<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FNB FINANCIAL SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NORTH CAROLINA 6021 56-1382275
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION CLASSIFICATION NUMBER)
OR ORGANIZATION) CODE NUMBER)
</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. HOWARD W. DOBBINS, ESQ.
MICHAEL P. SABER, ESQ. WAYNE A. WHITHAM, JR., ESQ.
SMITH, ANDERSON, BLOUNT, WILLIAMS, MULLEN, CLARK & DOBBINS
DORSETT, MITCHELL & JERNIGAN, L.L.P. TWO JAMES CENTER
2500 FIRST UNION CAPITOL CENTER 1021 EAST CARY STREET
RALEIGH, NORTH CAROLINA 27601 RICHMOND, VIRGINIA 23210-1320
(919) 821-1220 (804) 643-1991
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value per share..... 1,250,000(2) N/A $13,924,255 $3,870.94
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- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2), based upon the book value of the Black
Diamond Savings Bank, F.S.B. ("Black Diamond") common stock as of the latest
practicable date.
(2) Based upon the maximum number of the registrant's securities that may be
issued in the merger assuming an exchange ratio of 1.3333 shares of common
stock of the registrant for each share of Black Diamond common stock
pursuant to the merger described herein.
------------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
FNB FINANCIAL SERVICES CORPORATION
202 SOUTH MAIN STREET
REIDSVILLE, NORTH CAROLINA 27320
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1999
We invite you to attend a special meeting of shareholders of FNB Financial
Services Corporation to be held at 9:30 a.m., local time, on ,
1999 at Pennrose Park Country Club, 1622 Country Club Road, Reidsville, North
Carolina for the following purposes:
1. To consider and vote on the proposal to issue our shares to the
shareholders of Black Diamond Savings Bank, F.S.B. in exchange for their
shares of Black Diamond common stock pursuant to a merger agreement that
we signed with Black Diamond on May 28, 1999, a copy of which is
included as Appendix A to the attached joint proxy statement/prospectus.
In the merger, we would acquire Black Diamond by issuing 1.3333 shares
of our common stock for each share of Black Diamond common stock
outstanding, or approximately 1,113,397 shares of FNB stock all
together. After the merger, Black Diamond would be owned by FNB.
2. To transact such other business as may properly come before our special
meeting or any adjournment or postponement of it.
If you were an FNB shareholder at the close of business on July 15, 1999,
then you may vote at the special meeting, or any adjournment or postponement. We
need at least a majority of the votes cast at the meeting, either in person or
by proxy, to be cast in favor of the proposal in order to approve it. We urge
you to review and consider the enclosed material carefully before voting.
All shares represented by proxies will be voted as specified on the proxy
card. Proxy cards which are signed, but not marked, will be voted FOR approval
of this proposal.
Even if you do not actually attend the special meeting, it is important
that your shares be voted. Accordingly, we ask that you mark, date, sign and
return the enclosed proxy card in the envelope provided, which requires no
postage if mailed in the United States, so that we will receive it NO LATER THAN
, 1999.
By order of the Board of Directors,
Robert F. Albright
Executive Vice President, Secretary
and Chief Financial Officer
Reidsville, North Carolina
[ ], 1999
<PAGE> 3
BLACK DIAMOND SAVINGS BANK, F.S.B.
600 TRENT STREET
NORTON, VIRGINIA 24273
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1999
We invite you to attend a special meeting of shareholders of Black Diamond
Savings Bank, F.S.B. to be held at 5:00 p.m., local time, on ,
1999 at our offices located at 600 Trent Street, Norton, Virginia for the
following purposes:
1. To consider and vote on the Agreement and Plan of Merger, dated May 28,
1999, among Black Diamond, FNB Financial Services Corporation and FNB
Acquisition Sub, F.S.B., by which Black Diamond would be acquired by FNB
and become an FNB subsidiary.
2. To transact such other business as may properly come before our special
meeting or any adjournment or postponement of it.
If you were a Black Diamond shareholder at the close of business on July
15, 1999, then you may vote at the special meeting, or any adjournment or
postponement. We need at least two-thirds of all Black Diamond outstanding
shares to be cast in favor of the proposal in order to approve it. We urge you
to review and consider the enclosed material carefully before voting.
All shares represented by proxies will be voted as specified on the proxy
card. Proxy cards which are signed, but not marked, will be voted FOR approval
of this proposal.
Even if you do not actually attend the special meeting, it is important
that your shares be voted. Accordingly, we ask that you mark, date, sign and
return the enclosed proxy card in the envelope provided, which requires no
postage if mailed in the United States, so that we will receive it NO LATER THAN
, 1999.
By order of the Board of Directors,
Don Green
President and Chief Executive Officer
Norton, Virginia
[ ], 1999
<PAGE> 4
[FNB Logo] [BLACK DIAMOND LOGO]
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- --------------------------------------------------------------------------------
MERGER PROPOSED
YOUR VOTE IS VERY IMPORTANT
The boards of directors of each of Black Diamond Savings Bank, F.S.B. and
FNB Financial Services Corporation are sending you this Joint Proxy
Statement/Prospectus so that we may solicit your proxies for approval of FNB's
proposed acquisition of Black Diamond in a transaction structured as a merger.
If the merger is completed, each outstanding share of Black Diamond common
stock will be exchanged for 1.3333 shares of FNB common stock, rounded to the
nearest whole share. Based on a total of 835,069 shares of Black Diamond common
stock outstanding on June 30, 1999, FNB expects to issue approximately 1,113,397
shares to the current Black Diamond shareholders. FNB also will convert any
unexercised Black Diamond stock options into FNB stock options based on the same
exchange ratio.
Ernest J. Sewell
President and Chief Executive Officer
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
The date, time and place of the FNB shareholders' meeting is:
__________, 1999
9:30 a.m., eastern time
Pennrose Park Country Club
1622 Country Club Road
Reidsville, North Carolina
The date, time and place of the Black Diamond shareholders' meeting is:
__________, 1999
5:00 p.m., eastern time
600 Trent Street
Norton, Virginia
FNB common stock trades on The Nasdaq Stock Market under the symbol "FNBF."
On [ ], 1999, the closing sale price of FNB common stock was
$[ ].
This Joint Proxy Statement/Prospectus describes the terms and conditions of
the merger and includes, as Appendix A, a complete copy of the merger agreement.
Don M. Green
President and Chief Executive Officer
Black Diamond Savings Bank, F.S.B.
600 Trent Street
Norton, Virginia 24273
THE BOARDS OF DIRECTORS OF FNB AND BLACK DIAMOND EACH UNANIMOUSLY RECOMMEND A
VOTE "FOR" THE PROPOSALS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR
OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF ANY OF THE PARTIES, AND
THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN FNB COMMON STOCK WILL INVOLVE CERTAIN RISKS, INCLUDING A
POSSIBLE LOSS OF INVESTMENT. YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS
BEGINNING ON PAGE 17 BEFORE YOU CAST YOUR VOTE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED [ ], 1999 AND IS FIRST
BEING SENT TO
BLACK DIAMOND AND FNB SHAREHOLDERS ON OR ABOUT [ ], 1999.
<PAGE> 5
This Joint Proxy Statement/Prospectus incorporates important business and
financial information about FNB that is not included in or delivered with this
document. You should refer to "Where You Can Find More Information," on page 99
for a description of the documents incorporated by reference in this Joint Proxy
Statement/Prospectus.
You may obtain copies of FNB's documents, other than exhibits to those
documents, unless exhibits are specifically incorporated by reference into the
information that this Joint Proxy Statement/Prospectus incorporates, without
charge upon written or oral request to FNB directed to:
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
Attention: Robert F. Albright
(336) 342-3346
IN ORDER TO OBTAIN TIMELY DELIVERY PRIOR TO THE SPECIAL MEETINGS, PLEASE
MAKE YOUR REQUESTS FOR DOCUMENTS BY .
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE AT THE SPECIAL
MEETINGS. WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU DIFFERENT INFORMATION. YOU
SHOULD NOT ASSUME THAT THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS,
OR ANY SUPPLEMENT, IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT
OF SUCH DOCUMENTS, AND NEITHER THE MAILING OF THE JOINT PROXY
STATEMENT/PROSPECTUS TO THE SHAREHOLDERS OF BLACK DIAMOND OR FNB NOR THE
ISSUANCE OF FNB COMMON STOCK SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER TO SOLICITATION IN SUCH JURISDICTION.
i
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...... 1
SUMMARY..................................... 2
SELECTED HISTORICAL FINANCIAL DATA.......... 7
PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................... 9
FORWARD LOOKING STATEMENTS.................. 16
RISK FACTORS YOU SHOULD CONSIDER............ 17
About the Merger.......................... 17
About FNB................................. 17
About Black Diamond....................... 20
GENERAL INFORMATION ABOUT THE SPECIAL
MEETINGS.................................. 21
Date, Time and Place of the Special
Meetings................................ 21
Record Date and Outstanding Shares........ 21
Purposes of the Special Meetings.......... 21
Vote Required............................. 22
Voting of Proxies......................... 22
Authorization to Vote on Adjournment and
Other Matters........................... 23
Revocation of Proxies..................... 23
Solicitation of Proxies................... 23
THE MERGER.................................. 24
Background of the Merger.................. 24
Black Diamond's Reasons for the Merger.... 24
FNB Reasons for the Merger................ 25
Opinion of Black Diamond's Financial
Advisors................................ 25
Opinion of FNB's Financial Advisors....... 28
Interests of Persons in the Merger
Other Than as Shareholders............ 32
Form of the Merger........................ 33
Consideration for the Merger.............. 33
Effective Time of the Merger.............. 33
Procedures for Exchange of Black Diamond
Stock Certificates...................... 33
Anticipated Accounting Treatment.......... 34
Material Federal Income Tax
Considerations........................ 34
Stock Exchange Listing.................... 35
Resale of FNB Common Stock After the
Merger.................................. 35
THE MERGER AGREEMENT........................ 37
Certain Representations and Warranties.... 37
Certain Covenants and Agreements.......... 37
Conditions to the Merger.................. 40
Termination............................... 41
Termination Fee and Expense
Reimbursement........................... 42
Waiver and Amendment...................... 42
Expenses.................................. 42
Effect on Employee Benefits, Stock Plans
and Stock Options....................... 43
THE STOCK OPTION AGREEMENT.................. 44
Exercise of the Option.................... 44
Adjustment of Number of Shares............ 45
Substitute Option......................... 45
Limitation on Profits..................... 45
Effect of Stock Option Agreement.......... 45
Termination............................... 46
ABOUT FNB................................... 47
General Information....................... 47
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................... 47
ABOUT BLACK DIAMOND......................... 65
General Information....................... 65
Directors of FNB Following the Merger..... 65
Security Ownership of Management.......... 66
Security Ownership of Certain Beneficial
Owners.................................. 66
Executive Officer Compensation............ 66
Stock Options............................. 67
Employment Agreements..................... 67
Interest of Management in Certain
Transactions............................ 67
Management's Discussion and Analysis of
Financial Condition and Operating
Results................................. 68
DISSENTERS' RIGHTS.......................... 81
DESCRIPTION OF FNB CAPITAL STOCK............ 83
REGULATION AND SUPERVISION.................. 84
COMPARISON OF THE RIGHTS OF HOLDERS OF FNB
COMMON STOCK AND BLACK DIAMOND COMMON
STOCK..................................... 91
FUTURE SHAREHOLDER PROPOSALS................ 97
LEGAL MATTERS............................... 98
EXPERTS..................................... 98
WHERE YOU CAN FIND MORE INFORMATION......... 99
INDEX TO FINANCIAL STATEMENTS............... F-1
APPENDIX A -- Merger Agreement
APPENDIX B -- Stock Option Agreement
APPENDIX C -- Dissenters' Rights
APPENDIX D -- Opinion of Austin Financial
Services, Incorporated
APPENDIX E -- Opinion of Equity Research
Services, Inc.
</TABLE>
ii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: AS A BLACK DIAMOND SHAREHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: Black Diamond shareholders will receive 1.3333 shares of FNB common stock in
exchange for each share of Black Diamond common stock they own rounded to the
nearest whole share. For example, if you own 100 Black Diamond shares, you will
receive 133 FNB shares in the merger; if you own 500 Black Diamond shares, you
will receive 667 FNB shares in the merger. Just multiply 1.3333 by the number of
Black Diamond shares you own to arrive at the number of FNB shares you would
receive and remember to round up or down to the nearest whole number.
Q: WHAT HAPPENS AS THE MARKET PRICE OF FNB COMMON STOCK FLUCTUATES?
A: Since FNB common stock is traded on a stock exchange, its market value will
fluctuate before and after the closing of the merger. The value of the FNB
shares Black Diamond shareholders will receive in the merger will fluctuate up
and down as well.
Q: AS AN FNB SHAREHOLDER, HOW WILL THE MERGER AFFECT ME?
A: The merger will not affect your shares of FNB common stock other than, on an
absolute percentage basis, your FNB holdings will decline. Following the merger,
you and the other current FNB shareholders will own approximately 75% of the
common stock of FNB. After the merger, even though FNB will own Black Diamond,
Black Diamond will continue to be operated as a separate institution under its
current name.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail the
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at your shareholders' meeting. If you sign and send in
your proxy but don't indicate how you want to vote, your proxy will be counted
as a vote in favor of the applicable proposal. If you do not vote on the merger
or if you abstain, the effect will be a vote against the merger if you are a
Black Diamond shareholder. Abstentions and shares held in street name that are
not voted on this matter will not be included in determining the number of votes
of FNB common stock cast in favor of or against the proposal to issue shares in
connection with the merger agreement.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
shareholder meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you can
complete and submit a new proxy card. If you choose either of these two methods,
you must submit your notice of revocation or your new proxy card to FNB if you
are an FNB shareholder or to the Secretary of Black Diamond if you are a Black
Diamond shareholder. Third, you can attend the shareholder meeting and vote in
person. Simply attending the meeting, however, will not revoke your proxy; you
must also submit a completed ballot.
Q: SHOULD I SEND YOU MY BLACK DIAMOND STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible. We currently
expect to complete the merger by , 1999.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Only if you provide instructions on how your broker should vote. You should
instruct your broker how to vote your shares, following the directions your
broker provides. Without instructions from you to your broker, your shares will
not be voted and this will effectively be a vote against the proposal.
<PAGE> 8
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a complete description
of the legal terms of the merger, you should read carefully the entire Joint
Proxy Statement/Prospectus and the documents to which we have referred you. The
merger agreement is attached as Appendix A to this Joint Proxy
Statement/Prospectus and the related option agreement is attached as Appendix B.
For more information about FNB, see "Where You Can Find More Information" (page
99).
THE COMPANIES
Black Diamond Savings Bank, F.S.B.
(page 65)
600 Trent Street
Norton, Virginia 24273
(800-545-5499)
Black Diamond is a federally chartered savings bank with total assets of
approximately $131 million as of March 31, 1999. Black Diamond has been in
operation since 1973. Black Diamond conducts business through its main office in
Norton, Virginia and its branch offices in Harrisonburg, Pennington Gap,
Richlands and Norton, Virginia. Its primary market areas are Wise, Tazewell,
Russell, Lee, Rockingham and Augusta Counties in Virginia.
Black Diamond is engaged primarily in the business of attracting retail
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. Its loans and deposits are primarily generated from the
areas where its offices are located, which, with the exception of the
Harrisonburg branch, are largely rural. Black Diamond's management regards its
market areas as a moderate growth area in which there is significant competition
among financial service providers for market share. After the merger, Black
Diamond will be owned by FNB, but will continue as a separate institution using
its current name.
FNB Financial Services Corporation
(page 47)
202 South Main Street
Reidsville, North Carolina 27320
(336) 342-3346
FNB is a North Carolina bank holding company organized in 1984. Its
predecessor bank, FNB Southeast, was originally chartered in 1918 and has
historically served the Rockingham County area of North Carolina through three
branches in Reidsville and two in Eden, North Carolina. In 1995, FNB initiated a
strategic growth plan beginning with the hiring of a new chief executive
officer. By the end of 1998, FNB increased its number of branches from five to
ten while at the same time increasing its assets from $169 million to $422
million.
FNB 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. FNB 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 competes successfully with larger banks
located within and outside of North Carolina by retaining its personalized
approach and community focus.
EXCHANGE RATIO TO BE 1.3333 SHARES OF FNB COMMON STOCK FOR EACH BLACK DIAMOND
SHARE (PAGE 33)
As a Black Diamond shareholder, if the merger is completed you will receive
1.3333 shares of FNB common stock for each share of Black Diamond common stock
you own immediately prior to the merger, rounded to the nearest whole share. You
will not receive any fractional shares of FNB common stock or any cash in lieu
of a fractional share. On , 1999, the closing price of FNB common
stock was $ , making the value of 1.3333 shares of FNB common stock on
that date equal to $ .
SPECIAL MEETINGS TO BE HELD AND , 1999; RECORD DATES
SET AT [JULY 15], 1999 (PAGE 21)
The Black Diamond special meeting will be held at 5:00 p.m. on
, 1999 at Black Diamond's Norton branch, 600 Trent Street, Norton,
Virginia. Black Diamond shareholders will be asked to approve the merger and the
merger
2
<PAGE> 9
agreement. If you held shares of Black Diamond
common stock at the close of business on [July 15], 1999, you are entitled to
vote at the meeting.
The FNB special meeting will be held at 9:30 a.m. on , 1999 at
Pennrose Park Country Club, 1622 Country Club Road, Reidsville, North Carolina.
At that meeting, FNB shareholders will be asked to approve FNB's proposal to
issue shares of its common stock in the merger. If you held shares of FNB common
stock at the close of business on [July 15], 1999, you are entitled to vote at
the meeting.
REQUIRED VOTE (PAGE 22)
A majority of the votes cast at the FNB special meeting must be voted in
favor of FNB issuing its shares in the merger for this proposal to be approved.
Each FNB share is entitled to one vote on each matter to be voted on at the FNB
special meeting. As of June 30, 1999, directors and executive officers of FNB
and their affiliates owned 220,224 shares of FNB common stock, which represented
approximately 7% of the 3,343,929 FNB shares outstanding on that date.
Approval of the merger requires the affirmative vote of at least two-thirds
of all Black Diamond shares outstanding. As of June 30, 1999, directors and
executive officers of Black Diamond and their affiliates owned 230,651 shares of
Black Diamond common stock, which represented approximately 28% of the 835,069
Black Diamond shares outstanding at that date.
FNB AND BLACK DIAMOND BOARDS RECOMMEND SHAREHOLDER APPROVAL (PAGE 25)
The FNB board of directors believes that the merger is in the best
interests of the FNB shareholders. The FNB directors have unanimously approved
issuing FNB shares in the merger and recommend that FNB shareholders vote FOR
the proposal to issue such shares.
The Black Diamond board of directors has determined that the merger is in
the best interests of Black Diamond and its shareholders. The Black Diamond
directors have unanimously approved the merger agreement and the merger and
recommend that Black Diamond shareholders vote FOR approval and adoption of the
merger agreement.
Black Diamond's Fairness Opinion. In deciding to approve the merger, the
Black Diamond board of directors received and considered the opinion of Austin
Financial Services, Incorporated, Black Diamond's financial advisor, as to the
fairness of the merger from a financial point of view as of that date. A copy of
Austin Financial's opinion, dated as of the date of this Joint Proxy
Statement/Prospectus is attached to this Joint Proxy Statement/Prospectus as
Appendix D. The opinion of Austin Financial does not constitute a recommendation
as to how a Black Diamond shareholder should vote. You should read the opinion
in its entirety to understand the assumptions made, matters considered and
limitations of the review undertaken by Austin Financial in providing its
opinion.
FNB's Fairness Opinion. In deciding to approve the merger, the FNB board
of directors received and considered the opinion of Equity Research Services,
Inc., FNB's financial advisor, as to the fairness of the merger from a financial
point of view as of that date. A copy of Equity Research Services' opinion,
dated as of the date of this Joint Proxy Statement/Prospectus, is attached to
this Joint Proxy Statement/Prospectus as Appendix E. The opinion of Equity
Research Services does not constitute a recommendation as to how an FNB
shareholder should vote. You should read the opinion in its entirety to
understand the assumptions made, matters considered and limitations of the
review undertaken by Equity Research Services in providing its opinion.
For a discussion of the background of the merger and the factors that each
company considered in reaching its decision, please see page 24.
BENEFITS TO CERTAIN BLACK DIAMOND OFFICERS AND DIRECTORS IN THE MERGER (PAGE 32)
In considering the recommendation of the Black Diamond board of directors
to approve and adopt the merger agreement, as a Black Diamond shareholder, you
should be aware of interests that Black Diamond's directors and executive
officers have in the merger that are different from, or supplemental to, yours.
