
growth potential, banking relationships developed by members of management
during their careers and the ability to integrate the targeted market into the
Company's unique, community oriented culture.
25
<PAGE> 27
The Company's expansion strategy, both within and outside of its existing
markets, involves three key elements: (i) install high quality, well trained
management to serve the market; (ii) ascertain that the market is underserved by
financial institutions whose primary focus is to cater to the individualized
needs of customers; and (iii) find reasonably priced facilities. Management
believes that it has been successful in implementing these strategic elements in
its expansion program to date.
In 1997, the Bank opened new branches in Wilmington, Greensboro, Ruffin and
Madison, North Carolina. The Wilmington branch represented the Company's first
foray outside of the north central part of North Carolina and at December 31,
1997, after ten months of operations, held deposits and loans totaling $35.3
million and $59.5 million, respectively. A major factor contributing to this
growth was the ability of existing loan officers to capitalize on prior
relationships. The Greensboro, Ruffin and Madison branches expand the Bank's
services in the Triad -- Rockingham County area. Ruffin and Madison are each
located in Rockingham County, and Greensboro is in Guilford County, just south
of Rockingham County. At December 31, 1997, after less than a full year in
operation, the aggregate deposits and loans at these three branches were $39.4
million and $23.5 million, respectively. These figures do not necessarily
represent the rate of loan and deposit growth that may be achieved at these
branch locations in the future.
Seize Market Expansion Opportunities. The Company intends to capitalize on
opportunities to enter new and contiguous markets which it believes are
underserved as a result of banking consolidation and in which the Company's
community oriented philosophy and culture would flourish. The Company believes
that there is value to be added by providing the opportunity for greater
personalized banking relationships than exist with larger commercial banks in
its markets, although the Company also recognizes the need to carefully analyze
markets that are already well served by numerous institutions. The Company will
continue to distinguish itself by emphasizing high quality, sophisticated
services in a hometown environment.
Establish a Platform for Future Growth. The Company seeks to position
itself to manage its future expected growth in two fundamental ways: (i)
attract, retain and reward experienced personnel who are committed both to
conducting business in a friendly and personable manner and to the communities
in which they work and live; and (ii) continue a program to upgrade, modify and
expand its internal systems, procedures, equipment and software designed to
improve marketing and operating efficiencies. The Company will also continue to
analyze technological developments in the banking industry for opportunities to
improve or augment its services and products, although management will endeavor
to maintain the Company's personalized approach even as pressures to succumb to
technological advances mount.
Maintain a Friendly Environment for Employees and Customers. The Company
has instituted various programs to instill high morale among its employees which
the Company believes translates into exceptional customer service. For example,
in the "Tell on Your Buddy" program, employees are encouraged to share with
senior managers good ideas and thoughts put into practice by fellow employees
and, in the process, make themselves eligible for a significant reward. The
Company also holds lively weekly sales meetings to elicit ideas about products
and services to emphasize. The Company believes that the overall effect of these
programs is to improve morale, customer service and financial performance.
26
<PAGE> 28
MARKET AREAS
For operational purposes, the Company groups its markets into two regions,
the Triad region and the Wilmington region. The Company's deposit market share
in Reidsville as of June 30, 1997, the most recent date for which data are
available, was 32.6%, which ranked first among banks, credit unions and thrift
institutions, and in all of Rockingham County equaled 20.5% as of the same date,
which ranked first. The following table summarizes the banking offices, deposits
and market share for the Company's offices, categorized by city.
<TABLE>
<CAPTION>
DEPOSITS AT DECEMBER 31,
------------------------
REGION/CITY 1997 1996
- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
TRIAD REGION:
Reidsville(1)............................................... $152,221 $145,377
Eden(1)..................................................... 45,305 34,003
Madison..................................................... 14,611 Not open
Ruffin...................................................... 5,014 Not open
Greensboro.................................................. 19,822 Not open
-------- --------
Subtotal.......................................... 236,973 179,380
-------- --------
WILMINGTON REGION:
Wilmington.................................................. 35,301 Not open
-------- --------
Total............................................. $272,274 $179,380
======== ========
</TABLE>
- ---------------
(1) Includes three banking offices.
The following is a summary description of the Triad and Wilmington market
areas.
Triad -- Rockingham County. Rockingham County was formed in 1785 and is
located in the north central area of North Carolina. It has a land area of 568
square miles and a population of 87,672. Surrounding counties are Guilford to
the south, Caswell to the east and Stokes County to the west. The county is
bordered on the north by the Commonwealth of Virginia. Piedmont Triad
International Airport is located 20 miles away and Norfolk Southern has two rail
connection lines in the county. The county, which consists of several community
oriented towns, provides a full range of municipal services and extends
financial support to certain boards, agencies, and commissions to assist its
efforts to serve its citizens. Rockingham County's economy remained strong
through 1996 (the most recent year for which data are available) with average
unemployment of 4.6%. During 1996 industrial and commercial activity for
Rockingham County created $47.0 million in new investments that created 343
jobs.
Triad -- Greensboro. Greensboro has a diverse economy attributable to a
blend of trade, manufacturing and service businesses. Local industry is
characterized by the production of a wide range of products, including textiles,
apparel, tobacco, machinery and electronics equipment. The area has access to
major domestic and international markets from Interstate Highways 40 and 85 and
the Piedmont Triad International Airport. Entrepreneur magazine recently ranked
the Triad area as fourth in a list of the top 20 cities in which to establish a
small business. According to the U.S. Department of Commerce, the Triad area
recorded export sales of $3.6 billion in 1996 and is ranked 37th nationally in
that category.
Wilmington. Wilmington is the county seat and the industrial center of New
Hanover County and its recent rate of growth has been topped by only one other
city in North Carolina. The total population of New Hanover County is
approximately 125,000 and it is served by Interstate Highway 40 and U.S.
Highways 17 and 74. The area is serviced by national and regional airlines
through facilities at the New Hanover International Airport in New Hanover
County. The New Hanover County area has experienced extensive industrial
development and service/trade sector growth over the past 20 years. The
Wilmington area industries produce fiber optic cables for the communications
industry, aircraft engine parts, pharmaceuticals, nuclear fuel components and
various textile products. The New Hanover County area economy has become broadly
27
<PAGE> 29
diversified and has developed into a major resort area, a busy sea port (one of
North Carolina's only two deep water ports), a light manufacturing center, a
chemical manufacturing center and the distribution hub of southeastern North
Carolina.
LENDING ACTIVITIES
General. The Bank offers a broad array of lending services, including real
estate, commercial and consumer loans, to individuals and small to medium-sized
businesses and other organizations that are located in or conduct a substantial
portion of their business in the Bank's market areas. The Bank's total loans at
December 31, 1997 were $228.7 million, or 74.3% of total earning assets. The
Bank also makes secured construction loans to home builders and residential
mortgagees, which are often secured by first and second real estate mortgages.
At December 31, 1997, the Bank had no large loan concentrations (exceeding ten
percent of its portfolio) in any particular industry.
Loan Composition. The following table sets forth, at the dates indicated,
the composition of the Bank's loan portfolio and the related percentage
composition.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE:
Commercial.................................. $ 51,022 22.3% $ 30,516 21.1% $ 27,208 24.4%
Residential................................. 58,238 25.5 44,109 30.5 36,438 32.6
Construction and development................ 19,083 8.3 13,407 9.3 4,531 4.1
-------- ----- -------- ----- -------- -----
Total real estate................. 128,343 56.1 88,032 60.9 68,177 61.1
-------- ----- -------- ----- -------- -----
COMMERCIAL, FINANCIAL AND AGRICULTURAL...... 54,294 23.7 25,175 17.4 18,248 16.3
-------- ----- -------- ----- -------- -----
CONSUMER:
Direct...................................... 23,237 10.2 16,766 11.6 15,247 13.6
Home equity................................. 19,740 8.6 13,516 9.3 9,579 8.6
Revolving................................... 3,101 1.4 1,096 0.8 457 0.4
-------- ----- -------- ----- -------- -----
Total consumer.................... 46,078 20.2 31,378 21.7 25,283 22.6
-------- ----- -------- ----- -------- -----
Total............................. $228,715 100.0% $144,585 100.0% $111,708 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Real Estate Loans. Loans secured by real estate for a variety of purposes
constituted $128.3 million, or 56.1%, of the Bank's total loans at December 31,
1997. The Bank held at December 31, 1997 real estate loans of various sizes
ranging up to $2.9 million, secured by office buildings, retail establishments,
warehouses, motels, restaurants and other types of property. Loan terms are
typically limited to five years, although the installment payments may be
structured generally on a 15-year amortization basis. Interest rates may be
fixed or adjustable, based on market conditions, and the Bank generally charges
an origination fee. Management has attempted to reduce credit risk in the real
estate portfolio by emphasizing loans on owner occupied office and retail
buildings where the loan to value ratio, established by independent appraisals,
does not exceed 80% and net project cash flow available for debt service equals
120% of the debt service requirement. The Bank also often requires personal
guarantees of the principal owners of the property and obtains personal
financial statements of the principal owners in such cases. The Bank experienced
no net loan losses on commercial real estate loans during 1997 and 1996.
The Bank originates residential loans for its portfolio on single and
multi-family properties, both owner occupied and non-owner occupied, and at
December 31, 1997 it held $58.2 million of such loans. Loan terms are typically
limited to five years, with payments through the date of maturity generally
based on a 15 or 30 year amortization schedule. Rates may be fixed or variable,
and the Bank typically charges an origination fee. The Bank attempts to minimize
credit risk by requiring a loan to value ratio of 80% or less. The Bank has
experienced minimal loan losses on residential real estate over the past ten
years.
28
<PAGE> 30
The Bank also originates residential loans for sale into the secondary
market. Through its mortgage banking division, the Bank originates both fixed
and variable rate residential mortgage loans for sale with servicing released.
The Bank is able to generate loan origination fees, typically ranging from 1.0%
to 1.5% of the loan balance which are recognized in income when the loan is
sold. During 1997 and 1996, the Bank earned loan origination fees of $81,000 and
$32,000, respectively. At December 31, 1997, the Bank held none of such loans
for sale, and during 1997 the Bank sold an aggregate of $5.6 million of such
loans. The Bank sells these loans on a non-recourse basis.
The Bank's current strategy is for the majority of construction and
development loans on commercial and residential projects to be in the range of
$0.3 million to $2.5 million, not to exceed $2.5 million. At December 31, 1997
and 1996, the Bank held $19.1 million and $13.4 million, respectively, of such
loans. To reduce credit risk associated with such loans, the Bank limits its
lending to projects involving small commercial centers that have strong anchor
tenants and are otherwise substantially pre-leased, or residential projects that
are either presold or are being built by the proposed occupant. The leases on
commercial projects must generally result in a loan to capitalized lease value
of no greater than 75% and a net cash flow to debt service ratio of at least
120%. The Bank historically has required a personal guarantee from the developer
or builder. Loan terms are typically 12 to 15 months on a commercial project and
nine months on a residential project, although the Bank occasionally will make a
"mini-permanent" loan for purposes of construction and development up to a three
to five year term. Rates are typically variable and the Bank typically charges
an origination fee. During 1997 and 1996, the Bank experienced no net loan
losses on these types of loans.
Commercial Loans. The Bank makes loans for commercial purposes in various
lines of businesses. At December 31, 1997, the Bank held $54.3 million of
commercial loans, or 23.7% of its total loan portfolio. Equipment loans are
typically made on terms up to five years at fixed or variable rates, with the
financed equipment pledged as collateral to the Bank. The Bank attempts to
reduce its credit risk on these loans by limiting the loan to value ratio to
80%. Working capital loans are made on terms typically not exceeding one year.
These loans may be secured or unsecured, but the Bank attempts to limit its
credit risk by requiring the borrower to demonstrate the capacity to produce net
cash flow available for debt service of 125% to 150% of debt service
requirements. During 1997, the Bank experienced net loan losses on commercial
loans of $6,000 and in 1996 had no such net loan losses.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans originated directly by the Bank, home equity revolving lines of
credit, and unsecured revolving lines of credit. The home equity loans and
certain of the direct loans are secured by the borrower's residence, but the
Bank attempts to underwrite the credit independent of the collateral value. At
December 31, 1997, the Bank held $43.8 million of consumer loans, including home
equity revolving lines of credit. During 1997 and 1996, respectively, the Bank
experienced net consumer loan losses of $29,000 and $35,000.
Credit Card Loans. In 1996, the Bank began offering credit card loans to
individuals and businesses who meet the Bank's underwriting standards with
respect to income, credit rating, established residence and employment. Credit
card loans are subject to seasonal fluctuations based on consumer spending
habits, with the outstanding balances of such loans rising at the end of each
calendar year. At December 31, 1997, credit card loans equaled approximately
$2.3 million, or approximately 1.0% of the Bank's total loan portfolio. Net
losses on credit card loans equaled $19,000 in 1997 and $0 in 1996.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the aggregate outstanding
loans to a single borrower exceeds that individual officer's lending authority,
the loan request must be considered and approved by an officer with a higher
lending limit. Branch loan officers typically have lending limits up to
$100,000; loans in excess of that limit must be approved by the city executive.
If the lending request exceeds the city executive's lending limit, which is
$500,000, the loan must be submitted to and approved by the appropriate senior
credit officer. The senior credit officer has authority to approve a loan up to
$750,000. All loans in excess of $750,000 must be approved by the President and
Chief Executive Officer, who may approve loans of up to $2.5 million.
29
<PAGE> 31
The Bank has a continuous loan review procedure involving multiple officers
of the Bank which is designed to promote early identification of credit quality
problems through its credit management committee. All loan officers are charged
with the responsibility of reviewing no less than annually all credit
relationships in excess of $100,000 in their respective portfolios. All new
relationships, that is, those not more than 60 days old, in excess of $100,000
are reviewed by a credit management committee comprised of loan officers and
senior management every two weeks. Loan officers also review all criticized and
classified assets in their portfolio quarterly with the senior loan officers of
the Bank. The officers are responsible for implementing, where appropriate,
approved action plans with respect to such criticized and classified assets
designed to improve the Bank's credit position for an early resolution of the
problem loan. As part of its overall strategy to improve policies and
procedures, the Bank has also engaged a third party consultant to review its
loan portfolio, the first examination of which is expected to occur in 1998.
The Bank's credit review system supplements the Bank's loan rating system,
pursuant to which the Bank may place the loan on its criticized asset list or
may classify the loan in one of various other classification categories. A
specified minimum percentage of loans in each adverse asset classification
category, based on the historical loss experience in the Bank in each such
category, is used to determine the adequacy of the Bank's allowance for loan and
lease losses quarterly. These credits are also individually reviewed by senior
credit officers of the Bank to determine whether a greater allowance allocation
is justified due to the facts and circumstances of a particular adversely
classified loan. For more information on the Bank's allowance for loan and lease
losses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Outsourcing of Certain Operational Functions. The Company has agreements
with third parties to provide a variety of specialized functions to the Bank in
connection with its lending operations. In each of these relationships, the Bank
benefits from the service provider's expertise and economies of scale while
retaining the flexibility to take advantage of changes in available technology
without impacting customer service.
DEPOSITS
The Bank offers a variety of deposit programs to individuals and to small
and medium-sized businesses and other organizations at interest rates generally
competitive with local market conditions. The following table sets forth the mix
of depository accounts at the Bank as a percentage of total deposits at the
dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Non-interest bearing demand................................. 11.6% 12.2% 12.5%
Savings/NOW/MMI............................................. 19.4 27.3 28.8
Certificates of deposits.................................... 69.0 60.5 58.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The Bank accepts deposits at its ten banking offices, eight of which have
automated teller machines. The Bank's memberships in the "HONOR", "CIRRUS" and
"PLUS" networks allow customers access to their depository accounts from
regional ATM facilities. The Bank charges a fee of $1.50 per transaction for the
use of its ATM facilities by those who are not depositors with the Bank. The
Bank also operates two free-standing ATM's. See "Properties." The Bank controls
deposit flows primarily through the pricing of such deposits and to a certain
extent through promotional activities, such as its "Prestige" and "Priority"
accounts for deposits of $25,000 and $75,000, respectively, and the "FNB Club"
which extends special privileges and sponsors group excursions to sites and
performances of interest to account holders over the age of 55. The Bank also
offers as a convenience to come to a customer's home or place of business to
pick-up a non-cash deposit the customer wishes to make. At December 31, 1997,
the Bank had $59.7 million in certificates of deposit of $100,000 or more. In
January 1998, the Bank joined an electronic network which allows it to post
interest rates and attract certificates of deposit nationally. The investors are
generally credit unions or commercial banks (no brokers
30
<PAGE> 32
funds are accepted) and amounts are typically just under $100,000, to assure
FDIC insurance coverage. Deposit rates are set weekly by senior management of
the Bank. Management believes that the rates it offers are competitive with
those offered by other institutions in the Bank's market areas.