These interests include, among other things:
- - FNB will appoint Don M. Green and Gary Blosser to its board of directors after
the merger,
- - Don Green, Ben Sergent and Jack Kennedy will remain on the Black Diamond Board
of Directors
3
<PAGE> 10
and the current Black Diamond directors will be appointed to the local
advisory board for FNB,
- - Don Green, Ben Sergent and Esther W. Bolling have entered into new employment
and noncompetition agreements with Black Diamond, effective upon completion of
the merger, and
- - FNB will continue to maintain indemnification rights and liability insurance
for directors and officers of Black Diamond.
The Black Diamond board was aware of these and other interests and
considered them before approving and adopting the merger agreement.
TREATMENT OF STOCK OPTIONS IN THE MERGER (PAGE 43)
At the time of completion of the merger, each Black Diamond stock option
will automatically become an option to acquire the number of shares of FNB
common stock that the option holder would have been entitled to receive in the
merger had the option been exercised immediately before the merger. The terms
and conditions of the replacement option will be the same as the Black Diamond
option, except that the exercise price will be adjusted to give effect to the
1.3333 exchange ratio.
CONDITIONS TO THE MERGER (PAGE 40)
We will not complete the merger unless customary conditions (relating, for
example, to shareholder approval, the delivery of a tax opinion, the ability to
use pooling of interests accounting and receipt of all regulatory approvals) are
satisfied or waived. FNB and Black Diamond may not waive certain conditions that
are required by law to complete the merger, including (1) shareholder approvals
and (2) certain regulatory and governmental approvals.
TERMINATION AND AMENDMENT OF THE MERGER AGREEMENT (PAGES 41 AND 42)
We can mutually agree at any time to terminate the merger agreement without
completing the merger. Also, either company may terminate the merger agreement
if:
- - the merger is not completed by March 31, 2000,
- - the other party breaches a provision of the merger agreement that is not
cured,
- - the other party fails to satisfy a condition to the merger, which is not
waived, or capable of being satisfied within a reasonable period of time or
- - the Federal Reserve Board, the Office of Thrift Supervision, the North
Carolina Banking Commission or the Virginia State Corporation Commission do
not approve the merger.
FNB alone may terminate the merger agreement if:
- - the FNB board of directors determines that the merger has become inadvisable
or impracticable because (1) a regulatory agency requests conditions that are
objectionable to FNB or (2) litigation to restrain or prohibit the merger is
pending or threatened,
- - Black Diamond's board of directors withdraws or modifies its recommendation to
approve the merger in a manner adverse to FNB, or recommends another offer or
- - a third party takes steps to acquire Black Diamond.
Black Diamond alone may terminate the merger agreement if the Black Diamond
board of directors determines that the merger has become inadvisable or
impracticable because (1) a regulatory agency requests conditions that are
objectionable to Black Diamond or (2) litigation to restrain or prohibit the
merger is pending or threatened.
At any time prior to the completion of the merger, we may amend the merger
agreement in any way. Once the merger agreement is approved by shareholders of
either company, any amendment must be approved by FNB shareholders only if such
approval is required under North Carolina law and Black Diamond shareholders
only if such approval is required under federal law, except that shareholder
approval is necessary for an amendment that modifies either the amount or form
of the consideration to be received by Black Diamond shareholders or if there
would be a change in the tax or accounting treatment of the merger.
TERMINATION FEE (PAGE 42)
The merger agreement requires Black Diamond to pay FNB a termination fee of
$200,000 upon termination of the merger agreement where a third party has taken
steps to acquire Black Diamond or Black Diamond breaches any of its obligations
under the merger agreement. Black Diamond has
4
<PAGE> 11
agreed to reimburse FNB's reasonable expenses up
to $300,000 if FNB terminates the merger agreement because the Black Diamond
board of directors has withdrawn its recommendation of the merger or if Black
Diamond breaches the merger agreement. FNB has agreed to reimburse Black
Diamond's reasonable expenses up to $200,000 if Black Diamond terminates the
merger agreement because of an FNB breach.
REGULATORY APPROVALS (PAGE 40)
We cannot complete the merger until we receive approval of the Board of
Governors of the Federal Reserve System and the Office of Thrift Supervision.
FNB and Black Diamond filed notifications and applications with the Federal
Reserve and the OTS seeking approval of the merger. The OTS is the primary
regulator of Black Diamond. FNB also must obtain permission from the Virginia
State Corporation Commission to acquire control of Black Diamond. It is possible
that the Federal Reserve and OTS approvals will impose conditions or
restrictions that FNB or Black Diamond believe to materially adversely affect
the economic or business benefits of the merger.
STOCK OPTION AGREEMENT (PAGE 44)
As a condition to FNB's willingness to enter into the merger agreement, and
to discourage other companies from acquiring Black Diamond, Black Diamond has
granted FNB an option to purchase approximately 19.9% of Black Diamond's common
stock at an exercise price of $17.25 per share. Among other reasons, FNB can
exercise the option if a third party has taken steps to acquire Black Diamond
and Black Diamond's shareholders do not thereafter approve the merger or Black
Diamond breaches any of its obligations under the merger agreement. The maximum
compensation FNB may receive under the stock option agreement, together with any
termination fees under the merger agreement, is $3 million. If the FNB/Black
Diamond merger occurs, the option expires.
FNB TO USE POOLING OF INTERESTS ACCOUNTING TREATMENT (PAGE 34)
We expect the merger to qualify as a pooling of interests, which means that
going forward, the merged companies will be treated as if they had always been
combined for accounting and financial reporting purposes. Generally, pooling of
interests accounting treatment enhances future earnings by avoiding the creation
of goodwill relating to the merger. Therefore, FNB should be able to avoid
charges against future earnings resulting from the amortization of goodwill. We
have conditioned the merger upon the receipt of acceptable letters from the
independent accountants of each company relating to the pooling of interests
accounting treatment.
DISSENTERS' RIGHTS (PAGE 81)
The FNB shareholders do not have dissenters' rights of appraisal in
connection with the proposal on which they are voting.
The Black Diamond shareholders have dissenters' rights of appraisal in
connection with the merger. In order to exercise dissenters' rights and receive
payment, a dissenting shareholder must deliver to Black Diamond prior to the
shareholders' meeting a written notice identifying himself or herself and
stating his or her intent to dissent and to demand payment for his or her shares
if the merger is consummated and must not vote his or her shares in favor of the
merger. A VOTE AGAINST THE MERGER WILL NOT ITSELF CONSTITUTE THE REQUIRED
WRITTEN NOTICE, AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN
NOTICE OF AN INTENT TO DEMAND PAYMENT. After consummation of the merger, the
dissenting shareholder must properly comply with various procedural
requirements, including responding to certain notices received from FNB.
LISTING OF FNB COMMON STOCK (PAGE 35)
FNB will list the shares of its common stock to be issued in the merger on
the Nasdaq National Market, where its stock is currently traded and will
continue to trade after the merger.
NO FEDERAL INCOME TAX ON SHARES RECEIVED IN THE MERGER (PAGE 34)
As a condition to the merger, FNB must receive an opinion of its tax
counsel that the merger will qualify as a tax-free "reorganization" under the
Internal Revenue Code. Tax matters are complicated and the tax consequences of
the merger to you will depend on your personal circumstances. We urge you to
consult your own tax advisors to understand fully the tax consequences to you.
5
<PAGE> 12
COMPARISON OF MARKET PRICES AND DIVIDEND POLICIES
FNB common stock is traded on The Nasdaq Stock Market under the symbol
"FNBF." Black Diamond common stock is not publicly traded. The following table
shows the high and low sale prices per share of FNB common stock on The Nasdaq
Stock Market, based on published financial sources, and the frequency and per
share amount of dividends paid for each of the last two fiscal years and the
1999 fiscal year to date. The FNB stock prices and dividends in the table have
been adjusted to account for four-for-three stock splits, effected as 33% stock
dividends, paid to shareholders on April 30, 1997 and September 12, 1997.
<TABLE>
<CAPTION>
FNB
COMMON STOCK PRICE
------------------ FNB
CALENDAR PERIOD HIGH LOW DIVIDENDS PAID
- --------------- ------- ------- --------------
<S> <C> <C> <C>
Twelve Months ended December 31, 1997
First Quarter............................................. $15.19 $11.81 $0.09
Second Quarter............................................ 24.75 13.50 0.10
Third Quarter............................................. 29.00 21.75 0.10
Fourth Quarter............................................ 28.25 24.75 0.10
Twelve Months ended December 31, 1998
First Quarter............................................. $26.00 $23.75 $0.10
Second Quarter............................................ 25.50 22.50 0.10
Third Quarter............................................. 25.25 17.75 0.10
Fourth Quarter............................................ 19.75 16.00 0.10
Twelve Months ended December 31, 1999
First Quarter............................................. $18.50 $16.00 $0.11
Second Quarter............................................ 18.00 15.00 0.11
Third Quarter (through , 1999)................ N/A
</TABLE>
As of June 30, 1999, there were approximately 2,400 beneficial owners of
FNB common stock, including 890 holders of record. As of June 30, 1999, there
were approximately 402 holders of record of Black Diamond common stock.
The following table presents trading information for FNB common stock on
The Nasdaq Stock Market on May 28, 1999 (the last full trading day prior to
announcement of the signing of the merger agreement) and [ ], 1999
(the last practicable trading day for which information was available prior to
the date of this Joint Proxy Statement/Prospectus). Also set forth below for
each of those dates is the equivalent pro forma value of one share of Black
Diamond common stock (determined by multiplying the applicable price of FNB
common stock by the 1.3333 exchange ratio). Because the exchange ratio is fixed
and because the market price of FNB common stock is subject to fluctuation, the
market value of the FNB common stock that Black Diamond shareholders will
receive in the merger may increase or decrease prior to and following the
completion of the merger. We recommend that you also obtain current market
quotations.
<TABLE>
<CAPTION>
MAY 28, 1999 [ ], 1999
---------------- --------------------
HIGH LOW HIGH LOW
------ ------ -------- --------
<S> <C> <C> <C> <C>
FNB......................................... $15.75 $15.25
Black Diamond Equivalent Pro Forma Value.... $21.00 $20.33
</TABLE>
6
<PAGE> 13
SELECTED HISTORICAL FINANCIAL DATA
FNB is providing the following financial information to help you in your
analysis of the financial aspects of the merger. The annual selected historical
financial data presented below are derived from the audited consolidated
financial statements of FNB. The interim selected historical financial data
presented below are derived from the unaudited consolidated financial statements
of FNB. In the opinion of FNB management, the unaudited financial statements of
FNB include all adjustments that FNB considers necessary for a fair presentation
of the results of operations and financial position for each of the periods
presented. Operating results for FNB for the interim period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the full
fiscal year.
As this information is only a summary, you should read it in conjunction
with the historical financial statements (and related notes) of FNB contained in
the annual and quarterly reports, as amended, and other information that FNB has
filed with the Securities and Exchange Commission ("SEC"). See "Where You Can
Find More Information" on page 99. Financial information regarding Black Diamond
begins on page F-33.
7
<PAGE> 14
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF FNB
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND OTHER DATA)
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS ENDED
AT AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income............... $ 14,558 $ 10,961 $ 8,598 $ 7,250 $ 6,641 $ 3,805 $ 3,266
Provision for loan losses......... 1,130 760 415 260 105 228 265
Other income...................... 2,254 1,354 1,252 1,236 927 566 435
Other expenses.................... 9,970 7,903(1) 6,004 5,190 5,333 2,835 2,257
Net income........................ 3,847 2,477 2,410 2,170 1,592(2) 860 775
BALANCE SHEET DATA:
Assets............................ $421,709 $325,151 $209,796 $177,897 $169,231 $413,320 $367,789
Loans(3).......................... 255,827 228,715 144,585 111,708 79,787 265,120 247,470
Allowance for loan losses......... 2,606 2,331 1,638 1,258 1,052 2,740 2,550
Deposits.......................... 345,005 272,274 179,380 154,400 132,474 338,220 315,194
Other borrowings.................. 28,932 28,720 8,650 3,152 21,130 30,103 25,447
Shareholders' equity.............. 44,566 22,518 20,386 18,982 14,920 42,289 23,134
PER COMMON SHARE DATA(4):
Net income, basic................. $ 1.23 $ 1.00 $ 0.98 $ 0.89 $ 0.65 $ 0.25 $ 0.31
Net income, diluted(5)............ 1.16 0.93 0.96 0.88 0.65 0.25 0.29
Book value........................ 12.99 9.03 8.29 7.78 6.12 12.72 9.26
OTHER DATA:
Branch offices.................... 10 10 6 5 5 10 10
Full-time employees............... 144 129 95 87 90 139 142
PERFORMANCE RATIOS:
Return on average assets.......... 0.98% 0.96% 1.23% 1.27% 1.03% 0.83% 0.91%
Return on average equity.......... 10.58 11.86 12.52 12.91 9.76 8.17 13.92
Net interest margin (taxable
equivalent)..................... 3.92 4.57 4.84 4.72 4.84 3.89 4.08
Dividend payout................... 33.14 39.00 35.17 33.92 41.30 42.54 32.26
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans................ 1.02% 1.02% 1.13% 1.13% 1.32% 1.03% 1.03%
Allowance for loan losses to
period end non-performing
loans(6)........................ 735 180 299 2,859 670 377 172
Net charge-offs to average
loans........................... 0.34 0.04 0.03 0.06 0.28 0.15 0.08
Non-performing assets to period
end loans and foreclosed
property(6)..................... 0.70 0.38 0.40 0.21 0.43 0.62 0.62
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average
assets.......................... 9.27% 8.09% 9.85% 9.80% 10.55% 10.18% 6.56%
Total risk-based.................. 16.25 9.88 15.10 16.70 19.39 15.10 9.22
Average loans to average
deposits........................ 76.45 84.17 76.37 65.64 60.23 76.27 83.00
</TABLE>
- ---------------
(1) Includes approximately $1.4 million of non-interest expense attributable to
the opening of four new branches in 1997.
(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) an expense of
approximately $129,000 associated with increased equipment expense.
(3) Loans net of unearned income, before allowance for losses.
(4) Gives effect to a stock split in 1996 and two stock splits in 1997.
(5) Assumes the exercise of outstanding options to acquire FNB common stock. See
Note 14 to FNB's consolidated financial statements.
(6) Non-performing loans and non-performing assets include loans past due 90
days or more that are still accruing interest.
8
<PAGE> 15
FNB AND BLACK DIAMOND UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Set forth below are unaudited pro forma financial data of FNB and Black
Diamond combined. Information for FNB is derived from the audited financial
statements as of and for the years ended December 31, 1996, 1997 and 1998 and
also from unaudited interim financial statements as of and for the three months
ended March 31, 1999. Information for Black Diamond is derived from the audited
financial statements as of and for the years ended December 31, 1996, 1997 and
1998 and also from unaudited interim financial statements as of and for the
three months ended March 31, 1999. The proposed merger transaction between the
two companies is reflected under the pooling of interest method of accounting.
This information is not necessarily indicative of the results that actually
would have occurred.
9
<PAGE> 16
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
MARCH 31, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
BLACK PRO FORMA COMBINED FNB
FNB DIAMOND ADJUSTMENTS AND BLACK DIAMOND
-------- -------- ----------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 10,765 $ 9,583 $ -- $ 20,348
Investments securities................... 126,449 9,500 135,949
Loans and leases, net.................... 262,380 106,967 (325)(1) 369,022
Premises and equipment................... 7,352 2,017 9,369
Intangible assets........................ 557 58 615
Other assets............................. 5,817 2,568 8,385
-------- -------- ------ --------
Total assets..................... $413,320 $130,693 $ (325) $543,688
======== ======== ====== ========
LIABILITIES
Noninterest bearing demand............... $ 38,623 $ 6,030 $ -- $ 44,653
Interest bearing deposits................ 299,597 111,715 411,312
-------- -------- ------ --------
Total deposits........................... 338,220 117,745 -- 455,965
Purchased funds and other borrowings..... 30,103 2,500 32,603
Other liabilities........................ 2,708 1,146 213(1)(2) 4,067
-------- -------- ------ --------
Total liabilities................ 371,031 121,391 213 492,635
-------- -------- ------ --------
SHAREHOLDERS' EQUITY
Preferred stock.......................... -- -- --
Common stock............................. 3,325 2,088 (975)(3) 4,438
Surplus.................................. 19,576 4,806 975(3) 25,357
Retained earnings........................ 19,610 2,406 (538)(1)(2) 21,478
Accumulated other comprehensive income... (222) 2 (220)
-------- -------- ------ --------
Total shareholders' equity....... 42,289 9,302 (538) 51,053
-------- -------- ------ --------
Total liabilities and
shareholders' equity........... $413,320 $130,693 $ (325) $543,688
======== ======== ====== ========
</TABLE>
- ---------------
(1) To increase allowance for loan loss ($215 net of applicable tax benefit).
(2) To adjust for non-recurring charges (net of applicable tax benefits)
resulting from merger.
<TABLE>
<S> <C>
Investment advisor fees..................................... $129
Legal and accounting........................................ 172
Other transaction cost...................................... 22
----
$323
====
</TABLE>
(3) Adjustment for issuance of FNB shares.
10
<PAGE> 17
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTH PERIOD ENDED MARCH 31, 1999
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
BLACK COMBINED FNB
FNB DIAMOND AND BLACK DIAMOND
------ ------- -----------------
<S> <C> <C> <C>
Interest income
Loans................................................. $5,696 $2,297 $ 7,993
Investments and other................................. 1,935 164 2,099
------ ------ -------
Total interest income................................. 7,631 2,461 10,092
Interest expense
Deposits.............................................. 3,470 1,443 4,913
Purchased funds and other borrowings.................. 356 30 386
------ ------ -------
Total interest expense................................ 3,826 1,473 5,299
Net interest income before provision.................... 3,805 988 4,793
Provision for loan loss................................. 228 1 229
------ ------ -------
Net interest income after provision for loan losses..... 3,577 987 4,564
------ ------ -------
Noninterest income...................................... 566 118 684
Noninterest expense..................................... 2,835 704 3,539
------ ------ -------
Net income before taxes................................. 1,308 401 1,709
Income taxes............................................ 448 128 576
------ ------ -------
Net income.............................................. $ 860 $ 273 $ 1,133
====== ====== =======
Basic earnings per share................................ $ 0.25 $ 0.33 $ 0.25(1)
Diluted earnings per share.............................. $ 0.25 $ 0.32 $ 0.25(1)
</TABLE>
- ---------------
(1) Adjusted for exchange ratio of 1.3333 shares of FNB stock for each share of
Black Diamond stock.
(2) The table below summarizes non-recurring charges (net of applicable tax
benefits) resulting from the merger. These changes have not been reflected
in the above pro forma information.
<TABLE>
<S> <C>
Investment advisor fees..................................... $129
Legal and accounting........................................ 172
Other transaction costs..................................... 23
----
$323
====
</TABLE>
11
<PAGE> 18
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
BLACK COMBINED FNB
FNB DIAMOND AND BLACK DIAMOND
------- ------- -----------------
<S> <C> <C> <C>
Interest income
Loans................................................ $23,190 $8,796 $31,986
Investments and other................................ 7,485 1,086 8,571
------- ------ -------
Total interest income................................ 30,675 9,882 40,557
Interest expense
Deposits............................................. 14,600 5,879 20,479
Purchased funds and other borrowings................. 1,517 22 1,539
------- ------ -------
Total interest expense............................... 16,117 5,901 22,018
------- ------ -------
Net interest income before provision................... 14,558 3,981 18,539
Provision for loan loss................................ 1,130 41 1,171
------- ------ -------
Net interest income after provision for loan losses.... 13,428 3,940 17,368
------- ------ -------
Noninterest income..................................... 2,254 630 2,884
Noninterest expense.................................... 9,970 2,863 12,833
------- ------ -------
Net income before taxes................................ 5,712 1,707 7,419
Income taxes........................................... 1,865 533 2,398
------- ------ -------
Net income............................................. $ 3,847 $1,174 $ 5,021
======= ====== =======
Basic earnings per share............................... $ 1.23 $ 1.41 $ 1.18(1)
Diluted earnings per share............................. $ 1.16 $ 1.37 $ 1.13(1)
</TABLE>
- ---------------
(1) Adjusted for exchange ratio of 1.3333 shares of FNB stock for each share of
Black Diamond stock.
12
<PAGE> 19
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
BLACK COMBINED FNB
FNB DIAMOND AND BLACK DIAMOND
------- ------- -----------------
<S> <C> <C> <C>
Interest income Loans.................................. $17,616 $8,049 $25,665
Investments and other................................ 3,401 1,358 4,759
------- ------ -------
Total interest income................................ 21,017 9,407 30,424
Interest expense
Deposits............................................. 9,287 5,771 15,058
Purchased funds and other borrowings................. 769 -- 769
------- ------ -------
Total interest expense............................... 10,056 5,771 15,827
------- ------ -------
Net interest income before provision................... 10,961 3,636 14,597
Provision for loan loss................................ 760 (74) 686
------- ------ -------
Net interest income after provision for loan losses.... 10,201 3,710 13,911
------- ------ -------
Noninterest income..................................... 1,354 562 1,916
Noninterest expense.................................... 7,903 2,725 10,628
------- ------ -------
Net income before taxes................................ 3,652 1,547 5,199
Income taxes........................................... 1,175 510 1,685
------- ------ -------
Net income............................................. $ 2,477 $1,037 $ 3,514
======= ====== =======
Basic earnings per share............................... $ 1.00 $ 1.24 $ 0.98(1)
Diluted earnings per share............................. $ 0.93 $ 1.24 $ 0.93(1)
</TABLE>
- ---------------
(1) Adjusted for exchange ratio of 1.3333 shares of FNB stock for each share of
Black Diamond stock.
13
<PAGE> 20
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
BLACK COMBINED FNB
FNB DIAMOND AND BLACK DIAMOND
------- ------- -----------------
<S> <C> <C> <C>
Interest income
Loans................................................ $12,092 $8,284 $20,376
Investments and other................................ 3,268 1,290 4,558
------- ------ -------
Total interest income................................ 15,360 9,574 24,934
Interest expense
Deposits............................................. 6,449 5,909 12,358
Purchased funds and other borrowings................. 313 41 354
------- ------ -------
Total interest expense............................... 6,762 5,950 12,712
Net interest income before provision................... 8,598 3,624 12,222
Provision for loan loss................................ 415 292 707
------- ------ -------
Net interest income after provision for loan losses.... 8,183 3,332 11,515
------- ------ -------
Noninterest income..................................... 1,252 469 1,721
Noninterest expense.................................... 6,004 3,450 9,454
------- ------ -------
Net income before taxes................................ 3,431 351 3,782
Income taxes........................................... 1,021 105 1,126
------- ------ -------
Net income............................................. $ 2,410 $ 246 $ 2,656
======= ====== =======
Basic earnings per share............................... $ 0.98 $ 0.29 $ 0.74(1)
Diluted earnings per share............................. $ 0.96 $ 0.29 $ 0.73(1)
</TABLE>
- ---------------
(1) Adjusted for exchange ratio of 1.3333 shares of FNB stock for each share of
Black Diamond stock.
14
<PAGE> 21
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain unaudited historical and pro forma
per share data of FNB and Black Diamond, as well as equivalent per share data
with respect to one share of Black Diamond common stock on a pro forma basis for
the merger. You should read the data presented below in conjunction with the
unaudited pro forma combined condensed financial data and historical financial
statements (and related notes) of FNB and Black Diamond which are included or
incorporated by reference in this document. See "Where You Can Find More
Information" on page 99 and Index to Financial Statements on page F-1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1999
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
FNB Historical Earnings Per
Share..................... $1.23 $1.00 $0.98 $0.25
Black Diamond Historical
Earnings Per Share........ $1.41 $1.24 $0.29 $0.33
FNB and Black Diamond Pro
Forma Earnings Per
Share(1).................. $1.18 $0.98 $0.74 $0.25
Black Diamond Equivalent Pro
Forma Earnings Per
Share(2).................. $1.57 $1.31 $0.99 $0.33
Diluted Earnings Per Share:
FNB Historical Earnings Per
Share..................... $1.16 $0.93 $0.96 $0.25
Black Diamond Historical
Earnings Per Share........ $1.37 $1.24 $0.29 $0.32
FNB and Black Diamond Pro
Forma Earnings Per
Share(1).................. $1.13 $0.93 $0.73 $0.25
Black Diamond Equivalent Pro
Forma Earnings Per
Share(2).................. $1.51 $1.24 $0.97 $0.33
Dividends Per Share:
FNB Historical Dividends Per
Share..................... $0.40 $0.39 $0.34 $0.11
Black Diamond Historical
Dividends Per Share....... -- -- -- --
FNB and Black Diamond Pro
Forma Dividends Per
Share(3).................. $0.40 $0.39 $0.34 $0.11
Black Diamond Equivalent Pro
Forma Dividends Per
Share(2).................. $0.53 $0.52 $0.45 $0.15
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Book Value Per Share:
FNB Historical Book Value Per Share....................... $12.99 $12.72
Black Diamond Historical Book Value Per Share............. $10.85 $11.14
FNB and Black Diamond Pro Forma Book Value Per Share(1)... $11.81 $11.50
Black Diamond Equivalent Pro Forma Book Value Per
Share(2)............................................... $15.75 $15.33
</TABLE>
- ---------------
(1) Gives pro forma effect to the merger.
(2) Black Diamond equivalent per share amounts are calculated by multiplying the
FNB and Black Diamond pro forma per share amounts by the merger exchange
ratio of 1.3333.
(3) Same as FNB historical dividends per share since no change in FNB dividend
policy is expected as a result of the merger.
15
<PAGE> 22
FORWARD LOOKING STATEMENTS
The following statements are or may constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995:
- certain statements, including possible or assumed future results of
operations of Black Diamond and/or FNB, contained in "Summary;" "Risk
Factors You Should Consider;" "The Merger -- Background of the Merger;"
"The Merger -- Black Diamond Reasons for the Merger; FNB Reasons for the
Merger; Recommendations of the Board of Directors;" "Unaudited Pro Forma
Combined Financial Information;" "About FNB;" "About Black Diamond;"
including any statements contained herein regarding the prospects for FNB
and/or Black Diamond services and products, the impact of competition,
the proposed integration of the business and management structure for FNB
and Black Diamond;
- any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," "may," "will,"
"estimate," "continue," or similar expressions; and
- other statements contained in this Joint Proxy Statement/Prospectus
regarding matters that are not historical facts.
Forward looking statements represent our judgment about the future and are
not guarantees of our future performance. Because such statements are subject to
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward looking statements; factors that could
cause actual results to differ materially include, but are not limited to, those
discussed under "Risk Factors You Should Consider." FNB and Black Diamond
shareholders are cautioned not to place undue reliance on such statements, which
speak only as of the date of this Joint Proxy Statement/Prospectus.
The cautionary statements contained or referred to in this section should
be considered in connection with any subsequent written or oral forward looking
statements that may be issued by FNB or Black Diamond or persons acting on its
or their behalf. Neither FNB nor Black Diamond undertakes any obligation to
release any revisions to or to update publicly any forward looking statements to
reflect events or circumstances after the date of this Joint Proxy
Statement/Prospectus or to reflect the occurrence of unanticipated events.
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RISK FACTORS YOU SHOULD CONSIDER
In addition to the other information provided or incorporated by reference in
this Joint Proxy Statement/Prospectus, you should consider the following factors
carefully in evaluating whether to vote in favor of the merger or the issuance
of FNB common stock in connection with the merger. You should also refer to
"Forward Looking Statements" on page 16.
ABOUT THE MERGER
IT IS POSSIBLE THAT THE MERGER MAY NOT PRODUCE THE RESULTS WE EXPECT
The merger will challenge FNB's management to overcome certain risks,
including
- - successfully combining and integrating Black Diamond's operations and services
into FNB's,
- - the possible diversion of management's attention from other business concerns
to focus on the merger and
- - the possibility that Black Diamond will not perform in the way FNB expects.
FNB will achieve the anticipated benefits from the merger only if it can
successfully integrate Black Diamond's business into its operations. Such
integration will require substantial attention from management and could
interrupt certain of FNB's operations and business cycles. As in any business
combination, FNB cannot assure you that it can successfully integrate Black
Diamond into its operations. The risks associated with the merger could
adversely affect FNB's business in a material way.
EFFECT OF FNB STOCK PRICE FLUCTUATIONS ON FIXED EXCHANGE RATIO
In the merger, FNB will exchange 1.3333 shares of its common stock for each
outstanding share of Black Diamond common stock. This exchange ratio is fixed
and will not change as the market price of FNB common stock changes. As a
result, the value of the shares of FNB common stock received by Black Diamond
shareholders in the merger will vary depending on fluctuations in the value of
FNB common stock. Such fluctuations may be the result of changes in the
business, operations or prospects of FNB, market assessments of the likelihood
that the merger will be consummated, the timing, general market and economic
conditions and other factors. Accordingly, we cannot assure you that the value
of the consideration to be paid in the merger on the date of this Joint Proxy
Statement/Prospectus will be the same as on the date of the Black Diamond
special meeting and the FNB special meeting or at the time of the completion of
the merger.
POSSIBLE LOSS OF TAX-FREE TREATMENT (SEE PAGE 34)
We have structured the merger to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986. Although the Internal
Revenue Service has not provided a ruling on the matter, FNB will obtain a legal
opinion that the merger qualifies as tax-free. This opinion neither binds the
IRS nor prevents the IRS from adopting a contrary position. If the merger fails
to qualify as a tax-free reorganization, as a Black Diamond shareholder, you
would recognize gain or loss on each Black Diamond share surrendered in the
amount of the difference between your basis in such share and the fair market
value of the FNB shares you receive in exchange for it at the time of the
merger.
ABOUT FNB
FNB'S RAPID AND ACCELERATING GROWTH IS LIKELY TO CONTINUE STRAINING ITS
RESOURCES
FNB has experienced rapid growth over the past several years. The growth
and expansion of its business have placed, and FNB believes will continue to
place, a strain on its operational, human and financial resources. In order to
manage its growth, FNB must continue to attract, retain and reward qualified and
experienced management, loan and clerical personnel who possess both the
personal affiliations and leadership traits FNB seeks. In particular, FNB relies
on a number of key executives, including Ernest J. Sewell, its President and
Chief Executive Officer. FNB maintains key man life insurance on Mr. Sewell in
the amount of $1 million.
The loss of the services of any key executive, including Mr. Sewell, could
have a material adverse effect on FNB. Failure to manage growth effectively or
to attract and retain qualified personnel could have a material adverse effect
on FNB's business and could restrain its ability to successfully implement its
business strategy.
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AS FNB EXPANDS INTO NEW MARKETS, ITS BUSINESS COULD BE IMPACTED IN WAYS NOT
ANTICIPATED
In pursuing its growth strategy, FNB may continue to expand its presence
into new geographic markets, including markets outside the State of North
Carolina. For example, if the merger is completed, FNB will be serving markets
in the State of Virginia. FNB cannot be sure of its ability to establish local
affiliations, realize management and operating efficiencies or otherwise
establish a presence in these new geographic markets. As it enters new
geographic markets, FNB 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 that FNB seeks. Therefore, it will be
necessary for FNB to give significant autonomy to its managers in any new
branches. FNB may also be required to comply with laws and regulations that
differ from those that currently apply to FNB, and may face competitors with
greater knowledge of such local markets.
FNB'S CONTINUED EXPANSION PLANS COULD DISRUPT ITS BUSINESS IN SIGNIFICANT WAYS
FNB intends to continue to expand its business through selective de novo
branch openings and possible acquisitions, such as the merger. FNB may not be
able to consummate, or if consummated, successfully integrate, any future de
novo branch opening or acquisition, including the merger, and FNB could incur
disruption and unexpected expenses in integrating such transactions. Although
FNB currently has no agreements or understandings, either written or oral, in
place, other than with respect to the merger, in the normal course of business,
FNB evaluates potential transactions that would complement or expand its
business. In doing so, FNB competes with other potential bidders, many of which
have greater financial and operational resources.
There can be no assurance that FNB will be able to successfully negotiate,
finance or integrate any such transactions. Furthermore, the process of
evaluating, negotiating and integrating transactions may divert FNB's management
time and resources. FNB cannot assure you that any additional de novo branch
opening or acquisition, when consummated, will not have a material adverse
effect on its business.
FNB'S LOAN PORTFOLIO IS HEAVILY WEIGHTED TOWARD REAL ESTATE LOANS, SO FNB'S
PERFORMANCE MAY SHIFT WITH FLUCTUATIONS IN REAL ESTATE CONDITIONS
At March 31, 1999, real estate loans comprised 63.4% of FNB's total loan
portfolio, which includes residential mortgages and construction and commercial
loans secured by real estate. FNB 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 its
non-performing mortgage loans and its results of operations and financial
condition. Real estate values and the demand for mortgages and construction
loans are affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, the availability of loans
to potential purchasers, and acts of nature. Although FNB's underwriting
standards are intended to protect it 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 its loans and
its business.
FNB FACES STRONG COMPETITION FROM COMPETITORS WITH GREATER RESOURCES
Commercial banking in North Carolina is extremely competitive, due in large
part to statewide branching. Currently, many of FNB's competitors in certain
markets are significantly larger and have greater resources than FNB. FNB
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, FNB competes in its market areas with some of the largest banking
organizations in the country.
More than that, competition is not just 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 FNB's competitors. Consequently, many of FNB's competitors
have substantially higher lending limits due to their greater total
capitalization, and many perform functions for their customers that FNB does not
offer. As a result, FNB is likely to meet increased competition, especially as
it expands into new markets, that may limit its ability to maintain or
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increase its market share or otherwise materially and adversely affect its
business.
GOVERNMENT AGENCIES ACTIVELY REGULATE BANKS; FNB NEEDS TO REACT QUICKLY AND
POSITIVELY TO SHIFTS IN THE REGULATORY ENVIRONMENT
FNB's profitability 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. FNB's net interest income 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 its interest-earning assets.
FNB's operating results are also affected by credit policies of monetary
authorities, particularly the Board of Governors of the Federal Reserve. The
instruments of monetary policy include open market operations in 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 Board, FNB
cannot predict possible future changes in interest rates, deposit levels and
loan demand on its business.
In addition, FNB is subject to extensive supervision, regulation and
control by several federal and state governmental agencies, including the
Federal Reserve Board, the Commissioner of Banks in North Carolina and the
Federal Deposit Insurance Corporation. 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 FNB's industry. Although FNB cannot predict the impact of such
legislation and regulation, future changes may alter the structure of and
competitive relationships among financial institutions and the cost of doing
business. The addition of Black Diamond, which is regulated by the OTS, would
add another layer of oversight to FNB's business.
FNB MUST EFFECTIVELY RESPOND TO THE PACE OF TECHNOLOGICAL CHANGE AND RESULTING
CUSTOMER DEMANDS WITHOUT STRAYING FROM ITS BUSINESS PHILOSOPHY
The banking industry is undergoing, and FNB 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. FNB's future success will depend, in
part, on its ability to address customer needs by using technology to provide
products and services that will satisfy customer demands for convenience as well
as to enhance efficiencies in its operations.
FNB believes that keeping pace with technological advances is important, as
long as its emphasis on personalized services is not adversely impacted. As a
result, FNB has been upgrading its internal systems, both through the efficient
use of technology (including software applications) and by strengthening its
policies and procedures. Many of FNB's competitors will have substantially
greater resources to invest in technological and infrastructure improvements.
FNB cannot assure you that it will be able to effectively implement new
technology-driven products and services consistent with its emphasis on
individualized attention to customers' needs.
FNB IS ON SCHEDULE TO COMPLETE ITS WORK TO BE YEAR 2000 COMPLIANT, BUT
UNEXPECTED EVENTS COULD STILL OCCUR
As a lending institution, FNB's need to have its systems, applications and
procedures Year 2000 compliant is especially important. FNB does not currently
expect that the cost of its Year 2000 compliance program will be material to its
financial condition, and FNB expects to satisfy its compliance program without
material disruption of its operations. Year 2000 expenses totaled $9,000 for
1998, and are budgeted at $35,000 for 1999. These costs only reflect the
external cost of Year 2000 compliance. However, in the event that FNB's
significant suppliers do not successfully and timely achieve Year 2000
compliance, FNB's business could be adversely affected.
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FNB is also exposed to potential risk if borrowers suffer Year 2000-related
difficulties and are unable to repay their loans. FNB Southeast is discussing
the Year 2000 issue with borrowers as part of the loan granting or renewal
process. At this time, FNB is unable to determine what impact, if any, the Year
2000 will have on the loan payment performance of borrowers. Thus far, however,
none of FNB's borrowers have reported the expectation of material adverse
impacts as a result of the Year 2000.
ABOUT BLACK DIAMOND
ECONOMIC CONDITIONS OF BLACK DIAMOND'S MARKET AREA COULD AFFECT ITS
PROFITABILITY
Black Diamond's loans and deposits are primarily generated from the areas
where its offices are located. With the exception of Rockingham County, where
Black Diamond's Harrisonburg branch is located, the counties that Black Diamond
serves are largely rural, and the economy is diversified among the coal mining,
manufacturing, trade and services industries. Over the past several years, the
local economy has weakened as a result of layoffs and closings by local
employers. Population and household growth and per capita income levels for the
counties that Black Diamond serves are generally lower than comparable levels
for Virginia, with the exception of Rockingham County, while unemployment levels
are generally higher. While Black Diamond's management regards its market area
as a moderate growth area, there can be no assurance that the profitability of
Black Diamond will not be adversely affected if economic conditions remain at
their current levels.
BLACK DIAMOND'S LOAN PORTFOLIO IS HEAVILY WEIGHTED TOWARD REAL ESTATE LOANS, SO
BLACK DIAMOND'S PERFORMANCE MAY SHIFT WITH
FLUCTUATIONS IN REAL ESTATE CONDITIONS
At March 31, 1999, real estate loans, which include residential and
commercial real estate mortgages and construction loans, comprised 84.9% of
Black Diamond's total loan portfolio. Black Diamond generates a substantial
portion of its real estate mortgage loans in Virginia. Therefore, conditions of
the real estate markets in Virginia could strongly influence the level of its
non-performing mortgage loans and its results of operations and financial
condition. Real estate values and the demand for mortgages and construction
loans are affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, the availability of loans
to potential purchasers, and acts of nature. Although Black Diamond's
underwriting standards are intended to protect it 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 its
loans, and its business.
BLACK DIAMOND FACES STRONG COMPETITION FROM COMPETITORS WITH GREATER RESOURCES
Commercial banking in Virginia is extremely competitive, due in large part
to statewide branching. Currently, many of Black Diamond's competitors in
certain of its markets are significantly larger and have greater resources than
Black Diamond. Black Diamond encounters significant competition from a number of
sources, including bank holding companies, commercial banks, thrift
institutions, credit unions and other financial services providers. In addition,
the enactment of federal legislation authorizing nationwide interstate banking
has greatly increased the size and financial resources of some of Black
Diamond's competitors. Consequently, many of its competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers that Black Diamond does not offer. As a
result, Black Diamond will continue to meet increased competition that may limit
its ability to maintain or increase its market share or otherwise materially and
adversely affect its business.
THE YEAR 2000 DATE CHANGE MAY AFFECT BLACK DIAMOND'S OPERATIONS
Black Diamond's year 2000 project remains on schedule according to
guidelines set forth by the Federal Financial Institutions Examination Council.
At the present time, Black Diamond's management believes that the most critical
exposure to year 2000 system problems is with its data processing provider,
which has renovated and continues to test its systems and regards its systems as
year 2000 compliant. In addition, Black Diamond is dependent upon third parties
for electricity, telephone lines and computer services in maintaining customer
account information. See also "About Black Diamond -- General
Information -- Impact of the Year 2000" on page 80. While Black Diamond is not
presently aware of any major year 2000 problems, internally or externally, that
would affect its operations, Black Diamond cannot make any assurance that the
year 2000 date change will not adversely affect its business and operations.
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GENERAL INFORMATION ABOUT THE SPECIAL MEETINGS
DATE, TIME AND PLACE OF THE SPECIAL MEETINGS
The special meeting of the FNB shareholders will be held at 9:30 a.m.,
local time, on , 1999, at Pennrose Park Country Club, 1622
Country Club Road, Reidsville, North Carolina.
The special meeting of the Black Diamond shareholders will be held on
at 5:00 p.m., local time, at 600 Trent Street, Norton, Virginia.
RECORD DATE AND OUTSTANDING SHARES
The FNB board of directors has fixed the close of business on [July 15],
1999 as the record date. Only shareholders of record on the record date are
entitled to notice of and to vote at the FNB special meeting. As of the FNB
record date, there were issued and outstanding [ ] shares of FNB common
stock, held of record by approximately [ ] persons. Each holder of FNB
common stock is entitled to one vote per share held of record on the record
date.