INVESTMENT SERVICES
The Bank offers the services of an investment advisor employed by American
Express Financial Advisors who splits his time among seven of the Bank's
branches and is available to depositors, as well as those who are not account
holders in the Bank. This advisor offers mutual fund services, tax and estate
planning and other financial services and the Bank receives a commission based
on the advisor's sales. The Bank benefits by attracting customers to its
branches who may not otherwise have reason to transact business there and by
earning additional fees. In 1997, the Bank earned fees in the amount of $23,000
from commissions generated from these services.
MARKETING
The Bank currently markets its services through advertising campaigns and
in printed material, such as newspapers, magazines and direct mailings, as well
as through promotional items, such as caps, pens, pencils and shirts. The Bank's
officers are also heavily involved in local civic affairs and philanthropic
organizations in order to focus customers on products and services on a personal
level. The Bank occasionally sponsors community events and holds grand opening
ceremonies for its new branches to which local dignitaries are invited to speak
and participate in the festivities. Since the Company does not have a
fully-staffed marketing department, the Bank's marketing, advertising and public
relations campaigns focus on the following two components:
- Value. Among other things, the Bank offers attractive rates for its
financial products, including its certificates of deposit and checking
accounts. This pricing structure has been successful in attracting
depositors who are motivated by the Bank's rates, as well as by the
variety of individualized services the Bank promotes and offers.
- Convenience and Service. All personnel of the Bank aim toward serving
the individual needs of the Bank's customers. For example, senior
personnel are accessible on very short notice, even after normal banking
hours, by way of pagers and other means. In addition, all employees are
eligible to earn incentive compensation for sales and cross-sales to
customers.
Management intends to continue to market the Bank's services through a
combination of advertising campaigns, public relations activities and local
affiliations. In most of its markets, the Bank has established advisory boards,
comprised of local community leaders, to promote the Bank. While the key
messages of value, convenience, service and reliability will continue to play a
major role in the Bank's marketing and public relations efforts, management may
also focus on targeted groups, such as professionals, in addition to small to
medium-sized local businesses.
A vital part of the Bank's marketing plan is the execution of a public
relations strategy. Many traditional public relations methods will be used in
promoting Bank services. Management intends to pursue media coverage, including
general press, industry periodicals and other media covering banking and
finance, consumer issues and special interests. Press releases, quarterly
shareholder reports, media alerts and presentations will announce new banking
services as they are added.
COMPETITION
Commercial banking in North Carolina is extremely competitive, due in large
part to statewide branching. Currently, many of the Bank's competitors are
significantly larger and have greater resources than the Bank. The Bank
continues to encounter significant competition from a number of sources,
including bank holding companies, commercial banks, thrift institutions, credit
unions, and other financial institutions and financial intermediaries. Among
commercial banks, the Bank competes in its market areas with some of the largest
banking organizations in the State, several of which have as many as 200 to 300
branches in North Carolina. Competition with the Bank is not limited to
financial institutions based in North Carolina. The
31
<PAGE> 33
enactment of federal legislation authorizing nationwide interstate banking has
greatly increased the size and financial resources of some of the Bank's
competitors. Consequently, many of the Bank's competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers, such as trust services that the Bank does
not offer. As a result of the interstate banking legislation, the Bank's market
is open to future penetration by banks located in other states provided the
other state allows acquisitions of its banking institutions by North Carolina
banking institutions, thereby increasing competition. To date, there is
interstate branching among banks in North Carolina, Virginia, South Carolina and
Tennessee.
The management of the Bank believes banks compete in the following areas:
convenience of location, interest rates for deposits and loans, types of
accounts and services offered, and quality of the personnel providing services.
In its early years, the Bank sought to attract depositors and borrowers
primarily through offering competitive interest rates for both loans and
deposits. More recently, the Bank has determined to compete primarily through
the quality of its services, experience of its personnel and community oriented
approach. The Bank also relies on the personal contacts of its officers and
directors to attract depositors and borrowers in its target market of small to
medium-sized businesses. In addition to its central Board of Directors, the Bank
has established local advisory boards in most of the communities served to
promote contacts in the business communities.
PROPERTIES
The Company leases or owns ten banking offices, as shown in the following
table:
<TABLE>
<CAPTION>
LOCATION OWNED OR LEASED ATM(1) YEAR OPENED/PURCHASED
- -------- --------------------- ------ ---------------------
<S> <C> <C> <C>
202 South Main Street
Reidsville, North Carolina.......... Owned(2) X 1918(3)
1646 Freeway Drive
Reidsville, North Carolina.......... Owned X 1972
202 Turner Drive
Reidsville, North Carolina.......... Owned X 1989
203 East Meadow Road
Eden, North Carolina................ Leased (expires 2001) X 1987
801 South Van Buren Road
Eden, North Carolina................ Owned(4) X 1996
151 North Fieldcrest Road
Eden, North Carolina................ Leased (expires 2008) 1996
605 North Highway Street
Madison, North Carolina............. Owned X 1997
9570 U.S. 29 Business
Ruffin, North Carolina.............. Leased (expires 2004) 1997
2132 New Garden Road
Greensboro, North Carolina.......... Owned X 1997
704 South College Road
Wilmington, North Carolina.......... Leased (expires 2002) X 1997
</TABLE>
- ---------------
(1) Two additional remote ATM's are located in Reidsville, North Carolina
pursuant to leases that expire in 1998 and 2001, respectively. Each of the
ATM's situated at a banking office is a drive-up ATM.
(2) Consists of 27,000 square feet in a two story building and includes the
Company's executive offices.
(3) Original office opened in different location in 1918. Current office opened
in 1980.
(4) Serves as the main banking office in Eden. In 1996, the Bank also closed an
office located in Eden upon the expiration of the lease for such office.
32
<PAGE> 34
EMPLOYEES
As of December 31, 1997, the Company had approximately 129 full-time and 19
part-time employees. None of the employees of the Company are represented by any
collective bargaining unit. The Company considers its relations with its
employees to be good.
LEGAL PROCEEDINGS
In the ordinary course of operations, the Company is a party to various
legal proceedings. In the opinion of management, there is no proceeding pending,
or to the knowledge of management threatened, in which an adverse decision could
result in a material adverse change in the business or results of operations of
the Company.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to the supervision,
examination and reporting requirements contained in the Bank Holding Company Act
of 1956 (the "BHCA") and the regulations of the Federal Reserve. The Company's
subsidiary is organized as a national banking association and is subject to the
supervision, examination and reporting requirements of the OCC. The following
discussion sets forth certain of the material elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to the Company. This regulatory
framework is intended primarily for the protection of depositors and the federal
deposit insurance funds and not for the protection of security holders. To the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. A change in applicable statutes,
regulations or regulatory policy may have a material effect on the business of
the Company.
General. As a bank holding company, the Company is subject to the
supervision, examination and reporting requirements contained in the BHCA and
the regulations of the Federal Reserve. The Bank is organized as a national
banking association and is subject to the supervision, examination and reporting
requirements of the OCC.
Under the BHCA, bank holding companies may not directly or indirectly
acquire the ownership or control of more than five percent of the voting shares
or substantially all of the assets of any company, including a bank, without the
prior approval of, or a waiver of the requirement for such approval by, the
Board of Governors of the Federal Reserve.
In addition, the Company's activities, and those of companies which it
controls or in which it holds more than five percent of the voting stock, are
limited to banking or managing or controlling banks or furnishing services to or
performing services for its subsidiaries, or any other activity which the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the Federal Reserve must consider whether
the performance of such an activity can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. For example, banking, operating a thrift
institution, acquiring or servicing loans, leasing personal property, conducting
discount securities brokerage activities, performing certain data processing
services, acting as agent or broker in selling credit life insurance and certain
other types of insurance in connection with credit transactions and certain
insurance underwriting activities have all been determined by the Federal
Reserve to be permissible activities.
The Federal Reserve has the authority to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law
and to take certain remedial action. In particular, the Federal Reserve has the
power to order a holding company or its subsidiaries to terminate any activity
or terminate its ownership or control of any subsidiary, despite prior approval
of such activity or such ownership or control, when it has reasonable cause to
believe that continuation of such activity or such ownership or control
33
<PAGE> 35
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that bank holding company.
The Company is also subject to the North Carolina Bank Holding Company Act
of 1984 ("NCBHCA"). This statute prohibits bank holding companies from acquiring
or controlling certain non-bank banking institutions (for example, institutions
which accept deposits but do not make commercial loans) which have offices in
North Carolina. As required by the NCBHCA, the Company, by virtue of its
ownership of the Bank, has registered as a bank holding company with the
Commissioner of Banks of the State of North Carolina.
The earnings of the Company are affected by the legislative and
governmental actions of various regulatory authorities, including the Federal
Reserve Board, the OCC and the FDIC. In addition, there are numerous
governmental requirements and regulations that affect the activities of the
Company.
On November 13, 1997, the Company and the OCC entered into the MOU. The
MOU, which was signed by all of the Company's directors, arose out of the OCC's
regular examination of the Company in 1997. The actions that the OCC requested
the Company to take were, generally, in the nature of improving the Company's
internal procedures and policies, such as revising its written loan policy,
developing a program to strengthen its loan administration and taking steps to
increase its liquidity commensurate with its past, and expected future, growth.
Following the Company's implementation of the recommendations set forth in the
MOU, in February 1998 the OCC informed the Company that no further action was
being requested and the Company believes that it is in compliance with the
provisions of the MOU. See "Risk Factors -- Memorandum of Understanding,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 17 to the Company's Consolidated Financial Statements.
Payment of Dividends. The Company is a legal entity separate and distinct
from the Bank. A major portion of the Company's revenues result from amounts
paid as dividends to the Company by the Bank. The prior approval of the OCC is
required for the payment of any dividend by a national bank if the total of all
dividends declared by the board of directors of such bank in any calendar year
will exceed the sum of such bank's net profits for that year and its retained
net profits for the preceding two calendar years, less any required transfers to
surplus. Furthermore, unless and until a bank's surplus fund is equal to its
common capital, no dividend may be declared until the bank has carried to its
surplus fund not less than one-tenth of its net profits for the preceding
half-year (in the case of quarterly or semiannual dividends), or at least
one-tenth of its net profits for the preceding two consecutive half-years (in
the case of annual dividends). Federal law also prohibits any national bank from
paying dividends which would be greater than such bank's undivided profits after
deducting statutory bad debt in excess of such bank's allowance for loan losses.
Under the foregoing dividend restrictions, as of December 31, 1997, the
Bank, without obtaining affirmative governmental approvals, could pay aggregate
dividends of $4.9 million to the Company.
In addition, the Company and the Bank are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal regulatory authority has the power to determine, under
certain circumstances relating to the financial condition of a national bank or
bank holding company, that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The OCC (the appropriate
agency with respect to the Bank) has indicated that paying dividends that
deplete a bank's capital base to an inadequate level would be an unsound and
unsafe banking practice. The OCC, the FDIC and the Federal Reserve have each
indicated that banking organizations should generally pay dividends only out of
current operating earnings.
Borrowings. There are also various legal restrictions on the extent to
which the Company can borrow or otherwise obtain credit from the Bank. In
general, these restrictions require that any such extensions of credit must be
secured by designated amounts of specified collateral and are limited, as to the
Company, to ten percent of the Bank's capital stock and surplus.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's stockholders, pro
34
<PAGE> 36
rata and, to the extent necessary, if any such assessment is not paid by any
stockholder after three months notice, to sell the stock of such stockholder to
make good the deficiency.
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength to the Bank and to commit resources to support such
subsidiary. This support may be required at times when, absent such Federal
Reserve policy, the Company may not find itself willing or able to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy. The Federal Reserve, the FDIC and the OCC have adopted
substantially similar risk-based and leverage capital guidelines for United
States banking organizations. Under these risk-based capital standards, the
minimum consolidated ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least half of the total capital is to be composed of common stockholders'
equity, retained earnings, a limited amount of qualifying perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill and certain intangibles ("Tier I Capital" and,
together with Tier 2 Capital, "Total Capital"). The remainder of Total Capital
may consist of mandatory convertible debt securities and a limited amount of
subordinated debt, qualifying preferred stock and loan loss allowance ("Tier 2
Capital"). At December 31, 1997, the Company's Tier I and Total Capital ratios
were 8.92% and 9.88%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier I Capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent. The
Company's Leverage Ratio at December 31, 1997, was 7.02%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier I Leverage Ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The Federal
Reserve has not advised the Company of any specific minimum Leverage Ratio or
tangible Tier I Leverage Ratio applicable to it.
The Bank is subject to similar capital requirements adopted by the OCC or
the FDIC. The Bank had a Leverage Ratio of 6.79% as of December 31, 1997. The
federal banking agencies have not advised the Bank of any specific minimum
Leverage Ratio applicable to it.
Prompt Corrective Action. The Federal Deposit Insurance Act, as amended
(the "FDIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. The FDIA establishes five capital tiers:
"well capitalized"; "adequately capitalized"; "undercapitalized"; "significantly
undercapitalized"; and "critically undercapitalized". A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation.
The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to FDIC-insured
banks. The relevant capital measures are the Total Capital Ratio, Tier I Capital
Ratio and the Leverage Ratio. Under the regulations, a FDIC-insured bank will be
(i) "well capitalized" if it has a Total Capital Ratio of ten percent or
greater, a Tier I Capital Ratio of six percent or greater and a Leverage Ratio
of five percent or greater and is not subject to any order or written directive
by the OCC to meet and maintain a specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a Total Capital Ratio of eight
percent or greater, a Tier I Capital Ratio of four percent or greater and a
Leverage Ratio of four percent or greater (three percent in certain
circumstances) and is not
35
<PAGE> 37
"well capitalized"; (iii) "undercapitalized" if it has a Total Capital Ratio of
less than eight percent, a Tier I Capital Ratio of less than four percent or a
Leverage Ratio of less than four percent (three percent in certain
circumstances); (iv) "significantly undercapitalized" if it has a Total Capital
Ratio of less than six percent, a Tier I Capital Ratio of less than three
percent or a Leverage Ratio of less than three percent; and (v) "critically
undercapitalized" if its tangible equity is equal to or less than two percent of
average quarterly tangible assets. An institution may be downgraded to, or
deemed to be in, a capital category that is lower than is indicated by its
capital ratios if it is determined to be in an unsafe or unsound condition or if
it receives an unsatisfactory examination rating with respect to certain
matters. As of December 31, 1997, the Company's subsidiary bank had capital
levels that qualifies it as being "adequately capitalized" under such
regulations.
The FDIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized." "Undercapitalized" depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of: (i) an amount equal to five percent
of the depository institution's total assets at the time it became
"undercapitalized"; and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If a depository institution fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" insured depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator. A bank that is not "well capitalized" is subject
to certain limitations relating to so-called "brokered" deposits.
Depositor Preference Statute. Under federal law, deposits and certain
claims for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the "liquidation or other resolution" of such an institution by any
receiver.
Interstate Banking and Branching Legislation. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "IBBEA") permits interstate
acquisitions of banks and bank holding companies without geographic limitation,
subject to any state requirement that the bank has been organized for a minimum
period of time, not to exceed five years, and the requirement that the bank
holding company, prior to, or following the proposed acquisition, controls no
more than ten percent of the total amount of deposits of insured depository
institutions in the U.S. and no more than 30% of such deposits in any state (or
such lesser or greater amount set by state law).