The Black Diamond board of directors has fixed the close of business on
[July 15], 1999, as the record date for the determination of the holders of
Black Diamond common stock entitled to receive notice of and to vote at the
Black Diamond special meeting. Only holders of record of shares of Black Diamond
common stock on the record date will be entitled to receive notice of and to
vote at the special meeting. On the record date shares of Black
Diamond common stock were outstanding and held by approximately
holders of record. Each holder of Black Diamond common stock is entitled to one
vote per share held on the record date.
PURPOSES OF THE SPECIAL MEETINGS
FNB
FNB is furnishing this Joint Proxy Statement/Prospectus to its shareholders
in connection with the solicitation of proxies by the FNB board of directors for
use at the FNB special meeting. At the FNB special meeting, FNB shareholders
will be asked to approve (1) the proposal to issue shares of FNB common stock to
the Black Diamond shareholders in the merger, and (2) such other matters as may
properly come before the FNB special meeting.
IN UNANIMOUSLY APPROVING THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED IN CONNECTION WITH THE MERGER, THE FNB BOARD OF DIRECTORS
HAS DETERMINED THAT ISSUING 1,113,397 SHARES OF FNB COMMON STOCK TO THE
BLACK DIAMOND SHAREHOLDERS IN THE MERGER IS IN THE BEST INTERESTS OF THE
FNB SHAREHOLDERS AND RECOMMENDS THAT THE FNB SHAREHOLDERS VOTE IN FAVOR
OF ISSUING SUCH SHARES.
Black Diamond
Black Diamond is furnishing this Joint Proxy Statement/Prospectus to its
shareholders in connection with the solicitation of proxies by the Black Diamond
board of directors for use at the Black Diamond special meeting. The purpose of
the special meeting is to consider and vote upon the proposal to approve and
adopt the merger agreement and the merger transaction and to transact such other
business as may properly come before the special meeting or any adjournments or
postponements thereof. Pursuant to the merger agreement, at the effective time,
FNB Acquisition Sub will merge with and into Black Diamond, with Black Diamond
as the surviving corporation and a wholly-owned subsidiary of FNB, and each
share of Black Diamond common stock outstanding prior to the merger, other than
shares held by FNB, which shall be canceled, will be converted into the right to
receive 1.3333 shares of FNB common stock, rounded to the nearest whole share.
IN UNANIMOUSLY APPROVING THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED IN CONNECTION WITH THE MERGER, THE BLACK DIAMOND BOARD OF
DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF THE
BLACK DIAMOND SHAREHOLDERS AND RECOMMENDS THAT THE BLACK DIAMOND
SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
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VOTE REQUIRED
FNB
Assuming that a quorum is present at the FNB special meeting, approval of
the proposal to issue shares of FNB common stock in the merger and any other
matter that properly comes before the FNB special meeting (except with respect
to matters which by law, the FNB articles of incorporation or the FNB bylaws
require otherwise) requires the affirmative vote, either in person or by proxy,
of at least a majority of votes cast at the FNB special meeting. FNB
shareholders do not have dissenters' rights of appraisal with respect to the
issuance of FNB shares in the merger.
FNB shareholders are entitled to one vote for each share of FNB common
stock on all matters submitted to a vote of FNB shareholders. The presence at
the FNB special meeting, either in person or by proxy, of the holders of a
majority of the votes entitled to be cast at the meeting constitutes a quorum
for transaction of business. For purposes of determining whether there is a
quorum at the FNB special meeting, abstentions and broker non-votes will be
treated as shares that are present and entitled to vote. However, abstentions
and broker non-votes will have the effect of a vote against the proposal for FNB
to issue shares in the merger.
As of the FNB record date, directors and executive officers of FNB and
their affiliates beneficially owned 361,765 shares of FNB common stock, which
represented 10.4% of the shares of FNB common stock then outstanding.
Black Diamond
Assuming that a quorum is present at the Black Diamond special meeting,
approval of the merger agreement and the transactions contemplated in connection
with the merger requires the affirmative vote of two-thirds of the outstanding
voting stock of Black Diamond, either in person or by proxy.
Black Diamond shareholders are entitled to one vote for each share of Black
Diamond common stock on all matters submitted to a vote of Black Diamond
shareholders. The presence at the Black Diamond special meeting, either in
person or by proxy, of the holders of a majority of the votes entitled to be
cast at the meeting constitutes a quorum for the transaction of business. For
purposes of determining whether there is a quorum present at the Black Diamond
special meeting, abstentions and broker non-votes, if applicable, will be
treated as shares that are present and entitled to vote. However, abstentions
and broker non-votes, if applicable, will have the effect of a vote against the
proposals at the Black Diamond shareholders' meeting.
As of the Black Diamond record date, directors and executive officers of
Black Diamond and their affiliates beneficially owned 230,651 shares of Black
Diamond common stock, which represented approximately 28% of the shares of Black
Diamond common stock then outstanding.
VOTING OF PROXIES
FNB
If the accompanying proxy card is properly signed and returned to FNB and
not revoked before a vote is taken at the FNB special meeting, it will be voted
in accordance with the instructions contained therein. If the proxy card is
signed and returned, but voting directions are not marked, the proxy will be
voted FOR approval of issuing shares of FNB common stock in the merger and any
other matter that properly comes before the FNB special meeting.
At the FNB special meeting, shareholder votes will be tabulated by persons
appointed by the FNB board of directors to act as inspectors of election.
FNB is aware of no matters, except as described in this Joint Proxy
Statement/Prospectus, that may come before the FNB special meeting. If any other
matters are properly presented to the FNB special meeting for action, the
persons named in the applicable form of proxy will vote on such matters as
determined by the majority of the FNB board of directors.
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Black Diamond
If the accompanying proxy card is properly signed and returned to Black
Diamond and not revoked before a vote is taken at the Black Diamond special
meeting, it will be voted in accordance with the instructions contained therein.
If the proxy card is signed and returned, but voting directions are not marked,
the proxy will be voted FOR approval of the merger and any other matter that
properly comes before the Black Diamond special meeting.
At the Black Diamond special meeting, shareholder votes will be tabulated
by persons appointed by the Black Diamond board of directors to act as
inspectors of election.
Black Diamond is aware of no matters, except as described in this Joint
Proxy Statement/Prospectus, that may come before the Black Diamond special
meeting. If any other matters are properly presented to the Black Diamond
special meeting for action, the persons named in the applicable form of proxy
will vote on such matters as determined by the majority of the Black Diamond
board of directors.
AUTHORIZATION TO VOTE ON ADJOURNMENT AND OTHER MATTERS
By signing the proxy, a shareholder authorizes the proxy holder to vote in
his discretion regarding any procedural motions which may come before either
special meeting. For example, this authority could be used to adjourn the
meeting if FNB believes it is desirable to do so. Adjournment or other
procedural matters could be used to obtain more time before a shareholder vote
in order to solicit additional proxies or to provide additional information to
shareholders. Neither FNB nor Black Diamond has any plan to adjourn the meeting
at this time, but would attempt to do so if they believe that would promote
shareholder interests.
REVOCATION OF PROXIES
A shareholder of FNB or of Black Diamond may revoke a proxy at any time
before it is voted by (1) filing written notice of revocation with the corporate
secretary of FNB or Black Diamond (as applicable) which is actually received
prior to the vote of shareholders, (2) filing a duly executed proxy bearing a
later date with such corporate secretary before the vote of shareholders or (3)
attending the FNB or Black Diamond special meeting (as applicable) and voting in
person. Attendance at the special meeting will not by itself revoke the proxy.
Any such filing by a FNB shareholder should be sent to FNB at 202 South
Main Street, Reidsville, North Carolina 27320, attention: Robert F. Albright.
Any such filing by a Black Diamond shareholder should be sent to Black Diamond
Savings Bank, F.S.B., 600 Trent Street, Norton, Virginia 24273, attention:
Corporate Secretary.
SOLICITATION OF PROXIES
Each company will bear the cost of the solicitation of proxies from its
shareholders, except that FNB and Black Diamond will share the cost of filing,
printing and distributing the Registration Statement on Form S-4 (of which this
Joint Proxy Statement/Prospectus is a part) (the "Registration Statement") and
this Joint Proxy Statement/Prospectus in proportion to the number of their
respective shareholders (69% by FNB and 31% by Black Diamond).
In addition to solicitation by mail, the directors, officers and employees
of each company may solicit proxies from shareholders of that company by
telephone or personal communication or by other means. These persons will not
receive additional compensation, but they may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation.
FNB and Black Diamond will make arrangements with brokerage houses and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of FNB and Black Diamond stock held of record by such
persons, and such party will reimburse custodians, nominees and fiduciaries for
their reasonable out-of-pocket expenses in connection with this service.
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THE MERGER
BACKGROUND OF THE MERGER
In October 1998, with authority from the Black Diamond board of directors,
Mr. Don M. Green, President of Black Diamond, contacted Austin Financial,
Toledo, Ohio, to discuss and consider the feasibility and merits of the sale of
the organization in light of the merger and acquisition environment. Mr. Green
contacted Austin Financial after attending a seminar presented by Austin
Financial and preparation of a valuation of the common stock of Black Diamond by
Austin Financial. As a result of these conversations, Austin Financial prepared
an engagement letter for the review and consideration by Mr. Green and the Black
Diamond board of directors. On October 30, 1998 Black Diamond engaged Austin
Financial to act as its exclusive financial advisor with respect to strategic
alternatives including the possible sale, merger, consolidation or other
business combination involving Black Diamond.
On November 23, 1998 Austin Financial prepared and mailed a description of
Black Diamond to approximately 91 organizations Austin Financial believed would
be interested in acquiring Black Diamond. The description provided current and
historical financial performance trends and key aspects of the structure of
Black Diamond. At that time Black Diamond was not disclosed as the subject
organization in the material. Respondents were requested to complete and return
a confidentiality statement indicating their interest in receiving a full
package of information on the as yet unreferenced organization. Of the original
91 letters mailed, 25 banking organizations signed and returned the
confidentiality agreement.
On December 28, 1998 extensive financial and other information about Black
Diamond was forwarded to 24 of the organizations who had signed and returned the
confidentiality agreement. This package also indicated that all expressions of
interest would be due by 4:00 p.m. on January 22, 1999. This date was later
extended to allow for individual discussions with several interested parties. In
early April 1999 Austin Financial received final expressions of interest from
three organizations. One of the offers received was for the Harrisonburg office
only. On April 15, 1999, Black Diamond's board met with representatives of
Austin Financial to assist the board in evaluating these indications of
interest. At this meeting, the board of directors, with the assistance of Austin
Financial, reviewed the financial and nonfinancial terms of each proposal. The
board determined that FNB was the preferred bidder. As a result of these
discussions, the board instructed Austin Financial to pursue negotiations with
FNB.
After considerable negotiations, an agreement was reached between Black
Diamond and FNB on May 28, 1999 and a joint press release announcing the
proposed transaction was released.
BLACK DIAMOND'S REASONS FOR THE MERGER
The terms of the agreement and plan of merger, including the exchange
ratio, were the result of arms-length negotiations between Black Diamond and FNB
and their respective representatives. In the course of reaching its decision to
approve the plan of merger, the board of directors of Black Diamond consulted
with its special legal and financial advisors, as well as with management of
Black Diamond. Without assigning any relative or specific weights, the board
considered numerous factors, including but not limited to the following:
- the transaction will result in a tax deferred gain or loss to Black
Diamond's shareholders;
- the plan of merger provides for a fixed exchange;
- a business combination with a larger bank holding company, such as FNB,
was expected to provide both greater short-term and long-term value to
Black Diamond shareholders than other alternatives available and would
enhance Black Diamond's competitiveness and its ability to serve its
depositors, customers and the communities in which it operates;
- the economic conditions and prospects for the market in which Black
Diamond operates, and competitive pressures in the financial services
industry in general and the banking industry in particular;
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- the merger was expected to offer Black Diamond shareholders greater
liquidity for their shares and prospects for continued growth than if
Black Diamond were to remain independent;
- the bank regulatory environment in general;
- the business, results of operations, asset quality and financial
condition of FNB, the perceived future growth prospects of FNB and Black
Diamond following the merger, and the potential synergies and cost
savings expected to be realized from the merger; and
- the presentations of Black Diamond's financial advisor, Austin Financial,
and the opinion rendered by Austin Financial to the effect that the terms
of the Plan of Merger were fair, from a financial point of view, to the
holders of Black Diamond common stock. See "The Merger -- Opinion of
Black Diamond's Financial Advisors."
BLACK DIAMOND'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT BLACK
DIAMOND SHAREHOLDERS VOTE IN FAVOR OF THE MERGER.
FNB REASONS FOR THE MERGER
The terms of the merger, including the exchange ratio, are the result of
arm's-length negotiations between representatives of FNB and Black Diamond. In
reaching its decision to approve the merger agreement, the FNB board consulted
with its legal advisors regarding the terms of the transaction, with its
financial advisors regarding the financial aspects of the proposed transaction
and the fairness of the exchange ratio, and with management of FNB, and, without
assigning any relative or specific weights, considered a number of factors which
they deemed material, both from a short-term and long-term perspective,
including the following:
- the information presented to the directors by management concerning the
business, operations, earnings, asset quality, and financial condition of
Black Diamond, including the composition of the earning assets portfolio
of Black Diamond;
- the financial terms of the merger, including the relationship of the
value of the consideration issuable in the merger to the market value,
tangible book value, and earnings per share of Black Diamond common
stock;
- the nonfinancial terms of the merger, including the treatment of the
merger as a tax-free reorganization for federal income tax purposes,
arrangements relating to the continued involvement of Black Diamond
management with FNB and that the merger could be accounted for as a
pooling of interests;
- the likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay;
- the attractiveness of the market position of Black Diamond in the markets
in which it operates;
- the report of Equity Research Services reviewing a comparison of Black
Diamond to selected peer banks and thrifts and of premiums paid in other
transactions; and
- the opinion rendered by Equity Research Services as to the fairness, from
a financial point of view, of the exchange ratio to the holders of FNB
common stock.
FNB'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FNB SHAREHOLDERS VOTE
IN FAVOR OF ISSUING SHARES TO COMPLETE THE MERGER.
OPINION OF BLACK DIAMOND'S FINANCIAL ADVISORS
The board of directors of Black Diamond engaged Austin Financial to act as
its financial advisor with respect to determining the value of Black Diamond as
it relates to a possible merger involving all or a substantial amount of the
business, securities, or assets of Black Diamond. Black Diamond selected Austin
Financial as its financial advisor because of its reputation and because Austin
Financial has significant experience in transactions similar to the merger
proposed herein. Austin Financial analyzed Black Diamond
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and its operations, historical performance and future prospects, and provided an
opinion as to the fairness, from a financial point of view, of the terms of the
proposed merger.
Austin Financial is a nationally recognized investment banking firm
specializing in the banking and financial services industry. Austin Financial is
continually engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, private placements and valuations for estate,
corporate and other purposes. Austin Financial has not previously provided
professional services and/or products to Black Diamond in the ordinary course of
business. Furthermore, Austin Financial does not contemplate any future business
with Black Diamond and/or FNB arising from this engagement, nor has its opinion
concerning the fairness, from a financial point of view, of the terms of the
proposed merger been subject to indications of future business with either Black
Diamond or FNB.
Austin Financial rendered a written opinion to Black Diamond's Board of
Directors to the effect that the terms of the proposed merger are fair, from a
financial point of view, to the shareholders of Black Diamond. The written
opinion was delivered on May 19, 1999. No limitations were imposed by the Board
of Directors of Black Diamond upon Austin Financial with respect to the
investigations made or procedures followed by Austin Financial in rendering its
opinion. The full text of the opinion of Austin Financial dated May 19, 1999,
which sets forth assumptions made, matters considered and limits on the review
undertaken by Austin Financial, is attached as Appendix D. BLACK DIAMOND'S
SHAREHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY.
Austin Financial's opinion is directed only to the fairness, from a
financial point of view, of the terms of the proposed merger and does not
constitute a recommendation to any Black Diamond shareholder as to how such
shareholder should vote at the special meeting of Black Diamond shareholders or
any other matter.
In connection with its opinion, Austin Financial reviewed material bearing
upon the financial operating condition of Black Diamond including, but not
limited to: (1) the Annual Report for the fiscal year 1998; (2) financial
statements for year-end (1993-1998); (3) Statement of Condition, April 30, 1999;
(4) Uniform Thrift Performance Report, September 30, 1998; (5) Corporate Income
Tax Return, December 31, 1998; (6) projected depreciation schedule for 1998; (7)
Black Diamond's business plan (1998-2000); (8) various financial information
prepared by management; (9) publicly available information concerning the nature
and terms of certain other merger and acquisition transactions believed relevant
to its inquiry; (10) discussed the foregoing as well as other matters relevant
to its inquiry, including the past and current business operations and
acquisitions, results of regulatory examinations, financial condition, current
loan quality and trends, and future prospects of Black Diamond with certain
officers and representatives of Black Diamond; and (11) the Agreement and Plan
of Reorganization and Merger, signed May 28, 1999, by and between Black Diamond,
FNB Acquisition Sub, F.S.B., and FNB.
Also, in connection with its opinion, Austin Financial reviewed material
bearing upon the financial operating condition of FNB including, but not limited
to: (1) the Annual Report for the fiscal years (1993-1998); (2) Notice of Annual
Meeting and Proxy Statement, April 13, 1999; (3) Form 10-KSB for the fiscal
years (1995-1997); (4) Annual Report of Bank Holding Company FR Y-6 for the
fiscal years (1995-1997); (5) Consolidated Reports of Condition and Income
(year-end 1995-1997); and (6) Form 10-K for the fiscal year ended December 31,
1998.
Furthermore, Austin Financial also took into account its assessment of
general economic, market and financial conditions and its experience in other
transactions, as well as, its experience in securities valuation and general
knowledge of the banking industry. Austin Financial's opinion was necessarily
based upon conditions as they existed and could be evaluated on the date of the
opinion and the information made available to Austin Financial through that
date.
Austin Financial relied upon and assumed without independent verification
the accuracy and completeness of all of the financial and other information
provided to it by Black Diamond, its agents, or from public sources. Austin
Financial has not made an independent evaluation of the assets of Black Diamond,
but has relied upon the books and records of Black Diamond, and the audited
financial statements as presented to Austin Financial as the valuators of the
fair market value of Black Diamond. In addition,
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Austin Financial did not independently verify and relied on and assumed the
aggregate allowances for loan losses set forth in the balance sheet of Black
Diamond at April 30, 1999, were adequate to cover such losses and complied fully
with applicable law, regulatory policy, and sound banking practice as of the
date of such financial statements. Furthermore, Austin Financial did not
independently verify the carrying values of other real estate owned and loans
classified as in-substance foreclosures of Black Diamond in its respective April
30, 1999, balance sheet, and Austin Financial assumed that such carrying values
complied fully with applicable law, regulatory policy and sound banking practice
as of such date. Austin Financial did conduct a physical inspection of some of
the properties and facilities of Black Diamond, but Austin Financial did not
make any independent evaluation or appraisal of the assets, liabilities or
prospects of Black Diamond, nor was Austin Financial furnished with any such
evaluation or appraisal. Austin Financial also assumed that the proposed merger
is, and will be, in compliance with all laws and regulations that are applicable
to Black Diamond and FNB.
In connection with rendering its opinion to Black Diamond's Board of
Directors, Austin Financial performed a variety of financial analyses which are
summarized below. Austin Financial's summary of such analyses as set forth in
this Joint Proxy Statement/Prospectus does not purport to be a complete
description of such analyses. Austin Financial believes that its analyses and
the summary set forth in this Joint Proxy Statement/Prospectus must be
considered as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors and analyses, could
create an incomplete view of the analyses and the process underlying Austin
Financial's opinion. The preparation of a fairness opinion is a complex process
involving Austin Financial's subjective judgments and is not necessarily
susceptible to partial analysis or summary description. In its analyses, Austin
Financial made numerous assumptions with respect to industry performance,
business and economic conditions, and other matters, many of which are beyond
the control of Black Diamond or FNB. Any estimates contained in Austin
Financial's analyses are not necessarily indicative of future results or value,
which may be significantly more or less favorable than such estimates. Austin
Financial's estimates of values of companies do not purport to be appraisals or
necessarily reflect the price at which companies or their securities actually
may be sold. No company or transaction utilized in Austin Financial's analyses
was identical to Black Diamond, FNB or the proposed merger. Accordingly, such
analyses are not based solely on arithmetic calculations; rather, they involve
complex considerations and judgments by Austin Financial concerning differences
in financial and operating characteristics of the relevant companies, the timing
of the relevant transactions and prospective buyer interest, as well as other
factors that could affect the public trading markets of the company or companies
to which they are being compared. None of the analyses performed by Austin
Financial was assigned a greater significance by Austin Financial than any
other.