In addition, the IBBEA permits a bank to merge with a bank in another state
as long as neither of the states has opted out of interstate branching prior to
May 31, 1997. The state of North Carolina has "opted in" to such legislation,
effective June 22, 1995. In addition, a bank may establish and operate a de novo
branch in a state in which the bank does not maintain a branch if that state
expressly permits de novo interstate branching. As a result of North Carolina's
opt-in law, North Carolina law permits unrestricted interstate de novo
branching.
FDIC Insurance Assessments. Effective January 1, 1996, the FDIC reduced
the insurance premiums it currently charges on bank deposits insured by the Bank
Insurance Fund ("BIF") to the statutory minimum of $2,000 for "well capitalized"
banks.
Effects of Governmental Policies. The earnings and business of the Company
and the Bank are and will be affected by the policies of various regulatory
authorities of the United States, especially the Federal
36
<PAGE> 38
Reserve. The Federal Reserve, among other things, regulates the supply of credit
and deals with general economic conditions within the United States. The
instruments of monetary policy employed by the Federal Reserve for those
purposes influence in various ways the overall level of investments, loans,
other extensions of credit and deposits, and the interest rates paid on
liabilities and received on assets.
37
<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Willard B. Apple, Jr................... 67 Chairman of the Board of Directors of
the Company and the Bank
Elton H. Trent, Jr.(1)................. 65 Vice Chairman of the Board of Directors
of the Company and the Bank
Ernest J. Sewell....................... 57 President, Chief Executive Officer and
Director of the Company and the Bank
Charles A. Britt(1)(2)................. 48 Director of the Company and the Bank
Barry Z. Dodson(2)..................... 49 Director of the Company and the Bank
O. Eddie Green(2)...................... 63 Director of the Company and the Bank
Joseph H. Kinnarney(1)................. 44 Director of the Company and the Bank
Clifton G. Payne....................... 66 Director of the Company and the Bank
Kenan C. Wright(1)(2).................. 45 Director of the Company and the Bank
Robert F. Albright..................... 61 Senior Vice President, Secretary and
Chief Financial Officer of the Company
and the Bank and Treasurer of the
Company
Richard L. Powell...................... 46 Senior Vice President, Support Services
of the Company and the Bank and
Assistant Secretary of the Company
Howard E. Campbell..................... 51 Senior Vice President of the Bank
C. Melvin Gantt........................ 60 Senior Vice President, Area Manager, of
the Bank
Deborah S. Pryor....................... 45 Senior Vice President, Operations, of
the Bank
Arnold F. Robertson.................... 54 Senior Vice President, Sales Manager
and Marketing, of the Bank
Kenneth B. Yates....................... 40 Senior Vice President, Loan
Administration and Loan Review, of the
Bank
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Willard B. Apple, Jr., a former mayor of Reidsville, North Carolina, has
been Chairman of the Board of Directors of the Company and the Bank since 1993.
He also served as President and Chief Executive Officer of the Company from its
incorporation in 1984 until 1993 and the Bank from 1969 until 1993. Mr. Apple
also acted as interim Chief Executive Officer of the Company and the Bank from
August 1994 to January 1995. Mr. Apple is a former member of the Board of
Directors of the Federal Reserve Bank of Richmond and is a Life Member of the
Reidsville Jaycees. He has also served and currently serves on the boards of
various charitable and civic organizations located in the Rockingham County
area.
Elton H. Trent, Jr. joined the Board of Directors of the Bank in 1969 and
has been the Vice Chairman of the Board of Directors of the Bank since 1984 and
the Company since 1994. Mr. Trent is a former councilman of the City of
Reidsville and is now retired.
Ernest J. Sewell is the President, Chief Executive Officer and a Director
of the Company and the Bank. He assumed his current position on January 26, 1995
after the resignation of Willard B. Apple, Jr. from those positions on that
date. Prior to joining the Company and the Bank, Mr. Sewell served as Senior
Vice President of Branch Banking and Trust Company, with 26 years of previous
banking experience. Mr. Sewell is a member of the Board of Trustees of Annie
Penn Memorial Hospital, Reidsville, North Carolina, and is Chairman of its
38
<PAGE> 40
Investment Committee. He also serves on the boards of various charitable
organizations and is Vice Chairman of the Rockingham County Airport Authority.
Charles A. Britt joined the Board of Directors of the Company and the Bank
in 1986 and has been the owner of Carolina Apothecary, Inc. since January 1993.
Mr. Britt has a degree in pharmacy, which he earned in 1972 from the University
of North Carolina.
Barry Z. Dodson joined the Board of Directors of the Company and the Bank
in 1997 and is a self-employed Certified Public Accountant. He is the owner of
Barry Dodson CPA, an accounting firm with offices located in Madison and
Reidsville, North Carolina.
O. Eddie Green joined the Board of Directors of the Bank in 1970 and the
Board of Directors of the Company in 1984 and has been the Division Manager of
Chandler Concrete Co., Inc., providers of ready-mixed concrete located in
Reidsville, North Carolina, since 1991. Mr. Green obtained his degree in Civil
Engineering from N.C. State University in 1956.
Joseph H. Kinnarney joined the Board of Directors of the Company and the
Board of Directors of the Bank in 1988 and has been the President of Reidsville
Veterinary Hospital, Inc. since 1988. In 1976, Mr. Kinnarney earned a Masters
degree from the University of Kentucky in Animal Science and a Doctorate of
Veterinary Medicine from Cornell University in 1980.
Clifton G. Payne joined the Board of Directors of the Bank in 1976 and the
Board of Directors of the Company in 1984 and has been retired from the practice
of medicine since 1991. Dr. Payne earned his M.D. degree from the University of
North Carolina in 1956.
Kenan C. Wright joined the Board of Directors of the Company and the Board
of Directors of the Bank in 1990 and has been the President of The Wright Co. of
N.C. Inc., a general contractor located in Eden, North Carolina, since 1990.
Robert F. Albright joined the Bank in 1980 as Vice President with 23 years
of prior banking experience, and was elected Senior Vice President and Secretary
of the Company and the Bank in 1985.
Richard L. Powell joined the Bank in 1986 as Assistant Vice President and
was promoted to Vice President in 1988 and to Senior Vice President in 1993.
Howard E. Campbell joined the Bank in November 1997 as a Senior Vice
President. From 1986 to 1995, Mr. Campbell was a Vice President at Branch
Banking and Trust Company, when he became a partner in North State Financial
Management Corp., an investment advisory firm. He was with The Fidelity Bank,
headquartered in Fuquay-Varina, North Carolina as a Vice President during
September and October 1997.
C. Melvin Gantt joined the Bank in 1968, was promoted to Assistant Vice
President in 1975, to Vice President in 1978 and to Senior Vice President in
1987.
Deborah S. Pryor joined the Bank in 1971, was promoted to Assistant Vice
President in 1988, to Vice President in 1991 and to Senior Vice President in
1995.
Arnold F. Robertson joined the Bank in 1969, was promoted to Assistant Vice
President in 1975, to Vice President in 1980 and to Senior Vice President in
1988.
Kenneth B. Yates joined the Bank in 1982 as General Auditor, was promoted
to Vice President in 1988 and to Senior Vice President in 1995.
The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible, Class I, Class II and Class III. Each year
the shareholders elect the members of one of the three classes to a three year
term of office. Messrs. Apple, Green and Payne serve in the class whose term
expires in 1998; Messrs. Lambeth, Kinnarney, Trent and Wright serve in the class
whose term expires in 1999; and Messrs. Sewell, Britt and Dodson serve in the
class whose term expires in 2000. Mr. Lambeth reached the Company's mandatory
retirement age of 70 on December 20, 1997, and, accordingly, was unable to serve
his full term and has retired. Accordingly, Mr. Lambeth's retirement has created
a vacancy on the Board which, in addition to a vacancy created by a previous
retirement of another director, the Company does not currently
39
<PAGE> 41
plan to fill. A majority of the directors then in office are permitted to fill a
vacancy resulting from a retirement at any time and assign the new director to
any class as long as the members in each class are as close in number as
possible. The terms of Messrs. Apple, Green and Payne will expire at the 1998
annual meeting of shareholders; accordingly, they have been nominated to serve
new three-year terms ending in 2001 and such nominations will be submitted to
the Company's shareholders for approval at the 1998 annual meeting of
shareholders.
The Company has an Audit Committee and a Compensation Committee, but does
not have a standing Nominating Committee. The members of the Audit Committee are
Messrs. Green, Britt, Dodson and Wright. The Audit Committee reviews the reports
and oversees the actions of the Internal Audit Department. The Audit Committee
also reviews recommendations from the independent auditor. The members of the
Compensation Committee are Messrs. Britt, Kinnarney, Trent, Jr. and Wright. The
Compensation Committee reviews and recommends executive salary and benefit
programs.
40
<PAGE> 42
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding shares of the
Company's Common Stock held beneficially as of February 1, 1998, and as adjusted
to reflect the offering, (i) by each director and (ii) by all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
persons or entities listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent such
power may be shared with a spouse. There are no known holders of more than five
percent of the Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
---------------------------- ----------------------------
PERCENT OF PERCENT OF
NAME SHARES OWNED(2) CLASS SHARES OWNED(2) CLASS
- ---- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Willard B. Apple, Jr.(3)..................... 29,313 1.2% 29,313 *
Elton H. Trent, Jr.(4)....................... 50,056 2.0 50,056 1.6%
Ernest J. Sewell(5).......................... 41,789 1.7 41,789 1.3%
Charles A. Britt(6).......................... 16,850 * 16,850 *
Barry Z. Dodson(7)........................... 6,578 * 6,578 *
O. Eddie Green(8)............................ 31,209 1.2 31,209 1.0%
Joseph H. Kinnarney.......................... 16,978 * 16,978 *
Clifton G. Payne(9).......................... 61,328 2.5 61,328 1.9%
Kenan C. Wright.............................. 9,700 * 9,700 *
All directors and executive officers as a
group (16 persons)......................... 335,638 12.7 335,638 10.7%
</TABLE>
- ---------------
* Less than one percent
(1) Based upon 2,497,681 shares of Common Stock outstanding on February 1, 1998,
and 3,147,681 shares of Common Stock outstanding immediately after the
offering. The securities "beneficially owned" by an individual are
determined in accordance with the definition of "beneficial ownership" set
forth in the regulations of the Securities and Exchange Commission (the
"Commission"). Accordingly, they may include securities owned by or for,
among others, the spouse and/or minor children of the individual and any
other relative who has the same home as such individual, as well as other
securities as to which the individual has or shares voting or investment
power or has the right to acquire under outstanding stock options within 60
days of February 1, 1998. Beneficial ownership may be disclaimed as to
certain of the securities.
(2) Each director who is not an officer of the Company (other than Willard B.
Apple, Jr. and Barry Z. Dodson) has the right to acquire 5,726 shares of
Common Stock under presently exercisable stock options. Mr. Apple has the
right to acquire 20,290 shares. Mr. Dodson has the right to acquire 1,111
shares. All directors and executive officers as a group have the right to
acquire 140,224 shares of Common Stock under stock options exercisable
currently or within 60 days of February 1, 1998. These shares are shown as
beneficially owned.
(3) Includes 221 shares owned by spouse.
(4) Includes 120 shares owned by spouse.
(5) Includes 3,133 shares owned by spouse.
(6) Includes 332 shares owned by spouse.
(7) Includes 3,619 shares owned by spouse and children.
(8) Includes 3,650 shares owned by spouse and child.
(9) Includes 345 shares owned by spouse.
41
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's Amended and
Restated Articles of Incorporation (the "Articles") and the Company's Bylaws, as
amended (the "Bylaws") does not purport to be complete and is qualified in its
entirety by reference to such instruments.
At the Company's 1998 Annual Meeting of Shareholders scheduled to be held
on April 14, 1998, the shareholders of the Company will vote on a proposal
recommended by the Company's Board of Directors to amend the Articles to
increase the aggregate number of shares of Common Stock which the Company is
authorized to issue from 3,000,000 shares to 40,000,000 shares and to authorize
the issuance of up to 10,000,000 shares of Preferred Stock. Since, without such
amendment the Company would not have a sufficient number of authorized shares to
issue in this offering, such approval is a necessary condition to consummate the
offering. Accordingly, the description below assumes that the amendment to the
Articles has been approved by the shareholders of the Company and has been filed
with the Secretary of State of the State of North Carolina. Voting on the
proposed amendment is scheduled to occur prior to effectiveness of the
Registration Statement of which this Prospectus is a part.
AUTHORIZED CAPITAL
The Company is currently authorized to issue 3,000,000 shares of Common
Stock of which, as of February 1, 1998, 2,497,681 shares were issued and
outstanding and held of record by 772 persons, and 488,701 shares were reserved
for issuance under the Company's various equity compensation plans.
Upon the filing of the amendment to the Articles, which will occur just
prior to the effectiveness of this offering, the Company will be authorized to
issue 40,000,000 shares of Common Stock, and there will be 3,147,681 shares of
Common Stock issued and outstanding and 618,701 shares reserved for issuance
under the Company's various equity compensation plans.
Each shareholder is entitled to one vote per share of Common Stock on all
matters submitted to a vote of shareholders and is not entitled to cumulate
voting rights in the election of directors. Each share of Common Stock is
entitled to share equally in dividends from sources legally available therefor
when, as, and if declared by the Board of Directors. Upon liquidation or
dissolution of the Company, whether voluntary or involuntary, each share of
Common Stock is entitled to share equally in the assets of the Company available
for distribution to the shareholders of the Company's Common Stock. No
conversion rights, or redemption or sinking fund provisions, are applicable to
the Common Stock. The holders of Common Stock do not have any preemptive right
to purchase any stock or other securities of the Company. The Board of Directors
is authorized to issue without shareholder action additional shares of Common
Stock within the limits authorized by the Articles. All outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be, upon
issuance, validly issued, fully paid and non-assessable.
In addition, upon the filing of the amendment to the Articles, which will
occur just prior to the effectiveness of this offering, the Company will be
authorized to issue up to 10,000,000 shares of Preferred Stock. The shares of
Preferred Stock could be issued by the Company without shareholder approval from
time to time in one or more classes or series. The Board of Directors is
authorized to determine and fix the characteristics or features of the shares of
each such class or series, including without limitation: the designation of each
class or series; the number of shares of each class or series; the dividend rate
or amount, if any; the dates at which dividends, if declared, would be payable,
and the dates from which dividends would be cumulative, if at all; the
redemption price or prices or the terms and conditions of redemption, if any;
the amounts payable and the priorities of shares, if any, upon liquidation,
dissolution, or winding up of the Company; the rights and preferences, if any,
over or otherwise in relation to other classes or series of capital stock of the
Company and among classes and series of Preferred Stock as to dividends and
amounts payable upon liquidation, dissolution or winding up of the Company; the
conversion and exchange rights, if any; voting rights, if any, the number of
votes per share, and the number of votes, if any, in excess of a majority
required for specified corporate action; and any other preferences, relative
rights, or limitations that may be determined by the Board of Directors.
42
<PAGE> 44
The existence of the additional authorized shares of Common Stock and the
authorization of Preferred Stock could have the effect of discouraging
unsolicited takeover attempts. Such shares could be issued to a purchaser who
might cooperate with the Board of Directors in opposing an attempt by a third
party to gain control of the Company. The Board of Directors could issue shares
of Preferred Stock that may, depending on the terms of the class or series as
determined by the Board, make more difficult or discourage an attempt to obtain
control of the Company through a merger, tender offer, proxy contest or other
means. Such a provision may have an adverse impact on a shareholder who may want
to participate in certain transactions which are opposed by the Board of
Directors and may benefit management.
CERTAIN ARTICLES AND BYLAW PROVISIONS HAVING POTENTIAL ANTI-TAKEOVER EFFECTS
General. A number of provisions of the Articles and Bylaws address matters
of corporate governance and the rights of shareholders. The following summary of
such provisions is not intended to be complete and is qualified in all respects
by the Articles and Bylaws. Certain of these provisions may delay or prevent
takeover attempts not first approved by the Board of Directors (including
takeovers which certain shareholders may deem to be in their best interests.)
These provisions also could delay or frustrate the removal of incumbent
directors or the assumption of control by shareholders. In addition, certain of
the laws applicable to the Company may have the effect of preventing,
discouraging or delaying a change in control in the Company. All references to
the Articles are to the Company's Articles in effect as of the date of this
Prospectus.