The following is a brief description of the analyses performed by Austin
Financial in connection with its opinion as described to Black Diamond's board
of directors by Austin Financial:
I. SUMMARY
Each share of common stock of Black Diamond outstanding immediately prior
to consummation of the merger will be exchanged for 1.3333 shares of FNB. The
merger will result in the merger of FNB Acquisition Sub, F.S.B. with and into
Black Diamond and Black Diamond becoming a wholly-owned subsidiary of FNB. FNB
will continue to carry on its banking business in substantially the same manner
as before the reorganization.
II. DISCOUNTED CASH FLOW ANALYSIS
Austin Financial utilized a discounted cash flow analysis in order to
determine the fair market value of Black Diamond. Austin Financial projected
Black Diamond's cash flow from April 30, 2000, through April 30, 2004, assuming
a minimum equity capital to asset ratio of 6.00%. The present value per share
outstanding of Black Diamond's common stock resulting from this analysis was
$20.50 (assuming 835,069 shares outstanding).
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III. ADJUSTED BOOK VALUE ANALYSIS
Austin Financial also determined the adjusted book value of Black Diamond
as an alternative valuation method. The adjusted book value approach requires a
three-step process. First, the book value is determined. This figure is derived
from the April 30, 1999, balance sheet, and it represents the summary measure of
shareholders' claims against the assets, on a historical cost basis. Second,
assets and liabilities are restated to their fair market values. The adjusted
book value calculation considers each major asset and liability account
classification. Finally, additional "off-balance sheet" adjustments are
calculated, if necessary. The fair market value per share outstanding of Black
Diamond's common stock resulting from this analysis was $15.93.
IV. WEIGHTED VALUE ANALYSIS
Austin Financial applied an equal weighting of 50% to both the discounted
cash flow value and the adjusted book value. The applied weightings were based
on Austin Financial's review of the financial position, history and recent
performance of Black Diamond. The sum of the weighted values or $18.22 per share
outstanding equates to the fair market value of Black Diamond. Based on the
$18.22 per share value of Black Diamond's common stock as determined by Austin
Financial in comparison to FNB's last stock trade of $15.75 on May 18, 1999, the
terms of the proposed merger provide an additional $2.78 per current share
outstanding to Black Diamond's shareholders over and above the fair market
value.
V. ANALYSIS OF OTHER MERGER TRANSACTIONS
Austin Financial analyzed certain other mergers and acquisitions that were
announced during the first quarter of 1999 in the Southeast involving financial
institutions with assets of approximately $300 million or less. Austin
Financial's analysis showed that the implied per share valuations of Black
Diamond, applying the mean transaction multiples described above to Black
Diamond's earnings per share and book value per share were $32.33 and $26.45,
respectively. The results produced in this analysis do not purport to be
indicative of actual values or expected values of Black Diamond or shares of
Black Diamond's common stock.
Black Diamond and Austin Financial have entered into an arrangement
relating to the services to be provided by Austin Financial in connection with
the proposed merger. In regards to Austin Financial's services in determining an
opinion as to the fairness, from a financial point of view, of the terms of the
proposed merger, the fee is inclusive with the commission to be received upon
consummation of the reorganization. Austin Financial will receive a transaction
fee in an amount equal to 0.70% of purchase consideration in any form received
by Black Diamond and its shareholders in the merger. Black Diamond has satisfied
payment of a portion of this fee through the payment of monthly billings by
Austin Financial for services performed to date. Black Diamond will pay the
balance of the fee at closing. Based on the closing price of $ of
FNB common stock on July , 1999, Black Diamond estimates that the total
transaction fee payable to Austin Financial will be approximately
$ .
In addition, Black Diamond also has agreed to indemnify Austin Financial
and its officers, directors, shareholders, employees and agents for all of its
time, expenses, and any liability incurred as a result of Austin Financial's
proposed engagement by means of legal action, administrative proceedings or
threat thereof, unless such action, pending or threat thereof is caused by
Austin Financial's own unlawful conduct, breach of duty or negligence during the
course of performing Austin Financial's services.
Austin Financial, in rendering its opinion, has assumed that the
transaction will be a tax-free reorganization with no material adverse tax
consequences to any of the parties involved. In addition, Austin Financial has
assumed that in the course of obtaining the necessary regulatory approvals for
the transaction, no condition will be imposed upon Black Diamond or FNB that
will have a materially adverse impact on the contemplated benefits of the
proposed transaction to Black Diamond or FNB or any of their shareholders.
OPINION OF FNB'S FINANCIAL ADVISORS
FNB engaged Equity Research Services to render an opinion to FNB's board of
directors that the 1.3333 exchange ratio was fair, from a financial point of
view, to FNB's shareholders. The opinion was delivered on
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May 17, 1999, updated on May 28, 1999, and further updated as of the date of
this Joint Proxy Statement/ Prospectus. The full text of Equity Research
Services' opinion is included as Appendix E to this Joint Proxy
Statement/Prospectus and should be read in its entirety with respect to the
procedures followed, assumptions made, matters considered, qualifications and
limitations on the review undertaken by Equity Research Services in connection
with the opinion.
Equity Research Services' opinion is solely directed to FNB's board of
directors and addresses only the fairness, from a financial point of view, of
the 1.3333 exchange ratio. It does not address FNB's underlying business
decision to effect the proposed merger, nor does it constitute a recommendation
to any FNB shareholder as to how such shareholder should vote with respect to
the merger or as to any other matter.
Equity Research Services' opinion was one of many factors taken into
consideration by FNB's board of directors in making its determination to approve
the merger, and the receipt of Equity Research Services' opinion is a condition
precedent to FNB's consummation of the merger. The opinion of Equity Research
Services does not address the relative merits of the merger as compared to
alternative business strategies that might exist for FNB or the effect of any
other business combination in which FNB might engage.
In providing its opinion, Equity Research Services, without independent
verification, relied on the accuracy and completeness of all financial and other
information provided to or discussed with it or publicly available, and it has
not independently verified such information. With respect to financial forecasts
and other forward-looking information furnished to or discussed with it, Equity
Research Services has been advised by management of FNB and Black Diamond, as to
their respective information, that such forecasts and information were prepared
on the basis of reasonable estimates and judgments, and Equity Research Services
has assumed such to be accurate. Equity Research Services also has assumed that
the merger will be treated as a pooling of interests transaction and has not
performed or considered any independent appraisal or evaluation of the assets of
Black Diamond or FNB.
Equity Research Services is a North Carolina-based corporation primarily
engaged in: (i) performing valuations of, and valuations related to, closely
held and publicly traded companies; and (ii) conducting research on the
performance and investment characteristics of publicly traded companies and
publishing such analysis in the form of reports which are made available to the
respective companies and the investment community. All reports generated by
Equity Research Services for the purpose of investor relations are designated
"Investor Relations Report" and Equity Research Services receives a fee (from
the company whose securities are described) for producing such reports. The
reports do not contain a purchase or investment rating but do consider certain
investment characteristics of the respective company's securities. In addition,
Equity Research Services regularly fields inquiries from brokers, shareholders
and others who have questions about the respective company.
In connection with the services including and related to the "Investor
Relations Reports," the majority of Equity Research Services' clients are banks
that are located in North Carolina. FNB has been one of Equity Research
Services' clients since January 1993. Equity Research Services' engagement by
FNB involves producing the above mentioned "Investor Relations Reports,"
responding to questions about FNB and providing various financial advisory
services.
Equity Research Services was selected by FNB as its financial advisor
because of its knowledge of and experience in valuations and capital markets and
expertise in the commercial banking industry. No instructions were given or
limitations imposed by FNB upon Equity Research Services regarding the scope of
its investigation or the procedures it followed in rendering its opinion. Equity
Research Services does not trade in the securities of either FNB or Black
Diamond.
In connection with rendering its opinion to FNB's board of directors,
Equity Research Services, among other things, (i) reviewed the terms of the
merger agreement and option agreement; (ii) reviewed and analyzed the financial
position and performance of Black Diamond and FNB as reflected in certain
information provided for this purpose by the respective management; (iii)
reviewed financial forecasts of FNB and Black Diamond prepared by their
respective management; (iv) reviewed and analyzed certain exhibits produced by
FNB analyzing the merger; (v) reviewed information including, but not limited
to, Annual
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Reports for both companies, Annual Reports on Form 10-K for FNB, Quarterly
Reports to shareholders and Quarterly Reports on Form 10-Q for FNB, Uniform Bank
Performance Reports and Call Report data for FNB and Office of Thrift
Supervision Thrift Financial Report data for Black Diamond and conducted a
general and financial comparison of the two companies to one another, as well as
to other comparable institutions; and (vi) analyzed the terms of certain other
control transactions involving mergers of thrift institutions in the Southeast
which Equity Research Services deemed most relevant. Equity Research Services
also analyzed overall market, economic, financial and other considerations as
well.
Equity Research Services used a price of $16.50 per FNB share for purposes
of calculating the value of the transaction to Black Diamond's shareholders. The
price of $16.50 was the approximate price of FNB for the 30 trading days
preceding the date of the initial fairness opinion which was issued on May 17,
1999. The actual closing price of FNB stock on May 17, 1999 was $16.25 and the
closing price on May 28, 1999 was $15.50. Since Black Diamond's stock is not
quoted on any exchange or formal market, there was no quoted price for it as of
the same dates.
The following is a summary of certain aspects of Equity Research Services'
analysis which was performed in connection with the fairness opinion.
I. COMPARABLE TRANSACTIONS
As part of its analysis, Equity Research Services reviewed other
transactions involving whole-thrift acquisitions that had occurred in the
Southeast. Specifically, it considered more than 40 transactions that occurred
between April 15, 1997 and May 15, 1999 in the following states: North Carolina,
South Carolina, Virginia, West Virginia, Georgia, Tennessee and Alabama. For
each of the transactions, Equity Research Services considered various factors in
an attempt to develop a group of thrifts which were comparable to Black Diamond.
These factors included, but were not limited to, asset size, capital ratios,
level of profitability (measured both by return on average assets as well as
return on average equity) and asset quality. Equity Research Services also
analyzed the type of consideration provided to the seller (stock, cash or both).
Based on its analysis, Equity Research Services identified eight completed
transactions which involved selling companies that it believed had size,
financial and other characteristics that were, on the whole, similar to Black
Diamond. Equity Research Services then looked at the terms of those transactions
and considered the prices paid for those institutions based on a variety of
ratios in comparison to the price to be paid in the Black Diamond merger.
The range of multiples to stated book value for the eight above mentioned
transactions was from 147% to 366%. The median price paid was 248% of stated
book value. The comparable figure for Black Diamond is within that range based
on book value as of March 31, 1999 and well below the median. On the basis of
tangible book value, the multiples ranged from a low of 147% of tangible book
value to a high of 401% of tangible book value, with a median of 248%, the same
as for stated book value. The comparable figure for Black Diamond was similarly
within the range and below the median.
Likewise, the multiple of trailing 12 month earnings was lower for Black
Diamond than for the median of the eight transactions. While the median price
paid on the eight acquisitions was 28.3 times trailing 12 month earnings, it was
15.4 times for Black Diamond using earnings for the 12 months ended March 31,
1999. The price to be paid in the Black Diamond merger as a percentage of assets
was also lower than the peer group, as it was on the basis of deposits. For the
eight transactions, the median price paid as a percentage of assets was 21.6%
versus 14.7% for Black Diamond. The median price paid as a percentage of
deposits was 26.0% versus 16.3% for Black Diamond. The multiples in the Black
Diamond transaction were within a range Equity Research Services considered
reasonable but were lower in each case than the corresponding medians for the
eight transactions.
II. PRO FORMA TRANSACTION ANALYSIS
Equity Research Services also considered certain pro forma effects on FNB
resulting from the merger with Black Diamond. Specific considerations included,
but were not limited to, the impact of the merger on
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FNB's assets, net loans, deposits, equity, earnings, as well as other selected
measures. Equity Research Services also considered the anticipated impact of the
merger on projected earnings and profitability ratios, based largely on
representations made to it by FNB and Black Diamond. These projections and the
pro forma analysis are based on data available at the time the projections were
made and the analysis performed and should not be construed as necessarily being
indicative of the actual impact of the merger on FNB when consummated.
On a pro forma basis, the combined entity would have total assets as of
March 31, 1999 of approximately $544 million, versus $413 million for FNB on a
stand alone basis. Total deposits and gross loans for the combined entity would
be $456 million and $373 million, respectively, versus comparable figures of
$338 million and $265 million for FNB on a stand alone basis. The combined
entity would have total equity as of March 31, 1999 of approximately $51.6
million, versus $42.3 million for FNB on a stand alone basis. Additionally,
Equity Research Services determined that, based on estimates as to the cost
savings and other potential synergies prepared by FNB's management, as well as
various income statement, balance sheet and other assumptions, the merger could
be expected to be dilutive to FNB's estimated 1999 earnings per share by
approximately 5.6% but accretive to FNB's earnings per share in 2000 by
approximately 3.6% and that such accretion could increase in subsequent periods,
depending on the amount of revenue enhancements and cost savings that were
realized.
III. DISCOUNTED FUTURE CASH FLOW
Equity Research Services also projected the cash flow that Black Diamond
could produce over the next five years, under various circumstances and
assumptions, including the assumption that the company performed in accordance
with management's expectations. Equity Research Services then estimated the
terminal values for Black Diamond common stock at the end of the period by
applying multiples ranging from 16 times to 18 times earnings projected in year
five. The cash flow and terminal values were then discounted to present values
using different discount rates that ranged from 12% to 16%, reflecting different
assumptions regarding required rates of return. This analysis indicated present
values that compared favorably to the consideration to be paid in the merger.
IV. COMPARISON OF FNB AND BLACK DIAMOND TO THE INDUSTRY
Equity Research Services also compared FNB and Black Diamond to a group of
publicly traded financial institutions operating in the Southeast. Equity
Research Services considered factors including, but not limited to, asset size,
capitalization, asset quality and reserve coverage, dividend yield,
profitability ratios and valuation measures. FNB was compared to approximately
45 commercial banks located in North Carolina and Virginia with less than $1
billion in assets. This analysis indicated that FNB had a slightly lower return
on average assets ("ROAA") and return on average equity ("ROAE") than the
medians for the group of banks and trades at multiples of earnings and book
value which are likewise lower than the medians of the group. FNB's stock, based
on a price of $16.50, was trading at 14.7x trailing 12 month earnings and 130%
of book value, versus respective figures of 16.1x and 180% for the peer group.
Reserve coverage and asset quality were slightly better for FNB than for the
peer group.
Black Diamond was compared to approximately 22 thrifts located in North
Carolina and Virginia with less than $1 billion in assets. Black Diamond's ROAA
and ROAE were higher than the medians for the group of thrifts, although its
asset quality and reserve coverage were lower than the medians. Black Diamond's
stock, using an acquisition price of $22.00 per share, was higher on a price to
book value basis (at 197%) than the peer group (at 98%), although it was lower
on a price to trailing 12 month earnings basis (15.4x for Black Diamond versus
15.6x for the peer group).
V. COMPARISON OF INVESTMENT AND OTHER CHARACTERISTICS OF FNB AND BLACK DIAMOND
Equity Research Services also considered as part of its analysis
differences in the operating performance, financial condition and the investment
characteristics of FNB and Black Diamond. Specific considerations included, but
were not limited to, (i) relative levels of profitability and the components of
those profits;
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(ii) the composition of the balance sheet; (iii) asset quality and reserve
coverage; (iv) capitalization; (v) management depth; (vi) price appreciation and
liquidity of common stock; (vii) dividend policy; (viii) deposit market share;
and (ix) trends in many of these and other factors.
As part of this analysis, Equity Research Services compared growth rates of
Black Diamond and FNB from 1996 through 1998. Among its conclusions were that
both banks had experienced growth in earnings, assets, deposits and loans,
although FNB's growth rates exceeded those of Black Diamond's. The level of
nonperforming assets for Black Diamond was higher, as a percentage of total
assets, than it was for FNB, and Black Diamond's reserve coverage was lower.
Black Diamond's capitalization ratios, however, were somewhat lower than those
of FNB. FNB also had a more liquid stock, as defined by trading volume and paid
a cash dividend, while Black Diamond's stock did not pay a dividend.
The preparation of a fairness opinion requires the consideration of the
most appropriate methods of financial analysis and their applications. The
applications of that analysis consider many factors, all of which considered
together result in a final opinion of fairness or not. As a result, the
evaluation is not susceptible to partial analysis. Accordingly, none of the
above analysis should be considered as a single determinant of fairness but
should be construed as part of an overall analysis.
In its analysis, Equity Research Services made numerous assumptions with
respect to business conditions, economic conditions, projections of FNB's and
Black Diamond's performance, as well as other matters, many of which are beyond
FNB's and Black Diamond's control. Any estimates contained in Equity Research
Services' analysis are not necessarily indicative of future results or values.
Pursuant to a letter agreement dated April 27, 1999, FNB engaged Equity
Research Services to render a fairness opinion and agreed to pay Equity Research
Services $45,000 for its services. Equity Research Services is compensated by
FNB for its investor relations services on an annual retainer basis which does
not exceed $9,000. In addition, Equity Research Services has provided limited
financial advisory services to FNB with respect to the proposed acquisition of
Black Diamond on an hourly rate basis and such charges are approximately
$10,000. FNB also agreed to reimburse Equity Research Services for its
reasonable out-of-pocket expenses and to indemnify Equity Research Services and
its related parties against certain liabilities, including liabilities under the
federal securities laws.
INTERESTS OF PERSONS IN THE MERGER OTHER THAN AS SHAREHOLDERS
Certain members of Black Diamond's management, as well as certain members
of Black Diamond's board of directors, have interests in the merger in addition
to their interests as shareholders of Black Diamond. These interests are
described below. In each case, the Black Diamond board was aware of these
potential interests, and considered them, among other matters, in approving the
merger agreement and the transactions related to the merger.
DIRECTORS OF FNB. FNB will appoint two of Black Diamond's directors, Don
M. Green and Gary Blosser, to serve on its board of directors after the merger.
For their service as directors, Mr. Green and Mr. Blosser will be compensated in
accordance with FNB's standard arrangements for the compensation of directors.
In connection with the merger, FNB will reconstitute Black Diamond's board
of directors. The only Black Diamond directors who will continue to serve on the
Black Diamond board after the merger will be Don Green, Ben Sergent and Jack
Kennedy. All of the current members of Black Diamond's board of directors,
however, will be appointed to the local advisory board for FNB following the
merger. These advisory board members will receive fees of $150 per meeting.
EMPLOYMENT ARRANGEMENTS. As a condition to the obligations of FNB under
the merger agreement, Don Green, Ben Sergent and Esther W. Bolling, officers of
Black Diamond, have entered into new employment agreements with Black Diamond
for a three-year period beginning at the closing of the merger.
Pursuant to his employment agreement, Mr. Green will serve as President and
Chief Executive Officer of Black Diamond. Black Diamond will pay Mr. Green an
annual base compensation of $164,500, with
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increases and bonuses as Black Diamond's board of directors, in its discretion,
may approve from time to time. Mr. Green will also be entitled to receive
certain severance benefits upon its termination of his employment agreement,
including termination due to a change-in-control of FNB.
Mr. Sergent's and Ms. Bolling's employment agreements provide for their
service as Chief Operating Officer and Chief Financial Officer, respectively, of
Black Diamond. These employment agreements contain terms and provisions similar
to those in Mr. Green's employment agreement.
INDEMNIFICATION. FNB has agreed to continue to maintain indemnification
rights and liability insurance for the directors and officers of Black Diamond
to the same extent and on the same conditions as they are entitled to from Black
Diamond before the merger.
FORM OF THE MERGER
If (1) the holders of Black Diamond common stock approve the merger
agreement, (2) the FNB shareholders approve the proposal to issue shares of FNB
common stock, and (3) all other conditions to the merger are satisfied or
waived, where permissible, FNB Acquisition Sub, a newly formed subsidiary of
FNB, will be merged with and into Black Diamond, with Black Diamond being the
surviving corporation after the merger. Each share of FNB Acquisition Sub common
stock outstanding immediately prior to the merger will be converted into one
share of common stock of the surviving corporation. Black Diamond's bylaws and
charter will become those of the surviving corporation and the board of
directors of Black Diamond will be reconstituted to include five FNB designees
and three Black Diamond designees, although Black Diamond will continue as a
separate entity and keep its current name. The officers of Black Diamond will
become those of the surviving corporation. The date on which the closing of the
merger will occur is referred to in this Joint Proxy Statement/Prospectus as the
"Closing Date." The Closing Date will be designated by FNB, subject to 10 days'
advance notice to Black Diamond. The Closing Date must be set between five and
60 days following approval of the merger by the OTS. FNB and Black Diamond
anticipate that the Closing Date will occur as promptly as practicable after the
special meetings.