Classification of the Board of Directors. The Articles provide that the
Board of Directors of the Company is divided into three classes, Class I, 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 shareholders following the annual meeting at which the director was elected.
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. As a result of the
classification of the Board of Directors, approximately one-third of the members
of the Board of Directors will be elected each year, and, two annual meetings
will be required for the Company's shareholders to change a majority of the
members constituting the Board of Directors.
Removal of Directors; Filling Vacancies. The Bylaws provide that (i) the
shareholders may remove one or more of the directors with or without cause; (ii)
a director may be removed by the shareholders only if the number of votes cast
for the removal exceeds the number of votes cast against the removal; and (iii)
a director may not be removed by the shareholders at a meeting unless the notice
of the meeting states that the purpose, or one of the purposes, of the meeting
is removal of the director. In addition, vacancies occurring in the Board of
Directors may be filled by a majority of the remaining directors, even though
less than a quorum, or by the sole remaining director; but a vacancy created by
an increase in the authorized number of directors shall be filled only by
election at an annual meeting or at a special meeting of the shareholders called
for that purpose. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors.
Amendment of Bylaws. Subject to certain restrictions described below,
either a majority of the Board of Directors or the shareholders of the Company
may amend the Bylaws. A majority of the Board of Directors may amend the Bylaws
and adopt new Bylaws except that the Board of Directors has no power to adopt a
bylaw: (i) requiring more than a majority of the voting shares for a quorum at a
meeting of shareholders or more than a majority of the votes cast to constitute
action by the shareholders, except where higher percentages are required by law;
(ii) providing for the management of the Company otherwise than by the Board of
Directors or its Executive or other committees; (iii) increasing or decreasing
the number of directors authorized by the Bylaws; or (iv) classifying and
staggering the election of directors. In addition, a bylaw adopted or amended by
the shareholders may not be altered or repealed by the Board of Directors.
Generally, the shareholders of the Company may adopt, amend, or repeal the
Bylaws in accordance with the North Carolina General Statutes.
Preferred Stock. The issuance of shares of Preferred Stock with special
voting rights, liquidation preferences, redemption privileges or conversion
rights could delay, defer or prevent a change in control of the Company. The
Company has no present intention to issue any Preferred Stock.
43
<PAGE> 45
Supermajority Vote Requirement. The Articles generally provide that the
Company cannot 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 Company, unless such
consolidation, merger, conveyance or disposition is approved (a) by the
affirmative vote of not less than 75% of the aggregate voting power of the
outstanding stock entitled to vote thereon, and (b) by the affirmative vote of
not less than 75% of the aggregate voting power of the outstanding stock
entitled to vote thereon, which shall include the affirmative vote of at least
50% of the voting power of the outstanding stock of shareholders entitled to
vote thereon, other than Controlling Shareholders (as defined below), (i) if the
shareholder entitled to vote thereon is a person who, including affiliates of
such person, is the beneficial owner (as defined in the Securities Exchange Act
of 1934, as amended and the rules thereunder) of more than 20% of the voting
power of the Company (a "Controlling Shareholder"), and (ii) if, prior to the
acquisition of 20% of the voting power of the Company by a shareholder, the
Board of Directors of the Company had not unanimously approved such
consolidation, merger, conveyance or disposition. For purposes of determining
whether a person is a Controlling Shareholder, shares held, voted, or otherwise
controlled by a person as a trustee, plan administrator, officer of the Company,
or otherwise pursuant to an employee benefit plan of the Company or of an
affiliate of the Company shall not be deemed to be beneficially owned by such
person. When there is a Controlling Shareholder, this super-majority rule
requirement can be amended only by the affirmative vote of the voting power of
the Company then required to approve a consolidation, merger, conveyance or
disposition.
In addition, the North Carolina Shareholder Protection Act (the
"Shareholder Protection Act"), which is applicable to the Company, is designed
to prevent the abuses that sometimes occur during hostile takeovers. The
Shareholder Protection Act generally requires that, unless certain "fair price"
and procedural requirements are satisfied, the affirmative vote of the holders
of 95% of the outstanding shares of the Company's Common Stock (excluding shares
owned by an "Interested Shareholder") is required to approve certain business
combination transactions with another entity that is the beneficial owner of
more than 20% of the Company's voting shares or which is an affiliate of the
Company and previously has been a 20% beneficial owner.
In order to satisfy the "fair price" provisions, the price paid for any
shares in the second phase of an acquisition must be at least equal to the
highest of: (i) the highest per share price ever paid by anyone who is a part of
the acquiror; (ii) a price that exceeds the market price when the second phase
of the acquisition is announced by the same percentage as the highest price paid
by the acquiror exceeds the market price immediately before the acquisition
began; or (iii) a price computed by multiplying the Company's annual earnings
per share by the price/earnings multiple, if any, of the acquiror.
In addition, the procedural provisions require that: (i) the Company's
Board of Directors must maintain representation by continuing directors
proportionate to shares held by persons unaffiliated with the acquiror; (ii)
there must be no reduction in dividends except as approved by a unanimous vote
of directors; (iii) the acquiror must not acquire any additional shares of the
Company after the transaction in which it acquired its 20% interest; (iv) the
acquiror must not receive the benefit, directly or indirectly, except
proportionately with other shareholders, of any loans, advances, guarantees, or
financial assistance from the Company prior to consumption of the business
transaction; (v) the acquiror must not, prior to consummation of the business
transaction, make a major change in the Company's business or equity capital
structure unless by unanimous vote of the directors; and (vi) the acquiror must
distribute to the shareholders a proxy statement responsive to the requirements
of applicable federal securities laws, which must contain any recommendations by
the continuing directors and can include a fairness opinion from an independent
investment banking firm regarding the transaction.
The cumulative effect of the "supermajority" provision in the Articles
together with the Shareholder Protection Act combine to make it more difficult
to effect a merger, tender offer or proxy contest involving the Company, or an
acquisition of control of the Company by the holder of a large block of the
Company's Common Stock. This is the case even where the proposed action or
transaction may be favorable to, or in the best interests of, the Company's
shareholders.
44
<PAGE> 46
Special Meetings of Shareholders. The Bylaws provide that special meetings
of shareholders may be called only by the President, Secretary or Board of
Directors of the Company, or by any shareholder pursuant to the written request
of the holders of not less than 10% of all the shares entitled to vote at the
meeting. As a result, this provision would prevent shareholders owning less than
10% of the voting power of the outstanding Common Stock from compelling
shareholder consideration of any proposal (such as a proposal for a merger or
business combination) over the opposition of the Company's Board of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is the Bank.
45
<PAGE> 47
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom Interstate/Johnson Lane Corporation is acting
as representative (the "Representative"), have severally agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite each
Underwriter's name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Interstate/Johnson Lane Corporation.........................
--------
650,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel and to
various other conditions customary in a firm commitment underwritten public
offering. The nature of the Underwriters' obligations is such that it is
committed to purchase and pay for all shares of Common Stock offered hereby if
any are purchased.
The Underwriters propose to offer the shares of Common Stock being
purchased directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain securities dealers at such price
less a concession not in excess of $ per share of Common Stock. The
Underwriters may allow, and such selected dealers may reallow, a concession not
in excess of $ per share to certain other brokers and dealers. After
the initial public offering, the offering price and other selling terms may be
changed.
The Company has granted a 30-day option to the Underwriters to purchase up
to a maximum of 97,500 additional shares of Common Stock to cover
over-allotments, if any, at the same public offering price, less the
underwriting discount. To the extent that the Underwriters exercise this option,
the Underwriters have agreed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this offering.
The Underwriters do not intend to sell shares of Common Stock to any
account over which they exercise discretionary authority.
The Company and its executive officers and directors have agreed that they
will not sell, contract to sell, or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable for any shares of
Common Stock for a period of 120 days after the date of the commencement of the
offering without the prior written consent of the Underwriters. The Underwriters
may from time to time be a customer of, engage in transactions with, and perform
services for the Company or the Bank in the ordinary course of business.
The Company has agreed to indemnify the Underwriters against, and to
contribute to certain losses arising out of, certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act"),
or to contribute payments that the Underwriters may be required to make in
respect thereof.
During and after the offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions, "passive" market making (see below) and purchases
to cover syndicate short positions created in connection with the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the Common Stock sold
in the offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions.
46
<PAGE> 48
These activities may stabilize, maintain or otherwise affect the market price of
the Common Stock which may be higher than the price that might otherwise prevail
in the open market. These transactions may be effected on the Nasdaq National
Market or otherwise, and these activities, if commenced, may be discontinued at
any time.
As permitted by Rule 103 of Regulation M under the Exchange Act,
Underwriters or prospective Underwriters that are market makers ("passive market
makers") in the Common Stock may make bids for or purchases of Common Stock in
the Nasdaq National Market until such time, if any, when a stabilizing bid for
such securities has been made.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., Raleigh, North Carolina. Certain legal matters related to this offering
will be passed upon for the Underwriters by Moore & Van Allen, PLLC, Raleigh,
North Carolina.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, have been included herein and in the registration statement of which
this Prospectus is a part in reliance upon the report of Cherry, Bekaert &
Holland, L.L.P., independent auditors, included herein, and upon the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional
Offices located at 7 World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials also may be obtained from the web site that the
Commission maintains at http://www.sec.gov. Quotations relating to the Company's
Common Stock appear on the Nasdaq National Market and such reports and other
information concerning the Company also can be inspected and copied at the
offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006-1506.
The Company has filed with the Commission a registration statement on Form
S-2 (together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
47
<PAGE> 49
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 340-13086)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997;
2. The information under the caption "Executive Compensation" on pages
6 through 9 of the Company's definitive proxy statement with respect to its
1998 Annual Meeting of Shareholders filed with the Commission on March 13,
1998; and
3. All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any and all of the
documents which are incorporated herein by reference, other than exhibits to
such information (unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to the Company, 202
South Main Street, Reidsville, North Carolina 27320, Attention: Corporate
Secretary, telephone (336) 342-3346.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Prospectus except as so modified, and any statement so
superseded shall not be deemed to constitute part of this Prospectus.
FORWARD LOOKING STATEMENTS
Information set forth in this Prospectus under the captions "Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business" contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which statements represent the
Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology, such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereof or comparable terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the effects of future economic conditions,
governmental fiscal and monetary policies, legislative and regulatory changes,
the risks of changes in interest rates on the level and composition of deposits,
the effects of competition from other financial institutions, the failure of
assumptions underlying the establishment of the allowance for possible loan
losses, the low trading volume of the Common Stock, other considerations
described in connection with specific forward looking statements, factors set
forth in this Prospectus under the caption "Risk Factors" and other cautionary
elements specified in documents incorporated by reference in this Prospectus.
48
<PAGE> 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Income for the three years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 1997, 1996 and
1995...................................................... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997, 1996 and 1995.................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 51
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, 1997 and 1996,
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, 1997. 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Reidsville, North Carolina
February 10, 1998
F-2
<PAGE> 52
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 9,612 $ 6,467
Investment securities:
Available for sale (cost of $77,024 in 1997 and $51,674 in
1996).................................................. 77,346 51,929
Other (market value of $1,392 in 1997 and $643 in 1996)... 1,392 643
Loans, net of allowance for credit losses of $2,331 in 1997
and $1,638 in 1996........................................ 226,384 142,947
Property and equipment, net................................. 6,490 4,686
Accrued income and other assets............................. 3,927 3,124
-------- --------
Total assets...................................... $325,151 $209,796
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 31,464 $ 21,914
Interest-bearing.......................................... 240,810 157,466
-------- --------
Total deposits.................................... 272,274 179,380
Federal funds purchased and securities sold under agreements
to repurchase............................................. 13,720 8,650
Other borrowings............................................ 15,000 --
Accrued expenses and other liabilities...................... 1,639 1,380
-------- --------
Total liabilities................................. 302,633 189,410
-------- --------
Commitments and contingent liabilities
Shareholders' equity
Common stock, $1.00 par value;
Authorized -- 3,000,000 shares; Outstanding --
2,493,680 in 1997 and 1,383,105 in 1996................... 2,494 1,383
Paid-in capital........................................... 3,287 2,728
Retained earnings......................................... 16,541 16,119
-------- --------
22,322 20,230
Net unrealized appreciation on securities available for
sale................................................... 196 156
-------- --------
Total shareholders' equity........................ 22,518 20,386
-------- --------
Total liabilities and shareholders' equity........ $325,151 $209,796
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 53
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Loans................................................ $ 17,616 $ 12,092 $ 9,067
Federal funds sold................................... 133 53 163
Investment securities:
Taxable........................................... 2,800 2,480 3,222
Tax exempt........................................ 358 657 851
Other................................................ 110 78 80
---------- ---------- ----------
Total interest income........................ 21,017 15,360 13,383
---------- ---------- ----------
Interest expense
Deposits............................................. 9,287 6,449 5,508
Federal funds purchased and other borrowings......... 769 313 625
---------- ---------- ----------
Total interest expense....................... 10,056 6,762 6,133
---------- ---------- ----------
Net interest income.................................... 10,961 8,598 7,250
Provision for credit losses............................ 760 415 260
---------- ---------- ----------
Net interest income after provision for credit
losses............................................... 10,201 8,183 6,990
---------- ---------- ----------
Other income
Service charges on deposit accounts.................. 896 746 694
Other service charges and fees....................... 381 183 243
Net gain on sales of loans........................... 39 16 211
Net gain on securities available for sale............ 38 307 88
---------- ---------- ----------
Total other operating income................. 1,354 1,252 1,236
---------- ---------- ----------
Other expenses
Salaries and employee benefits....................... 4,709 3,630 3,082
Occupancy expense.................................... 529 345 297
Furniture and equipment expense...................... 628 465 424
Insurance expense, including FDIC assessment......... 62 35 187
Marketing expense.................................... 154 97 110
Printing and supply expenses......................... 251 205 160
Other expenses....................................... 1,570 1,227 930
---------- ---------- ----------
Total other expenses......................... 7,903 6,004 5,190
---------- ---------- ----------
Income before income taxes............................. 3,652 3,431 3,036
Income tax expense..................................... 1,175 1,021 866
---------- ---------- ----------
Net income............................................. $ 2,477 $ 2,410 $ 2,170
========== ========== ==========
Net income per share of common stock................... $ 1.00 $ 0.98 $ 0.89
========== ========== ==========
Net income per share of common stock -- assuming
dilution............................................. $ 0.93 $ 0.96 $ 0.88
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 54
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock
Balance at beginning of year............................ $ 1,383 $ 1,098 $ 1,097
Stock split effected in the form of a stock dividend.... 1,082 275 --
Exercise of stock options............................... 11 7 --
Dividend reinvestment plan.............................. 6 3 --
Employee 401(k) plan.................................... 12 -- --
Employee stock awards................................... -- -- 1
------- ------- -------
Balance at end of year.................................. 2,494 1,383 1,098
------- ------- -------
Paid-in capital
Balance at beginning of year............................ 2,728 2,580 2,562
Dividend reinvestment plan.............................. 156 60 --
Exercise of stock options............................... 92 84 --
Employee 401(k) plan.................................... 308 -- --
Employee stock awards................................... 3 4 18
------- ------- -------
Balance at end of year.................................. 3,287 2,728 2,580
------- ------- -------
Retained earnings
Balance at beginning of year............................ 16,119 14,837 13,403
Net income.............................................. 2,477 2,410 2,170
Cash paid for fractional shares......................... (14) (5) --
Cash dividends paid ($.39 per share in 1997, $.34 in
1996, and $.30 in 1995).............................. (959) (848) (736)
Stock split effected in the form of a stock dividend.... (1,082) (275) --
------- ------- -------
Balance at end of year.................................. 16,541 16,119 14,837
------- ------- -------
Net unrealized appreciation (depreciation) on available
for sale securities, net of tax effect
Balance at beginning of year............................ 156 467 (2,142)
Net change.............................................. 40 (311) 2,609
------- ------- -------
Balance at end of year.................................. 196 156 467
------- ------- -------
Total shareholders' equity...................... $22,518 $20,386 $18,982
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 55
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received......................................... $ 19,247 $ 14,685 $ 13,335
Fees and commission received.............................. 1,951 1,627 1,209
Interest paid............................................. (9,499) (6,660) (6,162)
Noninterest expense paid.................................. (6,749) (5,264) (4,365)
Income taxes paid......................................... (1,538) (1,493) (983)
Proceeds from mortgage loans.............................. 3,963 3,122 2,685
-------- -------- --------
Net cash provided by operating activities.......... 7,375 6,017 5,719
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale...... 55,427 43,707 44,183
Proceeds from maturities of securities available for
sale.................................................... 17,617 7,887 14,474
Purchases of securities................................... (99,330) (47,933) (34,858)
Capital expenditures...................................... (2,291) (1,532) (303)
Sales of assets........................................... 269 -- --
(Increase) decrease in other real estate owned............ 3 158 (1)
Net (increase) decrease in loans.......................... (88,505) (36,268) (34,132)
-------- -------- --------
Net cash used in investing activities.............. (116,810) (33,981) (10,637)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest checking
accounts................................................ 12,381 4,217 3,013
Net increase in time deposits............................. 80,514 20,764 18,914
Net increase in borrowed funds............................ 15,000 -- --
Net increase in federal funds purchased................... 5,070 5,498 2,022
Repayments of proceeds from long-term debt................ -- -- (20,000)
Purchase of fractional shares............................. (14) (5) --
Proceeds from issuance of common stock.................... 588 158 --
Dividends paid............................................ (959) (848) (736)
-------- -------- --------
Net cash provided by financing activities.......... 112,580 29,784 3,213
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,145 1,820 (1,705)
Cash and cash equivalents, beginning of year................ 6,467 4,647 6,352
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 9,612 $ 6,467 $ 4,647
======== ======== ========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate........ $ 107 $ 24 $ 135
======== ======== ========
Change in unrealized appreciation (depreciation) of
securities available for sale (net of tax effect of $25,
($199) and $1,669)...................................... $ 40 $ (311) $ 2,609
======== ======== ========
Employee stock awards..................................... $ 3 $ 4 $ 19
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income................................................ $ 2,477 $ 2,410 $ 2,170
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses........................... 760 415 260
Depreciation.......................................... 474 376 346
Accretion and amortization............................ 282 288 324
Gain on sale of securities available for sale......... (38) (307) (88)
(Gain) loss on sale of mortgage loans................. (39) (16) (211)
Provision for loss on other real estate............... -- -- 64
Proceeds from mortgage loans.......................... 3,963 3,122 2,685
(Gain) loss on other assets........................... 39 84 --
Deferred tax (benefit) provision...................... (338) (384) (122)
(Increase) decrease in accrued income and other
assets............................................... (803) (631) (257)
Increase (decrease) in accrued expenses and other
liabilities.......................................... 598 660 548
-------- -------- --------
Net cash provided by operating activities.......... $ 7,375 $ 6,017 $ 5,719
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 56
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 Southeast (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 ten full-service branches in Reidsville,
Madison, Eden, Ruffin, Greensboro, and Wilmington, North Carolina. A majority of
the Bank's customers are located in Rockingham, Guilford, and New Hanover
Counties. The Bank's primary deposit products are interest-bearing checking
accounts, certificates of deposit and individual retirement accounts. Its
primary lending products are commercial, real estate, and consumer 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 Rockingham,
Guilford, and New Hanover County areas. The local economies of these areas
depend heavily on the industrial, agricultural, and service sectors.