CONSIDERATION FOR THE MERGER
The merger agreement provides that, at the effective time of the merger,
each share of Black Diamond common stock outstanding immediately prior to the
effective time of the merger (other than any shares owned by FNB, which will be
canceled) will be converted into the right to receive 1.3333 shares of FNB
common stock, rounded to the nearest whole share. Former Black Diamond
shareholders will hold approximately 25% of the outstanding shares of FNB common
stock after the merger.
EFFECTIVE TIME OF THE MERGER
The merger will become effective at the time articles of combination filed
with the OTS are made effective (the "Effective Time"). Articles of combination
will be filed with the OTS at the same time as the closing of the merger.
PROCEDURES FOR EXCHANGE OF BLACK DIAMOND STOCK CERTIFICATES
The conversion of Black Diamond common stock into the right to receive FNB
common stock will occur automatically at the Effective Time of the merger. Any
shares of Black Diamond capital stock owned immediately prior to the Effective
Time of the merger by FNB will be canceled.
After the Effective Time of the merger, FNB will designate a bank or trust
company to act as exchange agent (the "Exchange Agent"), and shall deliver, for
the benefit of holders of shares of Black Diamond common stock, certificates
representing the shares of FNB common stock issuable pursuant to the merger, in
accordance with the merger agreement. The Exchange Agent will deliver the
certificates representing shares of FNB common stock and upon surrender for
exchange of certificates representing shares of Black Diamond common stock.
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As soon as practicable after the Effective Time of the merger, the Exchange
Agent will send a letter of transmittal to each former Black Diamond
shareholder, together with instructions regarding the surrender of certificates
previously representing Black Diamond common stock to be exchanged for
certificates representing the shares of FNB common stock issuable to such
shareholder.
YOU SHOULD NOT FORWARD BLACK DIAMOND COMMON STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL YOU HAVE RECEIVED A LETTER OF TRANSMITTAL.
Upon surrender of a certificate for Black Diamond common stock to the
Exchange Agent, together with an executed letter of transmittal, a Black Diamond
shareholder will be entitled to receive that number of shares of FNB common
stock which that shareholder has the right to receive in respect of that
certificate. The surrendered certificates will be canceled.
Holders of certificates previously representing Black Diamond common stock
will not be paid dividends or distributions, if any, with a record date on or
after the Effective Time of the merger on the shares of FNB common stock into
which such shares have been converted until such certificates are surrendered to
the Exchange Agent for exchange. Subject to applicable law, when such
certificates are surrendered, any unpaid dividends payable as described above
will be paid without interest.
After the Effective Time of the merger, there will be no further ability to
register a transfer of shares of Black Diamond common stock on the records of
Black Diamond. If a certificate representing shares for transfer is presented to
Black Diamond or FNB after the Effective Time of the merger, it will be canceled
and exchanged for a certificate representing shares of FNB common stock in
accordance with the terms of the merger agreement.
ANTICIPATED ACCOUNTING TREATMENT
FNB and Black Diamond intend for the merger to be accounted for as a
"pooling of interests" in accordance with generally accepted accounting
principles. FNB will restate, retroactively at the Effective Time of the merger,
its consolidated financial statements to include the assets, liabilities,
shareholders' equity and results of operation of Black Diamond, subject to any
adjustments required to conform with the accounting policies and financial
statement classifications of the two companies, as if the companies had always
been combined. In future financial statements, the results of operations of the
combined entities will include the results of both FNB and Black Diamond for the
entire fiscal year in which the merger occurs and all prior fiscal periods
presented therein.
The unaudited pro forma combined condensed financial data contained in this
Joint Proxy Statement/ Prospectus with respect to FNB and Black Diamond have
been prepared using the pooling of interests accounting method to account for
the merger. See "Unaudited Pro Forma Combined Condensed Financial Data"
beginning on page 9.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences of the merger to the Black Diamond shareholders. The summary is
based on the Internal Revenue Code of 1986, as amended, (the "Code"), Treasury
regulations promulgated thereunder, administrative rulings and pronouncements
and judicial decisions as of the date of this Joint Proxy Statement/Prospectus,
each of which is subject to change at any time. Any such change, which may or
may not be retroactive, could alter the tax considerations discussed below. The
discussion below is for general information only and does not address all
aspects of United States federal income taxation that may be material to you in
connection with the merger in light of your particular status or circumstances,
including, without limitation, Black Diamond shareholders who are (1) foreign
persons, (2) insurance companies, (3) tax-exempt entities, (4) retirement plans,
(5) dealers in securities, (6) persons whose shares of Black Diamond capital
stock were acquired pursuant to the exercise of employee stock options or
otherwise as compensation, (7) persons subject to the alternative minimum tax
and (8) persons in whose hands the Black Diamond capital stock does not
represent a capital asset. The discussion below does not address the effect of
any applicable state, local or foreign tax laws, or the effect of
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any federal tax laws other than federal income tax laws. The parties will not
request a ruling from the IRS in connection with any federal income tax
consequences of the merger.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE UNITED
STATES FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE MERGER
IN LIGHT OF YOUR PARTICULAR TAX CIRCUMSTANCES AND THE POSSIBLE EFFECTS
OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
Consummation of the merger is conditioned upon the receipt by FNB of an
opinion from its tax counsel, Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P., (the "Tax Opinion") that the merger will qualify as a
reorganization within the meaning of Section 368 of the Code. The Tax Opinion
will be based on certain assumptions and upon representations as to certain
factual matters made by Black Diamond, FNB and FNB Acquisition Sub. Such
representations, if incorrect, could jeopardize the conclusions reached in the
Tax Opinion. The Tax Opinion neither binds the IRS nor precludes the IRS from
adopting a contrary position. An opinion of counsel only represents such
counsel's best legal judgment and has no binding effect or official status of
any kind, and no assurance can be given that contrary positions will not be
taken by the IRS or a court considering the issues.
Based on the Tax Opinion, the material United States federal income tax
consequences to the Black Diamond shareholders that will result from the merger
are as follows:
(1) A Black Diamond shareholder will not recognize any gain or loss
upon the receipt of FNB common stock solely in exchange for his shares of
Black Diamond common stock pursuant to the merger.
(2) The aggregate tax basis of FNB common stock received by a Black
Diamond shareholder in the merger will equal the aggregate tax basis of
that shareholder in the Black Diamond common stock surrendered by that
shareholder in the merger.
(3) The holding period of the FNB common stock received by a Black
Diamond shareholder in the merger will include the period during which the
shareholder held the Black Diamond common stock surrendered in the merger.
(4) A dissenting Black Diamond shareholder that receives cash in
exchange for Black Diamond common stock pursuant to the merger will be
treated as having had the Black Diamond common stock redeemed. Subject to
special rules described below, such a shareholder will generally recognize
capital gain or loss on such redemption in an amount equal to the
difference between the amount of cash received and the basis of such Black
Diamond common stock. The tax rate applicable to capital gain of an
individual taxpayer varies depending on the taxpayer's holding period for
the shares. In the case of an individual, any such capital gain will be
subject to a maximum federal income tax rate of 20% if the individual's
holding period in such stock was more than one year at the effective time
of the merger. An individual's gain on the sale of Black Diamond common
stock held for one year or less is subject to tax as ordinary income at a
maximum rate of 39.6%. Under special rules, cash received by a dissenting
Black Diamond shareholder may be treated as ordinary income, taxable at a
maximum rate of 39.6%, if the redemption of such shareholder's Black
Diamond common stock is treated as a dividend. Dissenting Black Diamond
shareholders should consult their individual tax advisors on the possible
treatment of the redemption of their Black Diamond common stock as a
dividend.
STOCK EXCHANGE LISTING
It is a condition to the merger that, if the shares of FNB common stock
issuable in the merger are not repurchased in the open market, such shares be
approved for listing on The Nasdaq Stock Market, subject to official notice of
issuance.
RESALE OF FNB COMMON STOCK AFTER THE MERGER
Shares of FNB common stock issued pursuant to the merger will not be
subject to any restrictions on transfer arising under the Securities Act of
1933, as amended (the "Securities Act"), except for shares issued
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to any Black Diamond shareholder who may be deemed to be an "affiliate" of Black
Diamond for purposes of Rule 145 under the Securities Act. This Joint Proxy
Statement/Prospectus does not cover resales of FNB common stock received by any
person who may be deemed to be such an affiliate.
Persons who may be deemed to be affiliates of Black Diamond generally
include individuals or entities that control, are controlled by, or are under
common control with Black Diamond, and generally include the directors of Black
Diamond. Affiliates may not sell their shares of FNB common stock acquired in
connection with the merger, except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 under the Securities Act (or Rule 144 under the Securities Act in the
case of persons who become affiliates of FNB) or another applicable exemption
from the registration requirements of the Securities Act. In general, Rule 145
under the Securities Act provides that, for one year following the Effective
Time of the merger, an affiliate (together with certain related persons) would
be entitled to sell shares of FNB common stock acquired in connection with the
merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as those terms are defined in Rule 144 under the
Securities Act. Additionally, the number of shares to be sold by an affiliate
(together with certain related persons and certain persons acting in concert)
within any three-month period for purposes of Rule 145 under the Securities Act
may not exceed the greater of 1% of the outstanding shares of FNB common stock
or the average weekly trading volume of such shares during the four calendar
weeks preceding such sale. Rule 145 under the Securities Act will remain
available to affiliates if FNB remains current with its informational filings
with the SEC under the Securities Exchange Act of 1934. One year after the
Effective Time of the merger, an affiliate will be able to sell such shares of
FNB common stock without being subject to such manner of sale or volume
limitations provided that FNB is current with its Exchange Act informational
filings and such affiliate is not then an affiliate of FNB. Two years after the
Effective Time of the merger, an affiliate will be able to sell such shares of
FNB common stock without any restrictions so long as such affiliate had not been
an affiliate of FNB for at least three months prior to the date of such sale.
Black Diamond will obtain, within 60 days of the date of the merger
agreement, written undertakings ("Affiliate Letters") from each person who may
be deemed a Black Diamond affiliate, to the effect that, among other things,
such person will not sell, transfer or otherwise dispose of, or direct or cause
the sale, transfer or other disposition of, any shares of Black Diamond common
stock or FNB common stock, as applicable, beneficially owned by such person
prior to the Effective Time of the merger and will not sell, transfer or
otherwise dispose of, or direct or cause the sale, transfer or other disposition
of, shares of FNB common stock beneficially owned by such person as a result of
the merger or otherwise until after such time as FNB shall have publicly
released a report in the form of a quarterly earnings report, registration
statement filed with the SEC, report filed with the SEC or any other public
filing, statement or announcement which includes the combined financial results
of FNB and Black Diamond for a period of at least 30 days of combined operations
of FNB and Black Diamond following the Effective Time of the merger.
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement.
This summary is qualified in its entirety by reference to the merger agreement,
which is incorporated by reference in its entirety and attached to this Joint
Proxy Statement/Prospectus as Appendix A. FNB and Black Diamond shareholders are
urged to read the merger agreement in its entirety for a more complete
description of the merger.
CERTAIN REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
Black Diamond (which are subject, in certain cases, to specified exceptions)
relating to, among other things: (a) corporate organization, existence and good
standing and similar corporate matters; (b) capital structure; (c)
authorization, execution, delivery, consummation and enforceability of the
merger agreement and related matters; (d) ownership of securities; (e) financial
statements; (f) the absence of undisclosed liabilities; (g) filing of tax
returns, payment of taxes and tax compliance matters; (h) outstanding options,
warrants and related matters; (i) ownership and condition of property; (j)
accuracy of information furnished to FNB regarding employees, certain contracts
and debt instruments, employment contracts and related matters, real property
and affiliates; (k) agreements in force and effect; (l) legal proceedings and
compliance with laws; (m) employee benefit plans; (n) insurance; (o) its loan
portfolio; (p) the absence of material adverse changes since March 31, 1999; (q)
brokers and finders; (r) subsidiaries, partnerships and joint ventures; (s)
material reports and statements filed with the Federal Reserve Board, the FDIC,
the OTS and other governmental regulatory authorities with jurisdiction over
Black Diamond; (t) environmental matters; (u) accuracy of information disclosed
to FNB by Black Diamond; (v) the absence of any facts or conditions that would
interfere with the anticipated accounting or tax treatment of the merger or
prevent regulatory approval of the merger; (w) regulatory approvals; (x) Year
2000 readiness; and (y) insurance of deposits.
The merger agreement also contains customary representations and warranties
of FNB relating to, among other things: (a) corporate organization, existence
and good standing and similar corporate matters; (b) capital structure; (c)
authorization, execution, delivery, and enforceability of the merger agreement
and related matters; (d) brokers and finders; (e) the absence of material
adverse changes since March 31, 1999; (f) material reports and statements filed
with the Federal Reserve Board, the FDIC, the North Carolina Banking Commission,
the SEC and other governmental authorities with jurisdiction over FNB's
operations; (g) the absence of undisclosed liabilities; (h) the accuracy of
information disclosed by FNB to Black Diamond; (i) options, warrants and related
matters; (j) environmental matters; (k) the absence of any facts or conditions
that would interfere with the anticipated accounting or tax treatment of the
merger or prevent regulatory approval of the merger; (l) regulatory approvals;
and (m) Year 2000 readiness.
The merger agreement also includes customary representations and warranties
of FNB Acquisition Sub relating to, among other things, organization, and power
and authority to complete the merger.
The representations and warranties of Black Diamond, FNB and FNB
Acquisition Sub are not waived or otherwise affected by any investigation made
by any party and do not survive beyond the Effective Time of the merger.
CERTAIN COVENANTS AND AGREEMENTS
Conduct of Business Pending Merger
Pursuant to the merger agreement, Black Diamond has agreed that it will
operate its business substantially as presently operated and only in the
ordinary course and in general conformity with applicable laws and regulations,
and, consistent with such operations, it will use its best efforts to preserve
intact its present business organizations and its relationships with persons
having dealings with it. Black Diamond also has agreed that it will not, without
the prior written consent of FNB:
- make any changes in the salaries, bonuses or title of Don M. Green, Ben
Sergent or Esther W. Bolling or change the fees payable to any director;
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- make any change in the title, salaries, bonuses of any other employee,
other than those permitted by current employment policies in the ordinary
course of business, any of which changes shall be reported promptly to
FNB;
- enter into any bonus, incentive compensation, deferred compensation,
profit sharing, thrift, retirement, pension, group insurance or other
benefit plan or any employment or consulting agreement or increase
benefits under existing plans;
- create or otherwise become liable with respect to any indebtedness for
money borrowed (excluding deposits, Federal Home Loan Bank advances,
secured or unsecured, and similar indebtedness) or purchase money
indebtedness, or mortgage, pledge, or subject any of its assets to, or
permit any of its assets to become or remain subject to, any lien or any
other encumbrance;
- amend its charter or by-laws;
- except as otherwise provided in the merger agreement, declare any
dividend or make any distribution, or effect any split or combination in
respect of its capital stock;
- issue or contract to issue any shares of Black Diamond capital stock or
securities exchangeable for or convertible into capital stock, including,
without limitation, pursuant to stock options, except up to 91,388 shares
of Black Diamond common stock issuable pursuant to Black Diamond options
outstanding as of March 31, 1999;
- purchase any shares of Black Diamond capital stock;
- enter into, renew, extend or assume any material contract or obligation;
- other than as contemplated by the merger agreement with respect to the
work-out of nonperforming assets, waive, release, compromise or assign
any right or claim involving $50,000 or more;
- propose or take any other action which would make any representation or
of Black Diamond untrue;
- introduce any new products or services or change the rate of interest on
any deposit instrument to above-market interest rates;
- make any change in policies respecting extensions of credit or loan
charge-offs;
- change reserve requirement policies;
- change securities portfolio policies;
- acquire a policy or enter into any new agreement, amendment or
endorsement or make any changes relating to insurance coverage, including
coverage for its directors and officers, which would result in an
additional payment obligation of $50,000 or more;
- propose or take any action with respect to the opening, by merger,
acquisition or otherwise, or closing of any branches;
- amend the terms of the Black Diamond stock options;
- amend the terms of certain written severance or employment agreements; or
- make any change in any tax election or accounting method or system of
internal accounting controls, except as may be appropriate to conform to
any change in regulatory accounting requirements or generally accepted
accounting principles.
Black Diamond has also agreed that until the Effective Time of the merger,
it will consult and cooperate with FNB regarding the following activities,
provided that such activities may be conducted by Black Diamond in the ordinary
course of its business, consistent with prior practices: (1) loan portfolio
management, including management and work-out of nonperforming assets, and
credit review and approval procedures, and (2) securities portfolio and funds
management, including management of interest rate risk.
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No Solicitation
The merger agreement provides that neither Black Diamond nor any of its
executive officers, directors, representatives, agents or affiliates shall,
directly or indirectly, encourage, solicit or initiate discussions or
negotiations (with any person other than FNB) concerning any merger, sale of
substantial assets, tender offer, sale of shares of stock or similar transaction
involving Black Diamond (collectively, a "Significant Transaction") or disclose,
directly or indirectly, any information not customarily disclosed to the public
concerning Black Diamond, afford to any other person access to the properties,
books or records of Black Diamond or otherwise assist any person preparing to
make or who has made such an offer, or enter into any letter of intent or any
agreement with any third party providing for a Significant Transaction. Black
Diamond has agreed that it and any affiliate entities, and the respective
directors, officers, employees, agents, and representatives of the foregoing,
shall immediately cease and cause to be terminated any existing activities,
discussions, and negotiations with any person (other than FNB and its
representatives) conducted heretofore with respect to any Significant
Transaction. Black Diamond has agreed to promptly advise FNB of any inquiries or
proposals received by, any such information requested from, and any requests for
negotiations or discussions sought to be initiated or continued with, Black
Diamond or any affiliate entities, or any of the respective directors, officers,
employees, agents, or representatives of the foregoing, in each case from a
person (other than FNB or its representatives) with respect to a Significant
Transaction. In addition, Black Diamond has agreed to promptly advise FNB of the
substance and content of any such inquiry, proposal, information request,
negotiations, or discussions.
Dividends
Black Diamond has agreed not to declare any dividends or distributions in
respect of its capital stock from March 31, 1999 until the Effective Time of the
merger.
Transactions in FNB Common Stock
FNB, FNB Acquisition Sub and Black Diamond have agreed that none of them
will, nor will they permit their affiliates to, directly or indirectly purchase,
publicly sell or publicly acquire any shares of FNB common stock from the date
of this Joint Proxy Statement/Prospectus until the Effective Time of the merger.
However, this limitation does not apply to the issuance or acquisition of FNB
common stock pursuant to FNB employee benefit plans or the purchase or sale of
FNB common stock by FNB as trustee under FNB employee benefit plans or otherwise
in a fiduciary capacity in which it is directed to sell or purchase FNB common
stock.
Composition of FNB's Board of Directors Following the Merger
Subject to any necessary regulatory and shareholder approval, as soon as
possible after the merger, Don M. Green, President and Chief Executive Officer
of Black Diamond, and Gary Blosser, a current Black Diamond director, will
become members of FNB's board of directors. See "The Merger -- Interests of
Certain Persons in the Merger Other Than as Shareholders."
Indemnification
After the Effective Time of the merger, FNB will provide indemnification to
the officers and directors of Black Diamond and its subsidiaries for events
occurring prior to or subsequent to the Effective Time of the merger as if they
had been directors or officers of FNB prior to the Effective Time of the merger,
to the extent permitted under the North Carolina Business Corporation Act and
the Articles of Incorporation and bylaws of FNB as in effect on the date of the
merger agreement. Such indemnification will continue for three years after the
Effective Time of the merger, except that any right to indemnification in
respect of any claim asserted or made within the three year period shall
continue until final disposition of that claim. FNB has agreed to use reasonable
efforts to provide officers and directors liability insurance coverage to all
Black Diamond directors and officers, whether or not they become part of the FNB
organization after the Effective Time of the merger, to the same extent it is
provided to FNB's directors and officers; however coverage will
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not extend to acts as to which notice has been given prior to the Effective Time
of the merger. See "The Merger -- Interests of Persons in the Merger Other than
as Shareholders."
CONDITIONS TO THE MERGER
Each party's obligation to consummate the merger is subject to the
satisfaction by the other party at or prior to the Effective Time of the merger
of the following conditions unless waived by the other party:
- Representations and Warranties. The representations and warranties of
the other party contained in the merger agreement shall be true and
correct as of the date of the merger agreement and as of the Effective
Time of the merger.
- Performance of Obligations. The other party shall have in all material
respects performed all obligations required to be performed by it and
satisfied all conditions required to be satisfied by it under the merger
agreement prior to the Effective Time of the merger.
- Authorization of Transaction. The other party has taken all action
necessary to authorize the merger agreement and consummation of the
transactions contemplated thereby and such actions have not been
rescinded.
- Opinion of Counsel. Each party shall have received an opinion of counsel
to the other party that is satisfactory to such party.
- Effectiveness of Registration Statement. The Registration Statement
shall be effective under the Securities Act and FNB shall have received
all state securities laws or "blue sky" permits and other authorizations
or there shall be exemptions from registration requirements necessary to
offer and issue shares of FNB common stock in connection with the merger,
and neither the Registration Statement nor any such permit, authorization
or exemption shall be subject to a stop order or threatened stop order by
the SEC or any state securities authority.
- Regulatory Approvals. All required approvals from federal and state
regulatory authorities having jurisdiction to permit FNB to consummate
the merger and to issue shares of FNB common stock to Black Diamond
shareholders shall have been received and, as a condition to FNB's
obligation to consummate the merger, shall have contained no conditions
deemed in good faith to be materially disadvantageous by FNB.
- Acceptance by Counsel. The form and substance of all legal matters
contemplated by the merger agreement and of all papers delivered pursuant
to the merger agreement shall be reasonably acceptable to counsel for the
other party.
- Nasdaq National Market Listing. If the shares of FNB common stock to be
issued in the merger are not repurchased on the open market, the shares
to be issued in the merger shall have been approved for listing, upon
notice of issuance, on the Nasdaq National Market.
- Fairness Opinion. Black Diamond shall have received a written opinion in
form and substance satisfactory to Black Diamond from Austin Financial,
addressed to Black Diamond and dated as of the date of this Joint Proxy
Statement/Prospectus, to the effect that the terms of the merger,
including the exchange ratio, are fair, from a financial point of view,
to Black Diamond and its shareholders.
The obligation of FNB to complete the merger is subject to the following
additional conditions:
- Tax Opinion. FNB must receive an opinion from its tax counsel that the
merger will qualify for U.S. federal income tax purposes as a tax-free
reorganization.
- Affiliate Agreements. FNB shall have received a commitment signed by
each person deemed to be an affiliate of Black Diamond relating to
restrictions on the shares of FNB common stock to be received by such
person in the merger.
- Exercise of Dissenters' Rights. The aggregate number of shares of Black
Diamond common stock as to which cash is required to be paid as the
result of the exercise of any dissenters' rights under
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applicable law, when coupled with any other shares of Black Diamond
common stock deemed tainted for "pooling of interests" purposes, shall
not exceed 10% of the total number of shares of Black Diamond common
stock outstanding on the date of the merger agreement or at the Effective
Time of the merger.
- Employment and Non-compete Agreements. Don M. Green, Ben Sergent and
Esther W. Bolling shall each have entered into employment and non-compete
agreements with Black Diamond satisfactory to the parties. Such
agreements shall replace and supersede any prior employment agreements
between such individuals and Black Diamond.
- Accounting Treatment. (1) FNB shall have received assurances from its
independent public accountants, in form and substance satisfactory to
FNB, to the effect that the merger will qualify to be treated as a
"pooling of interests" for accounting purposes; (2) if requested by FNB,
Black Diamond's independent public accountants shall have delivered to
FNB a letter in form and content satisfactory to FNB to the effect that
such accountants are not aware of any fact or circumstance that might
cause the merger not to qualify for such treatment; and (3) it shall not
have come to the attention of management of FNB that any event has
occurred or that any condition or circumstance exists that makes it
likely that the merger may not so qualify.
- Resignations. FNB shall have received the written resignation,
satisfactory in form and substance to FNB, from each director of Black
Diamond other than Messrs. Green and Kennedy, effective as of the
Effective Time of the merger, and Ernest J. Sewell, Robert F. Albright,
R. Michael Hendricks, Richard L. Powell, Michael W. Shelton and Ben
Sergent shall have been elected to the board of directors of Black
Diamond as of the Effective Time of the merger.
- Fairness Opinion. FNB shall have received a written opinion in form and
substance satisfactory to FNB from Equity Research Services addressed to
FNB and dated as of the date of this Joint Proxy Statement/Prospectus to
the effect that the terms of the merger, including the exchange ratio are
fair, from a financial point of view, to FNB and its shareholders.
TERMINATION
The merger agreement may be terminated and the merger abandoned if the
shareholders of either FNB or Black Diamond fail to approve the merger at the
special meetings. In addition, the merger agreement may by terminated at any
time prior to the Effective Time of the merger, whether before or after approval
by the shareholders of each of FNB and Black Diamond:
(1) by mutual consent of FNB and Black Diamond;
(2) by FNB or Black Diamond if the merger has not been consummated on
or before March 31, 2000, unless the failure to consummate the merger is
the result of a willful and material breach of the merger agreement by the
party seeking to terminate the merger agreement;
(3) by FNB or Black Diamond if the other party has, in any material
respect, breached any covenant, agreement, representation or warranty in
the merger agreement and such breach has not been cured by the earlier of
30 days after the breaching party received notice of termination or the
Closing Date;
(4) by FNB upon the occurrence of certain "Purchase Events" under the
stock option agreement, as defined below;
(5) by FNB or Black Diamond in the event that any of the conditions to
the merger have not been satisfied or waived prior to the Closing Date;
provided that no party shall be entitled to terminate the merger agreement
if the condition providing the basis for termination can reasonably be and
is satisfied within a reasonable period of time, in which case the Closing
Date shall be postponed;
(6) by FNB, if the FNB board of directors determines in its sole
discretion, in good faith, that the merger has become inadvisable or
impracticable by reason of (a) the issuance of any order, decree or
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ruling of a regulatory authority containing conditions or requirements
reasonably deemed objectionable to FNB or (b) the institution of any
litigation or proceeding to restrain or prohibit the merger or obtain other
relief in connection with the merger agreement;
(7) by Black Diamond, if the Black Diamond board of directors
determines in its sole discretion, in good faith, that the merger has
become inadvisable or impracticable by reason of (a) the issuance of any
order, decree or ruling of a regulatory authority containing conditions or
requirements reasonably deemed objectionable to Black Diamond or (b) the
institution of any litigation or proceeding to restrain or prohibit the
merger or obtain other relief in connection with the merger agreement;
(8) by FNB or Black Diamond if the Federal Reserve Board, the OTS, the
North Carolina Banking Commission or the Virginia State Corporation
Commission deny approval of the merger and the time period for all appeals
or requests for reconsideration has expired;
(9) by FNB, if the Black Diamond board of directors (a) withdraws or
modifies in a manner adverse to FNB its approval or recommendation of the
merger, (b) recommends another offer or (c) resolves to do either (a) or
(b).
TERMINATION FEE AND EXPENSE REIMBURSEMENT
Black Diamond has agreed to pay FNB a fee of $200,000 by wire transfer of
immediately available funds if FNB terminates the merger agreement because prior
to the termination of the merger agreement, a "Purchase Event" (as defined in
the stock option agreement described below) has occurred or Black Diamond, or
any Black Diamond subsidiary, engages in negotiations relating to a transaction
that would qualify as a Purchase Event and a letter of intent or other agreement
is entered into within one year following the termination of the merger
agreement.
Black Diamond has agreed to pay FNB's expenses incurred in connection with
the merger agreement, including reasonable attorney's fees, up to $300,000 in
the event FNB terminates the merger agreement as a result of (a) Black Diamond's
non-curable material breach or (b) the Black Diamond board's withdrawal or
modification of its recommendation, recommendation of another offer or
resolution to do either of the prior actions.
FNB has agreed to pay Black Diamond's expenses incurred in connection with
the merger agreement, including reasonable attorney's fees, up to $200,000 in
the event Black Diamond terminates the merger agreement as a result of FNB's
non-curable material breach.
WAIVER AND AMENDMENT
Any party may waive any term or provision of the merger agreement and the
parties may amend the merger agreement, in a writing signed by all parties, at
any time, except for statutory requirements and required approvals of
shareholders and regulatory authorities. Any amendment or waiver executed after
the shareholders of Black Diamond have voted to approve the merger or the
shareholders of FNB have voted in favor of issuing shares of FNB common stock in
the merger cannot modify either the amount or form of the consideration to be
given for shares of Black Diamond common stock or otherwise materially adversely
affect such shareholders without their approval.
EXPENSES
Except as described under "-- Termination Fee and Expense Reimbursement"
above, the parties to the merger agreement have agreed that all costs and
expenses incurred in connection with the merger agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses, except
that the cost of printing and distributing the Registration Statement and this
Joint Proxy Statement/Prospectus will be paid 69% by FNB and 31% by Black
Diamond.
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<PAGE> 49
EFFECT ON EMPLOYEE BENEFITS, STOCK PLANS AND STOCK OPTIONS
Benefit Plans
All Black Diamond employees prior to the Effective Time of the merger who
remain Black Diamond employees immediately following the Effective Time of the
merger will be entitled to participate in FNB's 401(k) plan to the extent they
are eligible based on their length of service, compensation, job classification
and position. The existing Black Diamond 401(k) plan will be terminated prior to
the Effective Time of the merger. Except as described in this paragraph and as
otherwise prohibited by law, an employee's service with Black Diamond which is
recognized by the applicable benefit plan of Black Diamond at the Effective Time
of the merger shall be recognized as service with FNB for purposes of
eligibility to participate and vesting, if applicable, (but not for purposes of
benefit accrual) under the corresponding FNB benefit plan, if any, subject to
applicable break-in-service rules.
Stock Options
As a result of the merger, all options to purchase shares of Black Diamond
common stock granted under Black Diamond's stock option plans that remain
outstanding immediately prior to the Effective Time of the merger shall be
assumed automatically by FNB and converted automatically to options entitling
the holder thereof to acquire the number of shares of FNB common stock equal to
the number of shares of Black Diamond common stock subject to such option
immediately prior to the merger multiplied by 1.3333 rounded to the nearest
whole share, on the same terms and conditions as applied under such option,
except that the exercise price will be the exercise price of the Black Diamond
option divided by 1.3333 and rounded to the nearest cent.
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<PAGE> 50
THE STOCK OPTION AGREEMENT
The following is a summary of certain provisions of the stock option
agreement, a conformed copy of which is attached as Appendix B to this Joint
Proxy Statement/Prospectus and incorporated herein by reference. The following
summary is qualified in its entirety by reference to the stock option agreement.
You are encouraged to read the stock option agreement in its entirety.
Concurrently with the execution and delivery of the merger agreement, and
as a condition and inducement to FNB to enter into the merger agreement, FNB and
Black Diamond entered into the stock option agreement pursuant to which Black
Diamond granted FNB an option to purchase up to 166,179 shares of Black Diamond
common stock (19.9% of the currently outstanding Black Diamond common stock) at
a price per share of $17.25. If the option were exercised in full, the shares
subject to the option would represent approximately 16.6% of the currently
outstanding Black Diamond common stock, after giving effect to the issuance of
the option shares.
EXERCISE OF THE OPTION
Subject to applicable law and regulatory restrictions, FNB may exercise the
option, in whole or in part, only upon the occurrence of a "Purchase Event"
(defined below). A Purchase Event means any of the following events or
transactions occurring after the date of the stock option agreement:
(1) Black Diamond or any Black Diamond subsidiary, without having
received FNB's prior written consent, enters into an agreement with any
person under which such person would (a) merge or consolidate, or enter
into any similar transaction, with Black Diamond or any Black Diamond
subsidiary, (b) purchase, lease or otherwise acquire all or substantially
all of the assets of Black Diamond or any Black Diamond subsidiary or (c)
purchase or otherwise acquire (including by way of merger, consolidation,
share exchange or any similar transaction) securities representing 20% or
more of the voting power of Black Diamond or any Black Diamond subsidiary;
(2) if any person acquires beneficial ownership or the right to
acquire beneficial ownership of 20% or more of the outstanding shares of
the Black Diamond common stock;
(3) Black Diamond deliberately breaches any of its obligations under
the merger agreement after any person (a) shall have made a bona fide
proposal to Black Diamond by public announcement or written communication
that is or becomes the subject of public disclosure to acquire Black
Diamond or any Black Diamond subsidiary by merger, consolidation, purchase
of all or substantially all of its assets or any other similar transaction,
(b) shall have commenced a bona fide tender or exchange offer to purchase
shares of Black Diamond common stock such that upon consummation of such
offer such person would own or control 20% or more of the outstanding
shares of Black Diamond common stock, or (c) shall have filed an
application or notice with any federal or state regulatory agency for
clearance or approval to engage in any transaction described in clause (1)
or (2) above; or
(4) any federally insured depository or registered holding company
thereof (not affiliated with FNB) or any person, corporation or other legal
entity with a net worth exceeding $20 million (a) shall have made a bona
fide proposal to Black Diamond by public announcement or written
communication that is or becomes the subject of public disclosure to
acquire Black Diamond or any Black Diamond subsidiary by merger,
consolidation, purchase of all or substantially all of its assets or any
other similar transaction, (b) shall have commenced a bona fide tender or
exchange offer to purchase shares of Black Diamond common stock such that
upon consummation of such offer such person would own or control 20% or
more of the outstanding shares of Black Diamond common stock, or (c) shall
have filed an application or notice with any federal or state regulatory
agency for clearance or approval to engage in any transaction described in
clause (1) or (2) above, and thereafter the holders of Black Diamond common
stock shall have not approved the merger agreement and the transactions
contemplated thereby at the meeting of such stockholders held for such
purpose or such meeting shall have not been held or shall have been
canceled prior to termination of the merger agreement.
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<PAGE> 51
ADJUSTMENT OF NUMBER OF SHARES
The number and type of securities subject to the option and the exercise
price will be adjusted for any change in the Black Diamond common stock by
reason of a stock dividend, split-up, reclassification, recapitalization,
combination, exchange of shares or similar transaction, such that FNB will
receive (upon exercise of the option) the same number and type of securities as
if the option had been exercised immediately prior to the occurrence of such
event (or the record date therefor). The number of shares of Black Diamond
common stock subject to the option will also be adjusted in the event Black
Diamond issues additional shares of Black Diamond common stock such that the
number of shares of FNB common stock subject to the option represents 19.9% of
the Black Diamond common stock then outstanding, without giving effect to shares
subject to or issued pursuant to the option.
SUBSTITUTE OPTION
In the event Black Diamond enters into any agreement to (1) merge or
consolidate with any person other than FNB or one of its subsidiaries such that
Black Diamond is not the surviving corporation, (2) permit any person other than
FNB or one of its subsidiaries to merge into Black Diamond and Black Diamond is
the surviving corporation, but, in connection with such merger, the Black
Diamond common stock is exchanged for any other securities or other property or
the outstanding shares of Black Diamond common stock prior to such merger
represent less than 50% of the outstanding Black Diamond common stock following
such merger, or (3) sell or otherwise transfer all or substantially all of its
assets to a person other than FNB or one of its subsidiaries, the option will be
converted into an option (the "Substitute Option") to purchase securities of
either the acquiring person, a person that controls the acquiring person or
Black Diamond (if Black Diamond is the surviving entity), in all cases at the
option of FNB. The Substitute Option would be subject to immediate exercise by
FNB at a price and subject to conditions specified in the stock option
agreement.
LIMITATION ON PROFITS
If, as a result of the termination of the merger agreement, FNB's Total
Profit (as defined below) would exceed $3 million, FNB, at its sole discretion,
shall take any of the following actions, or a combination thereof, to reduce its
actually realized Total Profit to $3 million: (1) reduce the number of shares
subject to the option, (2) deliver to Black Diamond for cancellation shares of
Black Diamond common stock (or other securities into which the shares underlying
the option are converted or exchanged) or (3) pay cash to Black Diamond. "Total
Profit" means: (1) the aggregate amount of Net Proceeds (as defined below), plus
(2) all amounts received by FNB on the transfer of the option, plus (3) all
equivalent amounts with respect to the Substitute Option, plus (4) any
termination fee received by FNB under the merger agreement (see "The Merger
Agreement -- Termination Fee and Expense Reimbursement" above), minus (5) the
aggregate of the amount of cash paid to Black Diamond as a result of this
limitation on Total Profit and the value of shares of Black Diamond (or other
securities) previously delivered to Black Diamond. "Net Proceeds" is the
aggregate proceeds of a sale or disposition of the shares issued upon exercise
of the option in excess of the amount paid by FNB to exercise the option
multiplied by the number of shares included in such sale or disposition.
Notwithstanding the limitation described in this paragraph, if a court finally
adjudicates that FNB's Total Profit is unenforceable, then FNB's Net Proceeds
under the option shall be limited to the largest amount enforceable.
EFFECT OF STOCK OPTION AGREEMENT
The stock option agreement is intended to increase the likelihood that the
merger will be consummated on the terms set forth in the merger agreement and
could increase the cost to a third party of acquiring Black Diamond.
Consequently, the stock option agreement may have the effect of discouraging
persons who now or prior to the effective time of the merger might be interested
in acquiring all or a significant interest in Black Diamond from considering or
proposing such an acquisition, even if such persons were prepared to offer
higher consideration per share for Black Diamond common stock than that implicit
in the exchange ratio.
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<PAGE> 52
TERMINATION
The option will terminate and be of no further force and effect upon the
earliest to occur of (1) the Effective Time of the merger, (2) termination of
the merger agreement prior to the occurrence of a Purchase Event (other than a
termination resulting form a breach by Black Diamond of any covenant contained
therein) or (3) six months after a termination of the merger agreement if such
termination follows the occurrence of a Purchase Event or is due to a breach by
Black Diamond of any covenant contained therein.
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<PAGE> 53
ABOUT FNB
GENERAL INFORMATION
FNB is a North Carolina bank holding company with total assets of
approximately $413 million, deposits of approximately $338 million and
shareholders' equity of approximately $42.3 million, each as of March 31, 1999.
FNB was organized in 1984, although its predecessor and wholly-owned subsidiary,
FNB Southeast, was originally chartered in 1918 under the name First National
Bank of Reidsville. Effective March 15, 1999, FNB Southeast changed its charter
from a national bank to a North Carolina state bank. Historically, FNB Southeast
has served the Rockingham County area of North Carolina through three branches
in Reidsville and two in Eden, North Carolina. In 1995, FNB initiated a
strategic growth plan beginning with the hiring of a new chief executive
officer. By the end of 1997, FNB Southeast 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
1994 and 1998, FNB's net interest income, loans and deposits each increased at
compound annual growth rates of 21.7%, 33.8%, and 27.0%, respectively.
FNB Southeast 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. FNB Southeast 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 FNB Southeast competes
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, FNB adopted the following three-part
strategy: (1) increase market share and geographic reach through opportunistic
acquisitions in markets where the mix of economic, operational, cultural and
other factors are favorable; (2) position FNB to manage its planned growth by
adding experienced personnel and upgrading its internal systems and procedures;
and (3) generate internal growth at its existing banking offices by offering new
and complementary services and products. To accomplish these objectives, during
the past four years FNB has: (1) increased the number of its branch offices to
ten by opening new offices in Eden, Ruffin, Madison, Greensboro and Wilmington,
North Carolina; (2) expanded by approximately 60% the number of its full-time
personnel by adding 54 new employees, including several new vice presidents and
senior vice presidents; (3) completed a systematic review and revision of its
loan administration, loan policy and credit procedures; and (4) 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.
FNB 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. FNB will seek to hire qualified
personnel to help manage its planned growth and to develop new products that are
uniquely consistent with FNB's service orientation. FNB also plans, where
appropriate, to upgrade its systems and procedures and refine its ability to
offer customers sophisticated services without sacrificing its personalized
approach.
In the first quarter of 1999, FNB announced plans to open a branch in
Burgaw, North Carolina and two branches in Greensboro, North Carolina. Through
February 4, 1999, FNB completed the purchase of 119,000 shares of its
outstanding common stock, which represents 70% of the shares authorized under
its stock repurchase program announced in December 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of FNB and should be read in conjunction with FNB's
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<PAGE> 54
consolidated financial statements and notes thereto included elsewhere in this
Joint Proxy Statement/Prospectus. See also "Forward Looking Statements" on page
16.
YEAR ENDED DECEMBER 31, 1998
Results of Operations
During 1998, FNB achieved record earnings, as the significant balance sheet
growth recorded in 1997 from entering new markets continued into the next year.