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
The Company classifies its investment securities at time of purchase 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).
Other securities, which are carried at cost, include stock in the Federal
Reserve Bank and the Federal Home Loan Bank of Atlanta ("FHLB").
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 the level yield method.
F-7
<PAGE> 57
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans
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.
F-8
<PAGE> 58
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net income per share
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings per Share". SFAS No. 128 requires
disclosure of two earnings per share amounts: Net income per share of common
stock and net income per share of common stock -- assuming dilution. Net income
per share of common stock is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during each year. Net income per share of common stock -- assuming
dilution is computed by dividing net income plus any adjustments to net income
related to issuance of dilutive potential common shares by the weighted average
number of shares of common stock outstanding during each year plus the number of
dilutive potential common shares. All earnings per share amounts have been
restated in order to comply with the new accounting standard.
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 enters 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 1995 and 1996 have been reclassified to conform with the
1997 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,
1997 and 1996 were $362,000 and $625,000, respectively.
F-9
<PAGE> 59
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVESTMENT SECURITIES
Investment securities consists of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997
Available for sale:
U.S. treasury notes.......................... $ 3,074 $ 18 $ -- $ 3,092
U.S. government agency securities............ 68,997 75 99 68,973
State and municipal obligations.............. 4,953 328 -- 5,281
------- ---- ---- -------
77,024 421 99 77,346
------- ---- ---- -------
Other securities............................... 1,392 -- -- 1,392
------- ---- ---- -------
Total investment securities.......... $78,416 $421 $ 99 $78,738
======= ==== ==== =======
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
======= ==== ==== =======
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturities, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less..................................... $ 2,102 $ 2,103
Due after one through five years............................ 69,110 69,198
Due after five through ten years............................ 5,082 5,280
Due after ten years......................................... 730 765
------- -------
$77,024 $77,346
======= =======
</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:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales.................................... $55,427 $43,707 $44,183
Gross realized gains................................... 226 376 163
Gross realized losses.................................. 188 69 75
Applicable income tax on net realized gains............ 15 120 34
</TABLE>
F-10
<PAGE> 60
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, investment securities with a carrying value
of approximately $24,195,000 and $14,442,000 respectively, were pledged as
collateral to secure public deposits and for other purposes.
NOTE 4 -- LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial, financial and agricultural...................... $ 54,294 $ 25,175
Consumer.................................................... 46,078 31,378
Real estate:
Residential mortgage...................................... 58,238 44,109
Commercial mortgage....................................... 51,022 30,516
Construction.............................................. 19,083 13,407
-------- --------
Total............................................. $228,715 $144,585
======== ========
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans that were
considered impaired was approximately $1,250,000 and $0, respectively. The
related allowance for loan losses on these impaired loans was approximately
$188,000 and $0, respectively. The average recorded investment in impaired loans
for the years ended December 31, 1997 and 1996 was approximately $625,000 and
$0, respectively. Loans on nonaccrual status, not considered impaired, amounted
to approximately $12,000 at December 31, 1997 and $547,000 at December 31, 1996.
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, 1997, 1996 and 1995 were
$18,816,000, $14,852,000 and $14,491,000, respectively.
Certain 1-4 family residential mortgage loans are held as collateral under
a blanket floating lien to secure a portion of the Bank's borrowings (see Note
8).
NOTE 5 -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for the three years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................. $1,638 $1,258 $1,052
Provision for credit losses.............................. 760 415 260
Recoveries............................................... 93 54 74
Losses charged off....................................... (160) (89) (128)
------ ------ ------
Balance at end of year................................... $2,331 $1,638 $1,258
====== ====== ======
</TABLE>
F-11
<PAGE> 61
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PROPERTY AND EQUIPMENT
Properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $1,202 $ 870
Building and leasehold improvements......................... 4,724 3,690
Equipment................................................... 4,405 3,544
Construction in progress.................................... 28 39
------ ------
10,359 8,143
Less accumulated depreciation and amortization.............. 3,869 3,457
------ ------
$6,490 $4,686
====== ======
</TABLE>
NOTE 7 -- DEPOSITS
The aggregate amount of jumbo CDs, each with a minimum denomination of
$100,000, was approximately $59,700,000 and $21,200,000 in 1997 and 1996,
respectively.
At December 31, 1997 the scheduled maturities of CDs and IRAs are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998........................................................ $139,632
1999........................................................ 31,705
2000........................................................ 11,954
2001........................................................ 3,613
2002........................................................ 483
Thereafter.................................................. 650
--------
$188,037
========
</TABLE>
NOTE 8 -- FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS,
AND OTHER BORROWINGS
The following is a schedule of federal funds purchased, securities sold
under repurchase agreements, and FHLB borrowings:
<TABLE>
<CAPTION>
INTEREST MAXIMUM
BALANCE RATE AVERAGE OUTSTANDING
AS OF AS OF AVERAGE INTEREST AT ANY
DECEMBER 31 DECEMBER 31 BALANCE RATE MONTH-END
----------- ----------- ------- -------- -----------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C>
1997
Federal funds purchased and securities sold
under agreements to repurchase........... $13,720 5.31% $ 9,749 5.18% $15,455
FHLB borrowings............................ 15,000 5.74 4,521 5.83 15,000
------- ------- -------
Total................................. $28,720 $14,270 $30,455
======= ======= =======
1996
Federal funds purchased and securities sold
under agreements to repurchase........... $ 8,650 5.73 $ 5,415 5.79 $ 8,650
FHLB borrowings............................ -- -- 452 5.61 5,000
------- ------- -------
Total.................................... $ 8,650 $ 5,867 $13,650
======= ======= =======
</TABLE>
F-12
<PAGE> 62
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Bank had a $40 million line of credit with the
FHLB under which $15 million was outstanding. This line of credit is secured
with FHLB stock and a blanket floating lien on qualifying 1-4 family residential
mortgage loans. The outstanding amounts consist of $5 million maturing in 1998
and $10 million maturing in 2002. The borrowing maturing in 2002 has a one-time
call feature in 1999 whereby if called, the interest rate converts to a floating
rate based on the three month LIBOR.
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Bank. Securities sold under agreement to
repurchase represent short-term borrowings by the Bank with overnight maturities
collateralized by securities of the United States government or its agencies.
NOTE 9 -- INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense
Federal............................................. $1,448 $1,212 $ 787
State............................................... 149 193 201
------ ------ -----
Total current............................... 1,597 1,405 988
------ ------ -----
Deferred tax expense (benefit)
Federal............................................. (341) (308) (98)
State............................................... (81) (76) (24)
------ ------ -----
Total deferred.............................. (422) (384) (122)
------ ------ -----
Total income tax expense.................... $1,175 $1,021 $ 866
====== ====== =====
</TABLE>
The sources of deferred tax assets and liabilities and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................... $ 754 $484
Non-qualified deferred compensation plans................. 391 255
------ ----
Total............................................. 1,145 739
------ ----
Deferred tax liabilities:
Depreciable basis of property and equipment............... 271 248
Net unrealized gain on securities available for sale...... 125 99
Other..................................................... 8 28
------ ----
Total............................................. 404 375
------ ----
Net deferred tax assets (liabilities)....................... $ 741 $364
====== ====
</TABLE>
There is no valuation allowance for deferred tax assets as management
believes 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.
F-13
<PAGE> 63
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax based on statutory rates......................... $1,242 $1,166 $1,032
Increase (decrease) resulting from:
Effect of tax-exempt income........................ (104) (199) (255)
State income taxes, net of federal benefit......... 111 122 120
Other, net......................................... (74) (68) (31)
------ ------ ------
$1,175 $1,021 $ 866
====== ====== ======
</TABLE>
NOTE 10 -- LEASE COMMITMENTS
The minimum annual lease commitments under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------------
(IN
THOUSANDS)
<S> <C>
1998........................................................ $143
1999........................................................ 138
2000........................................................ 138
2001........................................................ 133
2002........................................................ 46
Thereafter.................................................. 205
----
$803
====
</TABLE>
Rental expense was $131,000 in 1997, $71,000 in 1996, and $38,000 in 1995.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to principal officers and directors and
their affiliated companies of approximately $3,424,000 and $3,382,000 at
December 31, 1997 and 1996, respectively. During 1997, additions to such loans
were $1,378,000 and repayments were $1,336,000. 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 Splits
In March, 1996, the Company paid a five-for-four split of the common stock
in the form of a 25% stock dividend. As a result, $275,000 ($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.
In April and September, 1997, the Company paid a four-for-three split of
the common stock in the form of a 33 1/3% stock dividend. As a result, $462,000
and $620,000 ($1 for each share issued pursuant to the split) was transferred
from retained earnings to the common stock account for the April split and the
September split, respectively. Cash was paid in lieu of fractional shares for
both splits.
All per share data in the financial statements has been adjusted to reflect
these three splits.
F-14
<PAGE> 64
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock grants
During 1997, 1996, and 1995, stock grants to employees amounted to 75, 85,
and 1,130 common shares, respectively.
Stock option plans
In 1996, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123,
the Company has elected to continue using the measurement prescribed in
Accounting Principles Board (APB) Opinion No. 25, and accordingly, SFAS No. 123
has no effect on 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 previously approved plans in
1997, 1996, 1995, 1992, and 1989 which authorize the granting of options with
respect to 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>
1997 1996 1995
------------------------ ------------------------- -------------------------
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............... 384,864 $10.66 164,101 $ 6.99 111,177 $ 6.83
Granted............ 90,330 23.11 233,942 12.80 52,924 7.20
Exercised.......... (13,001) 7.99 (13,179) 12.24 -- --
Forfeited.......... (9,275) 12.03 -- -- -- --
------- -------- --------
Outstanding -- End of
year............... 452,918 $13.25 384,864 $10.66 164,101 $ 6.99
======= ======== ========
Exercisable -- End of
year............... 155,378 $ 9.21 72,718 $ 6.90 48,544 $ 6.86
Weighted average fair
value of options
granted during the
year............... $ 6.73 $ 6.66 $ 3.65
</TABLE>
The following is a summary of information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.75-12.52 205,884 7.19 $ 9.06 116,202 $ 8.01
12.94-25.25 247,034 9.46 17.27 39,176 12.94
------- -------
452,918 155,378
======= =======
</TABLE>
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 plans been determined based on
the fair value at the grant date of the awards consistent with the provisions of
F-15
<PAGE> 65
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings -- as reported.................. $2,477,000 $2,410,000 $2,170,000
Net earnings -- pro forma.................... 2,068,000 2,153,000 2,145,000
Earnings per share -- as reported............ 1.00 0.98 0.89
Earnings per share -- pro forma.............. 0.84 0.88 0.88
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995: dividend yield of 3.20%,
expected volatility of 34.0%, risk-free interest rates of 5.70% for 1997, 6.20%
for 1996 and 5.40% for 1995, and expected lives of 4 years for 1997 and 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 and
1997 vest ratably over a four year period; however, no option will be
exercisable after ten years from the date granted.
NOTE 13 -- NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of net
income per share of common stock and net income per share of common
stock -- assuming dilution as required by SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
WEIGHTED
AVERAGE
INCOME COMMON SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ---------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders..... $2,477,000 2,472,760 $1.00
=====
Effect of Dilutive Securities:
Stock options............................... -- 182,717
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion........................ $2,477,000 2,655,477 $0.93
========== ========= =====
</TABLE>
F-16
<PAGE> 66
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
WEIGHTED
AVERAGE
INCOME COMMON SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders...... $2,410,000 2,453,529 $0.98
=====
Effect of Dilutive Securities:
Stock options................................ -- 57,730
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion......................... $2,410,000 2,511,259 $0.96
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
WEIGHTED
AVERAGE
INCOME COMMON SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders...... $2,170,000 2,436,825 $0.89
=====
Effect of Dilutive Securities:
Stock options................................ -- 24,615
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion......................... $2,170,000 2,461,440 $0.88
========== ========= =====
</TABLE>
NOTE 14 -- 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>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS
Cash and due from banks................................... $ 653 $ 374 $ 316
Securities................................................ 12 13 12
Investment in wholly-owned subsidiary..................... 21,829 19,960 18,647
Other assets.............................................. -- 39 7
------- ------- -------
$22,494 $20,386 $18,982
======= ======= =======
Shareholders' equity...................................... $22,494 $20,386 $18,982
======= ======= =======
</TABLE>
F-17
<PAGE> 67
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiary................................... $ 698 $ 835 $ 731
Amortization and other expenses............................. (74) (74) (18)
------- ------- -------
Income before tax benefit................................... 624 761 713
Income tax benefit.......................................... 25 25 6
------- ------- -------
Income before equity in undistributed net income of
subsidiary................................................ 649 786 719
Equity in undistributed net income of subsidiary............ 1,828 1,624 1,451
------- ------- -------
Net income.................................................. $ 2,477 $ 2,410 $ 2,170
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received from subsidiary........................ $ 698 $ 835 $ 731
Cash paid for franchise tax, registration cost,
acquisition cost and other............................. (74) (74) (18)
Sales of assets........................................... 12 -- --
Loss on asset sales....................................... 2 -- --
Refundable income taxes................................... 25 6 71
------- ------- -------
Net cash provided by operating activities.............. 663 767 784
------- ------- -------
CASH USED IN INVESTING ACTIVITIES
Purchase of real estate................................... -- (14) --
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid, net of DRIP............................... (797) (785) (736)
Proceeds from Employee 401(k)............................. 320 -- --
Proceeds from employee stock awards....................... 4 4 19
Exercise of stock options................................. 103 91 --
Purchase of fractional shares............................. (14) (5) --
------- ------- -------
Net cash used in financing activities.................. (384) (695) (717)
------- ------- -------
Net increase (decrease) in cash............................. 279 58 67
Cash at beginning of year................................... 374 316 249
------- ------- -------
Cash at end of year......................................... $ 653 $ 374 $ 316
======= ======= =======
RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING
ACTIVITIES
Net income.................................................. $ 2,477 $ 2,410 $ 2,170
Adjustments to reconcile net income to net cash provided
by operating activities
(Increase) decrease in other assets.................... 14 (19) 64
Equity in undistributed net income of subsidiary....... (1,828) (1,624) (1,450)
------- ------- -------
Net cash provided by operating activities................... $ 663 $ 767 $ 784
======= ======= =======
</TABLE>
NOTE 15 -- 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.
F-18
<PAGE> 68
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Bank's commitments and contingent liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
--------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit................................ $42,250 $27,272
Standby letters of credit................................... 13 216
------- -------
$42,263 $27,488
======= =======
</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 16 -- 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>
1997 1996
---- -----
<S> <C> <C>
Net pension cost includes the following components (in
thousands):
Service cost of the current period........................ $ 99 $ 60
Interest cost on the projected benefit obligation......... 177 158
Expected return on assets held in the plan................ (153) (148)
Net amortization of prior service......................... 11 11
---- -----
Pension expense........................................... $134 $ 81
==== =====
</TABLE>
The following sets forth the funded status of the plan and the amounts
shown in the accompanying balance sheet at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,276,728 in 1997 and $1,439,658 in 1996........... $2,310 $2,116
Effect of anticipated future compensation levels.......... 451 293
------ ------
Projected benefit obligation.............................. 2,761 2,409
Fair value of assets held in the plan..................... 2,412 2,289
------ ------
Plan assets less than projected benefit obligation........ (349) (120)
Unrecognized prior service cost being recognized over 15
years.................................................. 121 132
Net unrecognized loss (gain) from past experience
different from that assumed and effects of changes in
assumption............................................. 106 (82)
------ ------
Pension liability......................................... $ (122) $ (70)
====== ======
</TABLE>
F-19
<PAGE> 69
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average discount rate used to measure the projected benefit
obligation is 7.00% for 1997 and 1996, the rate of increase in future
compensation levels is 5.00% for 1997 and 1996, and the expected long-term rate
of return on assets is 7.00% for 1997 and 1996. 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 $63,000 for 1997 and $44,000 for 1996.
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 $58,000, $49,000, and
$45,000 for 1997, 1996 and 1995, 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 $304,000 and $207,000 at December 31, 1997 and 1996, respectively.
NOTE 17 -- REGULATORY MATTERS
On November 13, 1997, the Company and the Office of the Comptroller of the
Currency (the "OCC") entered into a Memorandum of Understanding ("MOU"), under
which the Company agreed to take certain actions to improve its infrastructure,
primarily necessitated by its rapid growth. In general, the OCC requested that
the Company improve its internal procedures and policies, such as revising its
written loan policy, developing a program to strengthen its loan administration,
and taking steps to increase its liquidity commensurate with its past, and
expected future, growth. In February 1998, the OCC informed the Company that no
further action was being requested and the Company believes that it is in
compliance with the MOU. Management believes that the actions taken by the
Company to address the concerns identified by the OCC in the MOU have not had a
material adverse effect on the business, results of operations, or financial
condition of the Company. While the Company expects the MOU to be terminated
after its next OCC examination, there is no assurance that the OCC will not in
the interim recommend supplemental actions to be taken by the Company.
The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the OCC. Under such restrictions, the Bank may not, without the prior
approval of the OCC, 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, 1997 that the bank could declare
without the approval of the OCC, amounted to approximately $4,902,000.
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.
F-20
<PAGE> 70
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
The most recent notification from the OCC 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. Since
that notification, the Bank has continued to experience asset growth. As a
result, at December 31, 1997, the Bank's ratio of total capital to risk weighted
assets was 9.6%, which places it into the adequately capitalized classification.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Total Capital (To Risk Weighted Assets)
Consolidated.......................... $23,938 9.9% $19,380 >=8.0% $ N/A
Subsidiary Bank....................... 23,248 9.6% 19,386 >=8.0% 24,233 >=10.0%
Tier I Capital (To Risk Weighted Assets)
Consolidated.......................... 21,607 8.9% 9,690 >=4.0% N/A
Subsidiary Bank....................... 20,917 8.6% 9,693 >=4.0% 14,540 >= 6.0%
Tier I Capital (To Average Assets)
Consolidated.......................... 21,607 7.0% 10,319 >=4.0% N/A
Subsidiary Bank....................... 20,917 6.8% 12,344 >=4.0% 15,430 >= 5.0%
December 31, 1996:
Total Capital (To Risk Weighted Assets)
Consolidated.......................... 21,868 15.1% 11,609 >=8.0% N/A
Subsidiary Bank....................... 21,442 14.8% 11,628 >=8.0% 14,535 >=10.0%
Tier I Capital (To Risk Weighted Assets)
Consolidated.......................... 19,464 13.4% 5,805 >=4.0% N/A
Subsidiary Bank....................... 19,039 13.1% 5,814 >=4.0% 8,721 >= 6.0%
Tier I Capital (To Average Assets)
Consolidated.......................... 19,464 9.6% 8,087 >=4.0% N/A
Subsidiary Bank....................... $19,039 9.4% $ 8,086 >=4.0% $10,108 >= 5.0%
</TABLE>
NOTE 18 -- 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.
F-21
<PAGE> 71
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
- ----------------------------------------------
Cash and cash equivalents..................... $ 9,612 $ 9,612 $ 6,467 $ 6,467
Investment securities
Available for sale.......................... 77,346 77,346 51,929 51,929
Other equity securities..................... 1,392 1,392 643 643
Loans......................................... 228,715 227,998 144,585 144,267
FINANCIAL LIABILITIES:
- ----------------------------------------------
Deposits...................................... 272,274 269,068 179,380 179,630
Federal funds purchased and retail repurchase
agreements.................................. 13,720 13,720 8,650 8,650
</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 19 -- BRANCH ACQUISITION
During March, 1996, the Bank completed its purchase of a branch located in
Eden, North Carolina from another financial institution. 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.
F-22
<PAGE> 72
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 9
Price Range of Common Stock........... 9
Dividends............................. 10
Capitalization........................ 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 25
Management............................ 38
Principal Shareholders................ 41
Description of Capital Stock.......... 42
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Available Information................. 47
Incorporation of Certain Documents by
Reference........................... 48
Forward Looking Statements............ 48
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
650,000 SHARES
[FNB LOGO]
FNB FINANCIAL
SERVICES CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
Interstate/Johnson Lane
Corporation
, 1998
======================================================
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses of the Company payable in
connection with the issuance and distribution of the Common Stock being
registered hereby, excluding underwriting discounts and commission. All expenses
of the offering will be borne by the Company. All amounts shown are estimates,
except the SEC registration fee and the NASD filing fee:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 5,402.56
NASD Filing Fee............................................. 2,331.38
Printing and Engraving Expenses............................. 50,000.00
Legal Fees and Expenses..................................... 175,000.00
Accounting Fees............................................. 50,000.00
Blue Sky Expenses........................................... 10,000.00
Miscellaneous Expenses...................................... 7,266.06
-----------
Total............................................. $300,000.00
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was, is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (a) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (b) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification described
above under the statutory scheme, Section 55-8-57 of the North Carolina General
Statutes permits a corporation to indemnify or agree to indemnify any of its
directors, officers, employees or agents against liability and expenses
(including attorney's fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interests of the corporation. The
Bylaws provide for indemnification to the fullest extent permitted under North
Carolina law for persons who serve as directors or officers of the Company, or
at the request of the Company serve as an officer, director, agent, partner,
trustee, administrator or employee for any other foreign or domestic entity,
except to the extent such activities were at the time taken known or believed by
the potential indemnities to be clearly in conflict with the best interests of
the Company. Accordingly, the
II-1
<PAGE> 74
Company may indemnify its directors, officers or employees in accordance with
either the statutory or non-statutory standards.
Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes require
a corporation, unless its articles of incorporation provide otherwise, to
indemnify a director or officer who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina General Statutes provides
that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or not
the corporation is otherwise authorized by the North Carolina Business
Corporation Act to indemnify such party. The Company has purchased a standard
directors' and officers liability policy which will, subject to certain
limitations, indemnify the Company and its officers and directors for damages
they become legally obligated to pay as a result of any negligent act, error, or
omission committed by directors or officers which acting in their capacity as
such.
As permitted by North Carolina law, Article 11 of the Articles limits the
personal liability of directors for monetary damages for breaches of duty as a
director arising out of any legal action whether by or in the right of the
Company or otherwise, provided that such limitation will not apply to (i) acts
or omissions not made in good faith that the director at the time of the breach
knew or believed were in conflict with the best interests of the Company, (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 the provision
became effective. In addition, Article 3 of the Articles provides that the Board
of Directors of the Company 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 a director, officer, employee or agent of the
Company.
Section 8 of the Underwriting Agreement filed as Exhibit 1.01 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
II-2
<PAGE> 75
ITEM 16. EXHIBITS
The following documents (unless indicated) are filed herewith and made a
part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.
4.01(1) -- Specimen Common Stock Certificate.
5.01 -- Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
10.01(2) -- Stock Compensation Plan of the Registrant approved April 11,
1989 by the Shareholders of the Registrant, with forms of
stock option and stock bonus agreements attached.
10.02(3) -- Omnibus Equity Compensation Plan of the Registrant.
10.03(3) -- Severance Policy for Senior Officers of the Registrant
(employed for five years or more).
10.04(4) -- Revised Severance Policy for Senior Officers of the
Registrant (employed for five years or more).
10.05(3) -- Severance Policy for Senior Officers of the Registrant
(employed for less than five years).
10.06(5) -- Equipment Sale Agreement and related agreements dated
September 24, 1992 by and among the Registrant and
Information Technology, Inc.
10.07(6) -- Benefit Equivalency Plan effective January 1, 1994.
10.08(6) -- Annual Management Incentive Plan.
10.09(6) -- Long Term Incentive Plan.
10.10(6) -- 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.
10.11* -- Split-Dollar Agreement dated January 27, 1995 between the
Bank and Ernest J. Sewell.
10.12* -- Split-Dollar Agreement dated September 26, 1994 between the
Bank and Robert F. Albright.
10.13* -- Split-Dollar Agreement dated January 27, 1995 between the
Bank and C. Melvin Gantt.
10.14* -- Split-Dollar Agreement dated December 8, 1995 between the
Bank and Richard L. Powell.
10.15(7) -- Lease, dated January 31, 1997, between the Registrant and
Landmark Commercial, Inc., relating to the Wilmington branch
office.
23.01 -- Consent of Cherry, Bekaert & Holland, L.L.P.
23.02 -- Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto).
24.01* -- Powers of Attorney.
27.01* -- Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
* Previously Filed.
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-14 (File No. 2-90095), filed with the Securities and Exchange
Commission.
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-8 (No. 33-33186), filed with the Securities and Exchange
Commission.
(3) Incorporated herein by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996, filed with the
Securities and Exchange Commission.
(4) Incorporated herein by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994, filed with the
Securities and Exchange Commission.
(5) Incorporated herein by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992, filed with the
Securities and Exchange Commission.
(6) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1995, filed with the
Securities and Exchange Commission.
(7) Incorporated herein by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission.
II-3
<PAGE> 76
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
3. The undersigned Registrant hereby undertakes that: (a) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (b) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bone fide offering thereof.
II-4
<PAGE> 77
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Reidsville, State of North Carolina, on March 31,
1998.
FNB FINANCIAL SERVICES CORPORATION
By: /s/ ERNEST J. SEWELL
----------------------------------
Ernest J. Sewell
President and Chief Executive
Officer
II-5
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on March 31,
1998 in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ ERNEST J. SEWELL President, Chief Executive Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
Ernest J. Sewell
/s/ ROBERT F. ALBRIGHT Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial Officer)
Robert F. Albright
* Vice President and Controller (Principal
- ----------------------------------------------------- Accounting Officer)
Michael W. Shelton
* Director
- -----------------------------------------------------
Willard B. Apple, Jr.
* Director
- -----------------------------------------------------
Charles A. Britt
* Director
- -----------------------------------------------------
Barry Z. Dodson
* Director
- -----------------------------------------------------
O. Eddie Green
* Director
- -----------------------------------------------------
Joseph H. Kinnarney
* Director
- -----------------------------------------------------
Clifton G. Payne
* Director
- -----------------------------------------------------
Elton H. Trent, Jr.
* Director
- -----------------------------------------------------
Kenan C. Wright
</TABLE>
*By: /s/ ERNEST J. SEWELL
---------------------------------
Attorney-in fact
II-6
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.
5.01 -- Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
23.01 -- Consent of Cherry, Bekaert & Holland, L.L.P.
23.02 -- Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
</TABLE>
<PAGE> 1
EXHIBIT 1.01
FNB FINANCIAL SERVICES CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
April __, 1998
INTERSTATE/JOHNSON LANE CORPORATION
As representative of the several
Underwriters named in Schedule I hereto,
c/o Interstate/Johnson Lane Corporation
Interstate Tower
121 West Trade Street
Charlotte, North Carolina 28202
Dear Sirs:
FNB Financial Services Corporation, a North Carolina corporation (the
"Company") proposes, subject to the terms and conditions stated herein, to issue
and sell to the underwriters named in Schedule 1 hereto (the "Underwriters") an
aggregate of 650,000 shares of common stock, par value $1.00 per share (the
"Common Stock"), of the Company (the "Firm Shares"), and, at the election of the
Underwriters, subject to the terms and conditions stated herein, to sell to the
Underwriters up to 97,500 additional shares of Common Stock (the "Optional
Shares") solely to cover overallotments, if any (the Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof are collectively called the "Shares").
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with each of the Underwriters that:
(a) A registration statement on Form S-2 (File No. 333-47203)
(the "Registration Statement") with respect to the Shares, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act");
the Registration Statement and any post-effective amendment thereto,
each in the form heretofore delivered to you, and, excluding exhibits
thereto but including all documents incorporated by reference in the
prospectus contained therein, delivered to you for each of the
Underwriters, have been declared effective by the Commission in such
form; no other document with respect to the Registration Statement has
heretofore been filed with the Commission; and no stop orders
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or
threatened by the Commission (any preliminary prospectus included in
the Registration Statement or filed with the Commission pursuant to
Rule 424 of the Rules and Regulations of the Commission under the Act,
being hereinafter called a "Preliminary Prospectus", the various parts
of such Registration Statement, including all
<PAGE> 2
exhibits thereto, and including (i) the information contained in the
form of final prospectus filed with the Commission pursuant to Rule
424(b) under the Act in accordance with Section 5(a) of this Agreement
and deemed by virtue of Rule 430(A) under the Act to be part of the
Registration Statement at the time it was declared effective, and (ii)
the documents incorporated by reference in the Prospectus contained in
the Registration Statement at the time such part of the Registration
Statement became effective, each as amended at the time such part
became effective, being herein called collectively the "Registration
Statement", and the final prospectus, in the form first filed pursuant
to Rule 424(b), being hereinafter called the Prospectus; and any
reference herein to any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by
reference herein pursuant to Item 12 of Form S-2 under the Act.
(b) No order preventing or suspending the use of any
Prospectus has been issued and no proceeding for that purpose has been
instituted or threatened by the Commission or the securities authority
of any state or other jurisdiction. No stop order suspending the
effectiveness of the Registration Statement or any part thereof has
been issued and no proceeding for that purpose has been instituted or
threatened or, to the best knowledge of the Company, contemplated by
the Commission or the securities authority of any state or other
jurisdiction.
(c) Each Prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto
complied when so filed in all material respects with the requirements
applicable to it under the Act and the rules and regulations
promulgated thereunder and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and any further documents so filed and
incorporated by reference in the Prospectus or any further amendment or
supplement thereto, when such documents become effective or are filed
with the Commission, as the case may be, will conform in all material
respects to the requirements of the Act or the Securities Exchange Act
of 1934, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Interstate/Johnson Lane Corporation expressly for use therein.
When the Registration Statement or any amendment thereto was declared
effective, and at each Time of Delivery (as hereinafter defined), it
(i) contained all statements required to be stated therein in
accordance with, and complied or will comply in all material respects
with the requirements of the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of
a material fact or omit to state any material fact necessary to make
the statements therein not misleading. When the Prospectus or any
amendment or supplement thereto is filed with the Commission pursuant
to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement or the
amendment thereto containing such amendment or
-2-
<PAGE> 3
supplement to the Prospectus was or is declared effective) and at each
Time of Delivery, the Prospectus, as amended or supplemented at any
such time (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
The foregoing provisions of this paragraph (c) do not apply to
statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity
with written information furnished to the Company by any Underwriter.
(d) The descriptions in the Registration Statement and the
Prospectus of statutes, legal and governmental proceedings or contracts
and other documents that are required to be so described are accurate
and fairly present the information required to be shown; and there are
no statutes or legal or governmental proceedings required to be
described in the Registration Statement or the Prospectus that are not
described as required and no contracts or documents of a character that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described and filed as required.
(e) Each of the Company and its subsidiary has been duly
incorporated, is validly existing as a corporation under the laws of
its jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and conduct its
business as described in the Prospectus. The Company has full power and
authority (corporate and other) to enter into this Agreement and to
perform its obligations hereunder. Each of the Company and its
subsidiary is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, except where the failure
to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its
subsidiary.
(f) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the description
of the Common Stock contained in the Prospectus. None of the issued
shares of capital stock of the Company or its subsidiary has been
issued or is owned or held in violation of any preemptive rights of
shareholders, and no person or entity (including any holder of
outstanding shares of capital stock of the Company or its subsidiary)
has any preemptive or other rights to subscribe for any of the Shares.
(g) All of the issued shares of capital stock of the Company's
subsidiary have been duly authorized and validly issued, are fully
paid, and, except as may be applicable under the National Bank Act,
nonassessable and are owned beneficially by the Company
-3-
<PAGE> 4
free and clear of all liens, security interests, pledges, charges,
encumbrances, defects, shareholders agreements, voting trusts, equities
or claims of any nature whatsoever. Other than First National Bank
Southeast, the Company does not own, directly or indirectly, any
capital stock or other equity securities of any other corporation or
any ownership interest in any partnership, joint venture or other
association.
(h) Except as disclosed in the Prospectus, there are no
outstanding (i) securities or obligations of the Company or its
subsidiary convertible into or exchangeable for any capital stock of
the Company or its subsidiary, (ii) warrants, rights or options to
subscribe for or purchase from the Company or its subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations, or (iii) obligations of the Company or its subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(i) Since the date of the most recent audited financial
statements included in the Prospectus, neither the Company nor its
subsidiary has sustained any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus.
(j) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) neither the
Company nor its subsidiary has incurred any liabilities or obligations,
direct or contingent, or entered into any transactions, not in the
ordinary course of business, that are material to the Company and its
subsidiary, (ii) the Company has not purchased any of its outstanding
capital stock or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, (iii) there has not been
any change in the capital stock, long-term debt or short-term debt of
the Company or its subsidiary, and (iv) there has not been any material
adverse change, or any development involving a prospective material
adverse change, in or affecting the financial position, results of
operations or business of the Company and its subsidiary, in each case
other than as disclosed in or contemplated by the Prospectus.
(k) The Shares have been duly authorized and, when issued and
delivered against payment therefor as provided therein, will be validly
issued and fully paid and nonassessable and will conform to the
description of the Common Stock contained in the Prospectus; and the
certificates evidencing the Shares will comply with all applicable
requirements of North Carolina law.
(l) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement (or any such right has been
effectively waived) or any securities being registered pursuant to any
other registration statement filed by the Company under the Act.
-4-
<PAGE> 5
(m) Neither the Company nor its subsidiary is, or (with or
without the giving of notice or passage of time or both), would be in
violation of its Articles of Incorporation or Bylaws or in default
under any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company or its subsidiary is
a party or to which any of their respective properties or assets are
subject that is material to the Company and its subsidiary, when taken
as a whole.
(n) The issue and sale of the Shares and the performance of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company or its subsidiary is a
party or to which any of their respective properties or assets is
subject, nor will such action conflict with or violate any provision of
the Articles of Incorporation or Bylaws of the Company or its
subsidiary or any statute, rule or regulation or any order, judgment or
decree of any court or governmental agency or body having jurisdiction
over the Company or its subsidiary or any of their respective
properties or assets.
(o) The Company and its subsidiary have good and marketable
title in fee simple to all real property, if any, and good title to all
personal property owned by them, in each case free and clear of all
liens, security interests, pledges, charges, encumbrances, mortgages
and defects, except such as are disclosed in the Prospectus or such as
do not materially and adversely interfere with the operations of the
Company and its subsidiary; and any real property and buildings held
under lease by the Company or its subsidiary are held under valid,
subsisting and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not material and do not interfere
with the operations of the Company or its subsidiary.
(p) No consent, approval, authorization, order or declaration
of or from, or registration, qualification or filing with, any court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation of the transactions contemplated by this
Agreement, except the registration of the Shares under the Act and such
as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of the Shares by the
Underwriters.
(q) Other than as disclosed in the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened (or any basis therefor) in which
the Company or its subsidiary is a party or of which any of their
respective properties or assets are the subject which, if determined
adversely to the Company or its subsidiary, would individually or in
the aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiary.
(r) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding
agreement of the Company enforceable
-5-
<PAGE> 6
against the Company in accordance with its terms subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement
of creditors' rights generally and to general equitable principles, and
except as the enforceability of rights to indemnity and contribution
under this Agreement may be limited under applicable securities laws or
the public policy underlying such laws.
(s) Neither the Company nor any of its officers, directors or
affiliates has (i) taken, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Shares or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased or paid anyone any compensation for soliciting
purchases of, the Shares or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company.
(t) The Company has obtained for the benefit of the Company
and the Underwriters from each of its directors and officers a written
agreement that for a period of 120 days from the date of the Prospectus
such director or officer will not, without your prior written consent,
offer, pledge, sell, contract to sell, grant any option for the sale
of, or otherwise dispose of (or announce any offer, pledge, sale, grant
of an option to purchase or other disposition), directly or indirectly,
any shares of Common Stock or securities convertible into, or
exercisable or exchangeable for, shares of Common Stock.
(u) The Company's subsidiary is not currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distributions on its subsidiary's capital stock, from
repaying to the Company any loans or advances to its subsidiary or from
transferring its subsidiary's property or assets to the Company, except
as disclosed in the Prospectus.
(v) The Company and its subsidiary have filed all foreign,
federal, state and local tax returns that are required to be filed by
them and have paid all taxes shown as due on such returns as well as
all other taxes, assessments and governmental charges that are due and
payable; and no deficiency with respect to any such return has been
assessed or proposed.
(w) The Company is not, nor will it become as a result of
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940.
2. Purchase and Sale of Shares. Subject to the terms and conditions
herein set forth, (a) the Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters agree, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the number
of Firm Shares set opposite the name of such Underwriter in Schedule I hereto,
and (b) in the event and to the extent that the Underwriters shall exercise the
-6-
<PAGE> 7
election to purchase Optional Shares as provided below, the Company agrees to
issue and to sell to each of the Underwriters, and each of the Underwriters
agree, severally and not jointly, to purchase from the Company, at the purchase
price per share set forth in clause (a) of this Section 2, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction, the numerator of which
is the maximum number of Optional Shares that such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I hereto
and the denominator of which is the maximum number of the Optional Shares that
all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
its election in whole or in part from time to time up to 97,500 Optional Shares,
at the purchase price per share set forth in clause (a) in the paragraph above
for the sole purpose of covering over-allotments in the sale of Firm Shares. Any
such election to purchase Optional Shares may be exercised by written notice
from you to the Company, given from time to time within a period of 30 calendar
days after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares are
to be delivered, as determined by you but in no event earlier than the First
Time of Delivery (as hereinafter defined) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice. In the event you elect to purchase all or a
portion of the Optional Shares, the Company agrees to furnish or cause to be
furnished to you the certificates, letters and opinions, and to satisfy all
conditions set forth in Section 7 hereof at each Subsequent Time of Delivery (as
hereinafter defined).
3. Offering by the Underwriters. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. Delivery of Shares; Closing. Certificates in definitive form for the
Shares to be purchased by each Underwriter hereunder, and in such denominations
and registered in such names as Interstate/Johnson Lane Corporation may request
upon at least 48 hours prior notice to the Company shall be delivered by or on
behalf of the Company to you for your account against payment by you of the
purchase price therefor by official bank check or checks (payable in next day
funds unless closing is on a Friday in which case it shall be payable in same
day funds) drawn on a Charlotte, North Carolina bank, payable to the order of
the Company. The closing of the sale and purchase of the Shares shall be held at
the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, Raleigh,
North Carolina. The time and date of such delivery and payment shall be, with
respect to the Firm Shares, at 10:00 a.m., Charlotte time, on the ____ full
business day after the execution of this Agreement or at such other time and
date as you and the Company may agree upon in writing, and, with respect to the
Optional Shares, at 10:00 a.m., Charlotte time, on the date specified by you in
the written notice given by you of the Underwriters' election to purchase all or
part of such Optional Shares, or at such other time and date as you and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery," such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called a "Subsequent Time of Delivery," and each such time and date for delivery
is herein called a "Time of Delivery." The Company will make such
-7-
<PAGE> 8
certificates available for checking and packaging at least 24 hours prior to
each Time of Delivery at your office at the address set forth above or such
other location designated by you to the Company.
5. Covenants of the Company. The Company covenants and agrees with the
Underwriter:
(a) The Company will file the Prospectus with the Commission
pursuant to and in accordance with subparagraph (1) (or, if applicable
and if consented to by you, subparagraph (4)) of Rule 424(b) not later
than the earlier of (i) the second business day following the execution
and delivery of this Agreement or (ii) the fifth business day after the
date on which the Registration Statement is declared effective. The
Company will advise you promptly of any such filing pursuant to Rule
424(b).
(b) The Company will not file with the Commission the
Prospectus or the amendment referred to in the second sentence of
Section l(a) hereof, any amendment or supplement to the Prospectus or
any amendment to the Registration Statement unless you have received a
reasonable period of time to review any such proposed amendment or
supplement and consented to the filing thereof and will use its best
efforts to cause any such amendment to the Registration Statement to be
declared effective as promptly as possible. Upon the request of the
Representative or counsel for the Representative, the Company will
promptly prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, any amendments to the
Registration Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the distribution
of the Shares by the Underwriters and will use its best efforts to
cause any such amendment to the Registration Statement to be declared
effective as promptly as possible. If required, the Company will file
any amendment or supplement to the Prospectus with the Commission in
the manner and within the time period required by Rule 424(b) under the
Act. The Company will advise the Representative, promptly after
receiving notice thereof, of the time when the Registration Statement
or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and
will provide evidence to the Representative of each such filing or
effectiveness.
(c) The Company will advise you promptly after receiving
notice or obtaining knowledge of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or any part thereof or any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, (ii) the suspension of the qualification of the
Shares for offer or sale in any jurisdiction or of the initiation or
threatening of any proceeding for any such purpose, or (iii) any
request made by the Commission or any securities authority of any other
jurisdiction for amending the Registration Statement, for amending or
supplementing the Prospectus or for additional information. The Company
will use its best efforts to prevent the issuance of any such stop
order and, if any such stop order is issued, to obtain the withdrawal
thereof as promptly as possible.
-8-
<PAGE> 9
(d) If the delivery of a Prospectus relating to the Shares is
required under the Act at any time prior to the expiration of nine
months after the date of the Prospectus, and if at such time any events
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or if for any reason it is necessary during such
same period to amend or supplement the Prospectus to comply with the
Act or the rules and regulations thereunder, the Company will promptly
notify you and upon your request (but at the Company's expense) prepare
and file with the Commission an amendment or supplement to the
Prospectus that corrects such statement or omission or effects such
compliance and will furnish without charge to each Underwriter and to
any dealer in securities, as many copies of such amended or
supplemented Prospectus as you may from time to time reasonably
request. If the delivery of a Prospectus relating to the Shares is
required under the Act at any time nine months or more after the date
of the Prospectus, upon your request but at the expense of such
Underwriter, the Company will prepare and deliver to such Underwriter
as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act. Neither your
consent to nor the Underwriter's delivery of, any such amendment or
supplement shall constitute a waiver of any of the conditions set forth
in Section 7.
(e) The Company promptly from time to time will take such
action as you may reasonably request to qualify the Shares for offering
and sale under the securities or blue sky laws of such jurisdictions as
you may request and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be required
to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction.
(f) The Company will promptly provide you, without charge, (i)
one manually executed copy of the Registration Statement as originally
filed with the Commission and of each amendment thereto, (ii) for each
other Underwriter a conformed copy of the Registration Statement as
originally filed and of each amendment thereto, without Exhibits, and
(iii) so long as a prospectus relating to the Shares is required to be
delivered under the Act, as many copies of each Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto as you may
reasonably request.
(g) As soon as practicable, but in any event not later than
the last day of the thirteenth month after the effective date of the
Registration Statement, the Company will make generally available to
its security holders an earnings statement of the Company and its
subsidiary, if any, covering a period of at least 12 months beginning
after the effective date of the Registration Statement (which need not
be audited) complying with Section 11(a) of the Act and the rules and
regulations thereunder.
(h) During the period beginning from the date hereof and
continuing to and including the date 120 days after the date of the
Prospectus, the Company will not, without your prior written consent,
offer, pledge, issue, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of (or announce any offer, pledge, sale,
grant
-9-
<PAGE> 10
of an option to purchase or other disposition), directly or indirectly,
any shares of Common Stock or securities convertible into, exercisable
or exchangeable for, shares of Common Stock, except as provided in
Section 2 and except for the issuance of Common Stock upon the exercise
of stock options or warrants outstanding on the date of this Agreement.
(i) Neither the Company nor any of its officers, directors or
affiliates will (i) take, directly or indirectly, prior to the closing
of the purchase and sale of the Shares, any action designed to cause or
to result in, or that might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Shares, (ii)
sell, bid for, purchase or pay anyone any compensation for soliciting
purchases of, the Shares or (iii) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company.
(j) The Company will apply the net proceeds from the offering
in the manner set forth under "Use of Proceeds" in the Prospectus.
(k) The Company will cause the Shares to be listed on the
NASDAQ National Market of the NASDAQ Stock Market at each Time of
Delivery and for at least one year from the date hereof.
6. Expenses. The Company will pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 10 hereof, including without limitation all costs and
expenses incident to (i) the fees, disbursements and expenses of the Company's
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement (including all amendments thereto), any
Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, this Agreement and any blue sky memoranda; (ii) the delivery of copies
of the foregoing documents to the Underwriters; (iii) the filing fees of the
Commission and the National Association of Securities Dealers, Inc. relating to
the Shares; (iv) the preparation, issuance and delivery to the Underwriters of
any certificates evidencing the Shares, including transfer agent's and
registrar's fees; (v) the qualification of the Shares for offering and sale
under state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto not to exceed
$15,000; (vi) any NASDAQ National Market of the NASDAQ Stock Market fees or
expenses; and (vii) any expenses for travel, lodging and meals incurred by the
Company and any of its officers, directors and employees in connection with any
meetings with prospective investors in the Shares. It is understood, however,
that, except as provided in this Section, Section 8 and Section 10 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses relating to the offer and sale of the Shares.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of
-10-
<PAGE> 11
Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of such Time of Delivery, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its covenants and agreements hereunder, and to the following
additional conditions precedent:
(a) If the Registration Statement as amended to date has not
become effective prior to the execution of this Agreement, such
registration statement shall have been declared effective not later
than 11:00 a.m., Charlotte time, on the date of this Agreement or such
later date and/or time as shall have been consented to by you in
writing. The Prospectus and any amendment or supplement thereto shall
have been filed with the Commission pursuant to Rule 424(b) within the
applicable time period prescribed for such filing and in accordance
with Section 5(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or in part thereof shall
have been issued and no proceedings for that purpose shall have been
instituted, threatened or, to the knowledge of the Company and the
Representatives, contemplated by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction.
(b) Moore & Van Allen, PLLC, counsel for the Underwriters,
shall have furnished to you such opinion or opinions, dated such Time
of Delivery, with respect to the incorporation of the Company, the
validity of the Shares being delivered at such Time of Delivery, the
Registration Statement, the Prospectus, and other related matters as
you may reasonably request and which are customary, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(c) You shall have received an opinion, dated such Time of
Delivery, of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., counsel for the Company in form and substance satisfactory to
you and your counsel, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation under the laws of North
Carolina and has the corporate power and authority to own or
lease its properties and conduct its business as described in
the Registration Statement and the Prospectus and to enter
into this Agreement and perform its obligations hereunder.
(ii) The subsidiary of the Company has been duly
incorporated, is validly existing as a national banking
association under the laws of the United States of America and
has the corporate power and authority to own or lease its
properties and conduct its business as described in the
Registration Statement and the Prospectus. The subsidiary is
duly qualified to transact business as a foreign corporation
and is in good standing under the laws of each other
jurisdiction in which it owns or leases property, or conducts
any business, so as to require such qualification, except
where the failure to so qualify would not have a material
adverse effect
-11-
<PAGE> 12
on the financial position, results of operations or business
of the Company and its subsidiary.
(iii) The Company's authorized, issued and
outstanding capital stock is as disclosed in the Prospectus.
All of the issued shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description of the Common
Stock contained in the Prospectus.
(iv) All of the issued shares of capital stock of the
Company's subsidiary has been duly authorized and validly
issued, are fully paid and, except as provided under the
National Bank Act, nonassessable, and are owned beneficially
by the Company.
(v) The Shares have been duly authorized and, when
issued and delivered against payment therefor as provided
herein, will be validly issued and fully paid and
nonassessable and will conform to the description of the
Common Stock contained in the Prospectus.
(vi) The issue and sale of the Shares being issued at
such Time of Delivery and the performance of this Agreement
and the consummation of the transactions herein contemplated
will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or
violation of any of the terms or provisions of, or constitute
a default under any of the following which is filed as an
exhibit to the Registration Statement: any indenture,
mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company or its subsidiary
is a party or to which any of their respective properties or
assets is subject, nor will such action conflict with or
violate any provision of the Articles of Incorporation or
Bylaws of the Company or its subsidiary or any statute, rule
or regulation which in such counsel's experience is normally
applicable to transactions of the type contemplated by this
Agreement or to the best of counsel's knowledge any order,
judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or its subsidiary or any
of their respective properties or assets.
(vii) No consent, approval, authorization or order
from, or registration, qualification or filing with, any
governmental agency or body is required for the issue and sale
of the Shares or the consummation of the transactions
contemplated by this Agreement, except the registration of the
Shares under the Act and such as may be required under state
securities or blue sky laws in connection with the offer, sale
and distribution of the Shares by the Underwriters.
(viii) This Agreement has been duly authorized,
executed and delivered by the Company.
-12-
<PAGE> 13
(ix) The Registration Statement and the Prospectus
and each amendment or supplement thereto (other than the
financial statements and schedules and other financial
information included therein, as to which such counsel need
express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the
requirements of the Act and the rules and regulations
thereunder. The descriptions in the Registration Statement and
the Prospectus of statutes are accurate and fairly present the
information required to be shown; and such counsel does not
know of any statutes or legal or governmental proceedings
required to be described in the Registration Statement or
Prospectus that are not described as required or of any
contracts or documents of a character required to be described
in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described
and filed as required.
(x) The Registration Statement is effective under the
Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period
required by Rule 424(b); and to such counsel's knowledge no
stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and, to such
counsel's knowledge, no proceedings for that purpose have been
instituted or threatened or are contemplated by the
Commission.
(xi) The Company is not, and will not be as a result
of the consummation of the transactions contemplated by this
Agreement, an "investment company," or a company "controlled"
by an "investment company", within the meaning of the
Investment Company Act of 1940.
Such counsel shall also state that no facts have come to their
attention which lead them to believe that as of its effective date, the
Registration Statement or any further amendment thereto made by the
Company prior to the date hereof (other than the financial statements
and related schedules therein or other financial data derived from
accounting records, as to which they need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectuses or any
further amendment or supplement thereto made by the Company prior to
the date hereof (other than the financial statements and related
schedules therein or other financial data derived from accounting
records, as to which they need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
the date hereof, either the Registration Statement or the Prospectuses
or any further amendment or supplement thereto made by the Company
prior to the date hereof (other than the financial statements and
related schedules therein or other financial data derived from
accounting records, as to which they need express no opinion) contains
an untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
-13-
<PAGE> 14
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, in
certificates of responsible officers of the Company and public
officials.
(d) You shall have received from Cherry, Bekaert & Holland,
L.L.P. letters dated, respectively, the date of this Agreement and the
effective date of the most recently filed post-effective amendment to
the Registration Statement and also at each Time of Delivery, in form
and substance satisfactory to you, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in or incorporated by reference
in the Registration Statement and the Prospectus.
(e) Since the date of the latest audited financial statements
included in the Prospectus, neither the Company nor its subsidiary
shall have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity,
whether or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as disclosed in
or contemplated by the Prospectus, or (ii) any change, or any
development involving a prospective change (including without
limitation a change in management or control of the Company), in or
affecting the position (financial or otherwise), results of operations,
net worth or business prospects of the Company and its subsidiary,
otherwise than as disclosed in or contemplated by the Prospectus
(including any amendment), the effect of which, in either such case, is
in your judgment so material and adverse as to make it unpracticable or
inadvisable to proceed with the purchase, sale and delivery of the
Shares being delivered at such Delivery as contemplated by the
Registration Statement, as amended as of the date hereof.
(f) Subsequent to the date hereof there shall not have
occurred any of the following: (i) any suspension or limitation in
trading in securities generally on the New York Stock Exchange (other
than normal market breaks or cooling periods), or any setting of
minimum prices for trading on such exchange, or in the Common Stock by
the Commission or the NASDAQ National Market of the NASDAQ Stock
Market; (ii) a moratorium on commercial banking activities in New York
declared by either federal or state authorities; (iii) any major
outbreak or major escalation of hostilities involving the United
States, declaration by the United States of a national emergency (other
than with respect to natural disasters) or war or any other national or
international calamity or emergency if the effect of any such event
specified in this clause (iii) in your judgment makes it impracticable
or inadvisable to proceed with the purchase, sale and delivery of the
Shares being delivered at such Time of Delivery as contemplated by the
Registration Statement, as amended as of the date hereof.
(g) The Company shall have furnished to you at such Time of
Delivery certificates of officers of the Company, satisfactory to you
as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the
Company of all of its obligations hereunder to be performed at or prior
to such Time of Delivery, and as to such other matters as you may
reasonably
-14-
<PAGE> 15
request, and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (e) of
this Section 7, and as to such other matters as you may reasonably
request.
(h) The Shares shall be listed on the NASDAQ National Market
of The NASDAQ Stock Market.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by the Company in Section
1 of this Agreement; (ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange (each an
"Application"); or (iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or any Application, material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or
any Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter. The Company will not, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion thereof) in respect of which
indemnification may be sought hereunder (whether or not such Underwriter is a
party to such claim, action, suit or proceeding), unless: such settlement,
compromise or consent includes an unconditional release of such Underwriter from
all liability arising out of such claim, action, suit or proceeding or related
cause of action or portion thereof.
(b) Each Underwriter agrees to indemnify and hold harmless the Company
and its officers, directors, agents, representatives and affiliates against any
losses, claims, damages or liabilities to which the Company may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto or any Application or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or
-15-
<PAGE> 16
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
through you expressly for use therein; and will reimburse the Company for any
legal or other expenses reasonably incurred by such Company in connection with
investigating or defending any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under subsection (a)
and (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party); provided, however, that if the defendants in any such action included
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such action on behalf of such indemnified
party and such indemnified party shall have the right to select separate counsel
to defend such action on behalf of such indemnified party. After such notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances, which
separate counsel shall be designated by the Representatives in the case of
indemnity arising under paragraph (a) of this Section 8) or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. Nothing in this Section 8(c)
shall preclude an indemnified party from participating at its own expense in the
defense of any such action so assumed by the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one
-16-
<PAGE> 17
hand and the Underwriter on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriter on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriter on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts, and commissions received by the Underwriters. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
9. Default of Underwriters. (a) If any Underwriter defaults in its
obligation to purchase Shares at a Time of Delivery, you may in your discretion
arrange for you or another party, or other parties to purchase such shares on
the terms contained herein. If within 36 hours after such default by any
Underwriter you do not arrange for the purchase of such Shares, the Company
shall be entitled to a further period of 36 hours within which to procure
another party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that,
-17-
<PAGE> 18
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that it
has so arranged for the purchase of such Shares, you or the Company shall have
the right to postpone a Time of Delivery for a period of not more than 7 days in
order to effect whatever change is made thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus that in your opinion may thereby be
made necessary. The cost of preparing, printing and filing any such amendments
shall be paid for by the Underwriters. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with effect as
if such person had originally been a party to this Agreement with respect to
such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of
Shares to be purchased at such Time of Delivery, then the Company shall have the
right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made, but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. Termination. (a) This Agreement may be terminated with respect to
the Shares or any Optional Shares in the sole discretion of the Representatives
by notice to the Company given prior to the First Time of Delivery or any
Subsequent Time of Delivery, respectively, in the event that (i) any condition
to the obligations of the Underwriters set forth in Section 7 hereof has not
been satisfied, or (ii) the Company shall have failed, refused or been unable to
deliver the Shares or to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior to such Time of
Delivery, in either case other than by reason of a default by any of the
Underwriters. If this Agreement is terminated pursuant to this Section 10(a),
the Company will reimburse the Underwriters upon demand for all out-of-pocket
expenses (including counsel fees and disbursements) that shall have been
incurred by it in connection with the proposed purchase and sale of the Shares.
The Company shall not in any event be liable to any of the Underwriters for the
loss of anticipated profits from the transactions covered by this Agreement.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in Section 10(a), the aggregate number of such Shares which remain
unpurchased exceeds one-eleventh of the aggregate number of Shares to be
purchased at such Time of Delivery, or if the Company shall not exercise the
right described in Section 9(b) to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to a Subsequent Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares)
thereupon terminate, without liability on the part of any nonfaulting
Underwriter or the Company, except for the expenses to be borne by the Company
-18-
<PAGE> 19
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers and the
Underwriter, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of the Underwriter or any controlling person referred to in
Section 8(e) or the Company, or any officer or director or controlling person of
the Company referred to in Section 8(e), and shall survive delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 6 and 8 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
12. Notices. All communications hereunder shall be in writing and, if
sent to the Underwriter, shall be mailed, delivered or telegraphed and confirmed
in writing to Interstate/Johnson Lane Corporation, 121 West Trade Street,
Charlotte, North Carolina 28202, Attention: Corporate Finance Department (with a
copy to Moore & Van Allen, PLLC, One Hannover Square, Suite 1700, Raleigh, North
Carolina 27601, and if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed in writing to the Company at 202 South Main Street,
Reidsville, North Carolina 27302, Attention: President and Chief Executive
Officer (with a copy to Gerald F. Roach of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, Suite 2500, First Union Capital Center, Raleigh, North
Carolina 27601).
13. Representatives. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you will be binding upon all the Underwriters.
14. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of, each Underwriter and the Company and to the extent
provided in Sections 8 and 10 hereof, the officers and directors and controlling
persons referred to therein and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from the Underwriters shall be deemed a successor or assign by reason
merely of such purchase.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina without giving effect to
any provisions regarding conflicts of laws.
16. Counterparts. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and upon
the acceptance hereof by
-19-
<PAGE> 20
Interstate/Johnson Lane Corporation, this letter will constitute a binding
agreement among the Underwriters and the Company.
Very truly yours,
FNB FINANCIAL SERVICES CORPORATION
By: _______________________________
Name: Ernest J. Sewell
Title: President & Chief Executive Officer
-20-
<PAGE> 21
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above
at Charlotte, North Carolina.
INTERSTATE/JOHNSON LANE CORPORATION
By: _______________________________
James H. Glen, Jr.
Managing Director
-21-
<PAGE> 22
SCHEDULE I
NUMBER OF
OPTIONAL SHARES
TOTAL NUMBER OF TO BE PURCHASED
FIRM SHARES TO IF MAXIMUM
UNDERWRITER BE PURCHASED OPTION EXERCISED
- ----------- ------------ ----------------
Interstate/Johnson Lane Corporation
---------- ----------
Total
========== ==========
-22-
<PAGE> 1
EXHIBIT 5.01
SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, L.L.P.
LAWYERS
2500 FIRST UNION CAPITOL CENTER
RALEIGH, NORTH CAROLINA 27601
PHONE: 919-821-1220
FAX: 919-821-6800
March 31, 1998
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
Re: Registration Statement of Form S-2
Gentlemen:
We have acted as counsel to FNB Financial Services Corporation (the
"Company"), in connection with the preparation of a Registration Statement on
Form S-2 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"), on March 3, 1998 (File No. 333-47203) relating to the registration of up
to 747,500 shares (including up to 97,500 shares subject to Underwriters'
over-allotments, the "Shares") of the Company's common stock, par value $1.00
per share ("Common Stock"). The Shares will be sold pursuant to an underwriting
agreement (the "Underwriting Agreement") by and between the Company and
Interstate/Johnson Lane Corporation, as representative of the several
underwriters named in the Underwriting Agreement. This opinion is furnished
pursuant to the requirement of Item 601(b)(5) of Regulation S-K under the Act.
We have examined the Amended and Restated Articles of Incorporation of the
Company, in the form in which such Amended and Restated Articles of
Incorporation are to be filed by the Company with the North Carolina Secretary
of State (and have assumed, for purposes of our opinion set forth below, that
such Amended and Restated Articles of Incorporation have been so filed), the
Bylaws of the Company, as amended, minutes of meetings of its Board of
Directors, and such other corporate records of the Company and other documents
and have made such examinations of law as we have deemed necessary for purposes
of this opinion.
Based on and subject to the foregoing and to the additional qualifications
set forth below, it is our opinion that the Shares that are being offered and
sold by the Company pursuant to the Registration Statement, when issued by the
Company as contemplated by the Registration Statement following effective filing
of the Amended and Restated Articles of Incorporation and sold in accordance
with the Underwriting Agreement, will be legally issued, fully paid and
nonassessable.
We hereby consent to the reference to our firm in the Registration
Statement under the heading "Legal Matters" and to the filing of this opinion as
an exhibit to the Registration Statement. Such consent shall not be deemed to be
an admission that this firm is within the category of persons whose consent is
required under Section 7 of the Act or the regulations promulgated pursuant to
the Act.
This opinion is limited to the laws of the State of North Carolina and no
opinion is expressed as to the laws of any other jurisdiction.
The opinion expressed herein does not extend to compliance with federal and
state securities law relating to the sale of the Shares.
This opinion is rendered solely for your benefit in connection with the
transaction described above and may not be used or relied upon by any other
person without prior written consent in each instance.
Sincerely yours,
/s/ Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
FNB Financial Services Corporation:
We consent to the inclusion in Amendment No. 1 to the Registration
Statement of FNB Financial Services Corporation on Form S-2 relating to the
registration of up to 747,500 shares of its Common Stock of our report dated
February 10, 1998, relating to the consolidated balance sheets of FNB Financial
Services Corporation and Subsidiary as of December 31, 1997 and 1996, 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,
1997, which report appears in such registration statement and to the reference
to our firm under the heading "Experts" in the Prospectus.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Greensboro, North Carolina
March 27, 1998