Net income was $3.8 million, or $1.16 per share, fully diluted, compared with
$2.5 million, or $0.93 per share, in 1997. The increase of 55.3% in net income
was principally fueled by a 32.8% increase in net interest income and a 66.5%
increase in non-interest income. Non-interest expense, at the same time, was
26.2% higher and the provision for loan losses was raised 48.7% over last year,
the latter as a result of increased loan balances and higher net loan losses.
Net income in 1997 exceeded the prior year by just 2.8%, as a result of $1.4
million in expenses during 1997, which were associated with the opening of new
branches. Over the last few years, markets in which FNB operates have been
characterized by excellent economic conditions, resulting in healthy loan growth
and sound asset quality.
FNB'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.
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<PAGE> 55
The following table summarizes net interest income and average yields
earned and rates paid for the years indicated, on a tax equivalent basis. The
next table presents the changes in interest income and interest expense
attributable to volume and rate changes between 1998 and 1997 and 1997 and 1996.
AVERAGE BALANCE AND NET INTEREST INCOME ANALYSIS
FULLY TAXABLE EQUIVALENT BASIS
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net(2).............. $248,397 $23,190 9.34% $185,829 $17,616 9.48% $129,150 $12,092 9.36%
Taxable investment
securities............... 116,238 6,912 5.97 47,669 2,800 5.86 42,214 2,480 5.82
Tax-exempt investment
securities(3)............ 4,886 411 9.06 6,135 542 9.37 10,985 990 9.60
Other securities........... 1,215 89 7.33 884 63 7.13 756 52 6.88
Deposits with FHLB......... 2,240 119 5.31 849 47 5.54 485 26 5.36
Federal funds sold and
retail repurchase
agreements............... 1,698 94 5.54 2,477 133 5.37 1,027 53 5.16
-------- ------- -------- ------- -------- -------
Total earning assets....... 374,674 30,815 8.24 243,843 21,201 8.70 184,617 15,693 8.51
NON-EARNING ASSETS:
Cash and due from banks.... 7,747 6,845 5,201
Premises and equipment..... 6,849 6,166 4,042
Other assets............... 5,436 3,302 2,953
Less: Allowance for loan
loss..................... (2,591) (1,882) (1,440)
-------- -------- --------
Total assets............... $392,115 $258,274 $195,373
======== ======== ========
INTEREST BEARING
LIABILITIES:
Savings and time
deposits................. $290,124 14,600 5.03 $195,311 9,287 4.75 $148,400 6,449 4.35
Federal funds purchased,
borrowed funds and
securities sold under
agreements to
repurchase............... 28,008 1,517 5.42 14,270 769 5.39 5,868 313 5.33
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities.............. 318,132 16,117 5.07 209,581 10,056 4.80 154,268 6,762 4.38
-------- ------- -------- ------- -------- -------
OTHER LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits............ $ 34,782 $ 25,474 $ 20,721
Other liabilities.......... 2,852 2,329 1,131
Shareholders' equity....... 36,349 20,890 19,253
-------- -------- --------
Total liabilities and
shareholders' equity..... $392,115 $258,274 $195,373
======== ======== ========
Net interest income and net
yield on earning
assets(1)(4)............. $14,698 3.92% $11,145 4.57% $ 8,931 4.84%
======= ==== ======= ==== ======= ====
Interest rate spread(5).... 3.17% 3.90% 4.13%
==== ==== ====
</TABLE>
- ---------------
(1) The average balances for all years include market adjustments to fair value
for securities and loans available/held for sale, with such adjustments
excluded for purposes of computing average yield.
(2) The average loan balances include non-accruing loans.
(3) The fully tax equivalent basis is computed using a federal tax rate of 34%.
(4) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5) Earning asset yield minus interest bearing liabilities rate.
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<PAGE> 56
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 FNB. Net interest income is influenced by
changes in interest rates, volume and the mix of these various components. Net
interest income on a fully taxable equivalent basis was $14.7 million, which
represented a 31.9% increase over the previous year. In 1997, taxable equivalent
net interest income increased to approximately $11.1 million from approximately
$8.9 million in 1996, which was an increase of 24.7%. Actual net interest income
was 32.8% higher in 1998, following an improvement of 27.5% in 1997.
Growth in net interest income for 1998 resulted from significantly higher
loan and investment securities balances, supported by deposit growth and
additional capital as a result of the public offering. Average loans outstanding
during the year equaled $248.4 million compared to $185.8 million in 1997, an
increase of 33.7%. In the previous year, average loans outstanding were 43.9%
higher than 1996. This outstanding loan growth is attributed to generally
favorable economic conditions in FNB's lending markets and a more aggressive
focus on lending in new and existing areas. Average investment securities during
1998 were $122.3 million, up 123.7% over 1997, following an increase of only
1.4% the previous year. Purchases during the year were chiefly in relatively
short term taxable securities, which serves the dual purpose of improving
liquidity and acting as a source of funds for future loan growth. Average total
deposits of $324.9 million were up 47.2% in 1998, which followed a gain of 30.5%
the previous year. Average shareholders equity balances of $36.3 million
represented a 74.0% increase over 1997, with the amount outstanding at year end
approximately double the previous year end.
Interest margins continued their recent decline in 1998, as the weighted
average yield on earning assets fell to 8.24%, from 8.70% in 1997, but the
weighted average rate paid on interest bearing liabilities rose to 5.07% in
1998, from 4.80% in 1997. Consequently, the interest rate spread fell to 3.17%
in 1998, from 3.90% the previous year. The prime rate on loans was reduced from
8.50% to 7.75% during the last quarter of 1998, which caused the weighted rate
on loans to fall from 9.48% in 1997 to 9.34% this year. Investment securities
yields were 6.09% on a taxable equivalent basis in 1998, down from 6.25% last
year, as significant purchases this year have occurred in a lower interest rate
environment. Even more meaningful to the decline in the average earning asset
yield was the effect of higher yielding loans averaging 76.2% of earning assets
in 1997, compared with only 66.3% in 1998, while lower yielding investment
security balances represented approximately 10.3% more this year than in 1997.
The weighted average rate paid on savings and time deposits increased from 4.75%
in 1997 to 5.03% this year, as deposit growth came principally from higher
yielding certificates of deposit, with the effect of greater cost tempered by
the increased stability of fixed maturities.
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<PAGE> 57
VOLUME AND RATE VARIANCE ANALYSIS
YEARS ENDED DECEMBER 31, 1998 AND 1997
FULLY TAXABLE EQUIVALENT BASIS
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
VOLUME(2) RATE(2) TOTAL VOLUME(2) RATE(2) TOTAL
VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, net..................... $5,926 $ (352) $5,574 $5,303 $ 221 $5,524
Taxable investment
securities................... 4,021 91 4,112 320 0 320
Tax exempt investment
securities(1)................ (110) (21) (131) (439) (14) (453)
Other earning assets........... 102 (4) 98 29 3 32
Federal funds sold and retail
repurchase agreements........ (42) 3 (39) 75 5 80
------ ------- ------ ------ ----- ------
Total interest
income............. 9,897 (283) 9,614 5,288 215 5,503
------ ------- ------ ------ ----- ------
INTEREST EXPENSE:
Savings and time deposits...... 4,489 824 5,313 2,039 799 2,838
Federal funds purchased,
borrowed funds and securities
sold under agreements to
repurchase................... 740 8 748 448 8 456
------ ------- ------ ------ ----- ------
Total interest
expense............ 5,229 832 6,061 2,487 807 3,294
------ ------- ------ ------ ----- ------
Inc/(dec) in net interest
income....................... $4,668 $(1,115) $3,553 $2,801 $(592) $2,209
====== ======= ====== ====== ===== ======
</TABLE>
- ---------------
(1) The fully tax equivalent basis is computed using a federal tax rate of 34%.
(2) Changes attributable to both volume and rate have been allocated
proportionately.
NON-INTEREST INCOME AND EXPENSE
Non-interest income of $2.3 million in 1998 was $900,000, or 66.5%, more
than the previous year. Net securities gains represented the largest variance,
increasing $384,000 as gains were taken in connection with a restructuring of
the portfolio, which involved the sale of U. S. Government agency securities and
the purchase of mortgage-backed securities. In addition, gains were also taken
to enhance the total portfolio return during a period when interest rates were
historically low. Fees on bankcard transactions doubled to $427,000, while
deposit service charges were up $211,000, because of pricing changes and
increased deposit volume. FNB offers a variety of mortgage products in its
markets and generally sells the fixed rate production in the secondary market
which, because of the declining rate structure, generated gains on the sales of
$53,000 more than last year. In 1997, total non-interest income of $1.4 million
was $102,000 more than the prior year and included 20.1% more in deposit service
charges, but lower net security gains.
Non-interest expense increased $2.1 million, or 26.2%, in 1998 to $10.0
million, compared to $7.9 million in 1997. Last year, non-interest expense of
$7.9 million exceeded the previous year by $1.9 million, or 31.6%. The primary
reason for the significant increase in expense in 1998 has been the full year
effect of investments made during 1997, principally in adding experienced
personnel to manage FNB's growth.
Personnel expense of $5.9 million in 1998 exceeded the previous year by
$1.2 million, or 26.1%. Full time salaries of officers and staff of $3.9 million
were $754,000 or 23.6% more than 1997. At December 31, 1998, FNB had
approximately 144 full-time and 17 part-time employees, compared with 129
full-time and 19 part-time employees at December 31, 1997. Employee benefits of
$1.1 million in 1998 were up $296,000 or 35.6% over 1997 and included additional
costs for retirement and 401(k) plans and social security taxes, as well as the
various insurance plans, such as health, life, disability and workmen's
compensation.
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<PAGE> 58
Occupancy expense followed a 53.3% increase in expense in 1997 with an
additional 15.5% in 1998, the latter amounting to an increase of $82,000.
Premises rental, maintenance and repairs, utilities and depreciation expense
were all higher in 1998, much of it attributed to the new offices opened in 1997
being open for all twelve months of 1998. Furniture and equipment expense
totaled $836,000 in the current year, up $208,000 or 33.1%, following a 35.1%
increase in 1997 over 1996. Depreciation on equipment of $538,000 this year was
up 55.8% over 1997, while equipment rent, personal property taxes and repairs
also posted higher numbers in 1998. All other expenses of $2.584 million were up
$548,000, or 26.9% over 1997, with many of the increases attributed to a full
year of expenses for the offices opened at various periods during 1997.
Individual line items which increased at least $25,000 and 25% over 1997 were
insurance (principally FDIC), director fees, legal and professional, telephone,
exams and audits, travel and entertainment, bank card, other real estate and
miscellaneous. In 1997, all other expenses were up 30.2% over the prior year,
which was also principally related to the office openings during the year. The
efficiency ratio, which measures non-interest expense as a percentage of net
interest income plus non-interest income, was 58.8% in 1998, an improvement over
the 63.2% posted the previous year.
Income tax expense for the year 1998 of $1,865,000 was up 58.7% over the
$1,175,000 charged to expense in 1997. Income before tax in 1998 increased 56.4%
over the previous year. The effective tax rates for 1998 and 1997 were 32.7% and
32.2%, respectively. Generally, the Company attempts to minimize tax expense by
purchasing U.S. Government Agency bonds which are not subject to state income
tax, as well as North Carolina municipal bonds which are not subject to Federal
or state income taxes.
FINANCIAL CONDITION
FNB's consolidated assets of $421.7 million at year end increased 29.7%
over the previous year, following an increase of 55.0% in 1997. While the growth
in earning assets in 1997 was heavily weighted toward loans, 1998 growth
occurred in both loans and investment securities. Supporting that growth this
year were increases of 22.6% in non-interest bearing deposits, 27.2% in interest
bearing deposits and a nearly 100% increase in shareholders' equity. A major
share of the balance sheet expansion resulted from increases at the new offices
and it is expected that future growth will continue in those markets through
existing and new branches, as well as other market areas FNB is currently
evaluating.
The following tables summarize key information regarding the loan portfolio
as of the period ended December 31:
LOAN PORTFOLIO COMPOSITION
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Commercial........... $ 83,202 32.6% $ 51,022 22.3% $ 30,516 21.1% $ 27,208 24.4% $15,037 18.8%
Residential.......... 50,121 19.6 58,238 25.5 44,109 30.5 36,438 32.6 30,060 37.7
Construction......... 24,976 9.8 19,083 8.3 13,407 9.3 4,531 4.1 681 0.9
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total real
estate......... 158,299 62.0 128,343 56.1 88,032 60.9 68,177 61.1 45,778 57.4
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Commercial, financial
and agricultural... 45,141 17.6 54,294 23.7 25,175 17.4 18,248 16.3 11,272 14.1
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Consumer:
Direct............... 23,908 9.3 23,237 10.2 16,766 11.6 15,247 13.6 12,619 15.8
Home equity.......... 24,122 9.4 19,740 8.6 13,516 9.3 9,579 8.6 9,708 12.2
Revolving............ 4,357 1.7 3,101 1.4 1,096 0.8 457 0.4 410 0.5
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total consumer... 52,387 20.4 46,078 20.2 31,378 21.7 25,283 22.6 22,737 28.5
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total............ $255,827 100.0% $228,715 100.0% $144,585 100.0% $111,708 100.0% $79,787 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======= =====
</TABLE>
52
<PAGE> 59
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------------
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............... $24,961 $ 17,391 $ 2,789 $ 45,141 $ 6,712 $ 13,468
Real estate -- construction.. 12,504 11,209 1,263 24,976 967 11,505
Real estate -- residential... 7,674 12,170 30,277 50,121 31,751 10,696
Real estate -- commercial.... 11,135 54,171 17,896 83,202 26,617 45,450
Consumer..................... 11,264 24,704 16,419 52,387 15,628 25,495
------- -------- ------- -------- ------- --------
$67,538 $119,645 $68,644 $255,827 $81,675 $106,614
======= ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1997 1996 1995 1994
------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual(1)..................................... $ 355 $1,263 $547 $ 44 $154
Past due 90 days or more and still accruing
interest......................................... 0 29 0 0 3
Other real estate.................................. 1,451 31 48 192 191
Renegotiated troubled debt......................... 0 0 0 0 0
</TABLE>
- ---------------
(1) If nonperforming loans outstanding at December 31, 1998 had been performing
in accordance with their terms, $22,963 more in interest income would have
been recorded in 1998. Actual interest income recorded in 1998 was $9,936.
Refer to Note 1 -- Loans of FNB's Consolidated Financial Statements included
elsewhere herein for a discussion of discontinuance of accruals on loans.
Other than amounts listed above, there were no other loans which (a)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (b) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
Loan growth during 1998 was less robust than in the recent past, with
outstanding loans up 11.9% at year end, following increases of 58.2% in 1997 and
29.4% in 1996. Loans secured by real estate were up 23.3% and represented 62.0%
of total loans, compared with 56.1% at year end 1997. Within the category,
commercial real estate loans increased 63.1%, to a level of $83.2 million.
Commercial, financial and agricultural loans were down 16.9%, representing 17.6%
of total loans, compared with 23.7% last year end. Consumer loans advanced
13.7%, led mainly by increases in home equity loans. Management believes FNB is
not dependent on any single customer or group of customers concentrated in a
particular industry, the loss of whose loans or whose insolvency would have a
material adverse effect on operations.
53
<PAGE> 60
INVESTMENT SECURITIES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- ------------------------------ ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
--------- -------- -------- --------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
agency............... $ 0 $ 0 0.00% $ 3,074 $ 3,092 5.98% $13,075 $13,076 5.32%
U.S. Treasury.......... 139,488 140,280 5.86 68,997 68,973 6.01 31,906 31,760 5.87
State and municipal
obligations(1)....... 3,815 4,111 9.33 4,953 5,281 9.11 6,693 7,093 9.45
Other equity........... 1,335 1,335 7.16 1,392 1,392 7.08 643 643 6.93
-------- -------- ------- ------- ------- -------
Total
investment
securities(1)... $144,638 $145,726 5.97 $78,416 $78,738 6.22 $52,317 $52,572 6.20
======== ======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR TO YEARS TO AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS WEIGHTED
-------------- --------------- --------------- --------------- AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD(1)
------ ----- ------- ----- ------- ----- ------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.............. $ 0 -- $ 0 -- $ 0 -- $ 0 -- $ 0 --
U.S. government agency..... 0 -- 85,128 5.94% 42,645 5.61% 11,715 6.19% 139,488 5.86%
State and municipal
obligations(1)........... 60 13.03% 631 11.50 3,124 8.83 0 -- 3,815 9.33
--- ------- ------- ------- --------
Total investment
securities(1)... $60 13.03 $85,759 5.98 $45,769 5.83 $11,715 6.19 $143,303 5.95
=== ======= ======= ======= ========
</TABLE>
- ---------------
(1) Yields stated on a tax equivalent basis.
Investment securities (at amortized cost) of $145.7 million at year end
were up $67.0 million or 85.1% over 1997. U.S. Government agency securities
continue to represent the major share of the total portfolio, increasing from
88.0% of the portfolio at the end of 1997 to 96.4% at year end 1998. Management
believes that the additional risk of owning agencies over U.S. Treasury
securities is negligible and has capitalized on the favorable spreads available
on the former. However, the interest rate risk of purchasing longer term
municipal securities at their continued relatively low rates has kept us out of
that market for approximately the last two years.
Our investment portfolio goals are to achieve good total portfolio returns,
within the context of remaining relatively short in maturity to fund loan growth
and mitigate the unfavorable effect of interest rate increases. To this end, FNB
has consistently categorized the entire portfolio as available for sale, which
it believes offers the greatest amount of flexibility in managing a total return
concept.
ASSET QUALITY
Management believes that asset quality is of the greatest 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 probable
charge-offs of non-collectible loans. The loan portfolio is analyzed quarterly
in an effort to identify potential problems before they actually occur. 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 tables below depict a summary of the allowance for loan losses and the
allocation of the allowance for loan losses for the years ended December 31,
1994 through 1998. The allocation, including the
54
<PAGE> 61
percentage of loans in each category to total loans, 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.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period.................. $2,331 $1,638 $1,258 $1,052 $1,174
Charge-offs:
Commercial.................................. 597 16 0 0 0
Real estate -- construction................. 0 0 0 0 0
Real estate -- mortgage..................... 4 13 0 0 15
Consumer.................................... 347 131 89 128 332
------ ------ ------ ------ ------
948 160 89 128 347
------ ------ ------ ------ ------
Recoveries:
Commercial.................................. 12 10 0 2 52
Real estate -- construction................. 0 0 0 0 0
Real estate -- mortgage..................... 0 0 0 0 0
Consumer.................................... 81 83 54 72 68
------ ------ ------ ------ ------
93 93 54 74 120
------ ------ ------ ------ ------
Net charge-offs............................... 855 67 35 54 227
------ ------ ------ ------ ------
Provision charged to operations............... 1,130 760 415 260 105
------ ------ ------ ------ ------
Balance, end of period........................ $2,606 $2,331 $1,638 $1,258 $1,052
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans..... 0.34% 0.04% 0.03% 0.06% 0.28%
====== ====== ====== ====== ======
Ratio of allowance to year-end loans.......... 1.02% 1.02% 1.13% 1.13% 1.32%
====== ====== ====== ====== ======
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
$ % $ % $ % $ % $ %
------ --- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial.................. $1,427 18% $1,190 24% $ 826 17% $ 512 16% $ 546 14%
Real
estate -- construction.... 4 10 8 8 13 9 9 4 0 1
Real estate -- mortgage..... 27 52 154 48 151 52 131 57 50 57
Consumer.................... 1,066 20 298 20 386 22 320 23 224 28
General..................... 82 0 681 0 262 0 286 0 232 0
------ --- ------ --- ------ --- ------ --- ------ ---
Total Allocation..... $2,606 100% $2,331 100% $1,638 100% $1,258 100% $1,052 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
The 1998 provision of $1.1 million compares with $760,000 in 1997 and
$415,000 in 1996, which equals a 48.7% increase in 1998 and a two year increase
of 172.3%. The increase in the dollar level of the allowance was necessitated by
the growth in loans, while the level of non-performing loans and charge-offs has
remained at comparatively low levels. Net charge-offs did increase in 1998 to a
level of $855,000 or 0.34% of average loans outstanding, compared with $67,000
and 0.04% in 1997. Approximately 62% of the net charge-offs in 1998 were for
just two commercial loans, which had not performed well over an extended
55
<PAGE> 62
period of time and were finally written off. At December 31, 1998, the allowance
for loan losses as a percentage of year end loans was 1.02%, which was equal to
the percentage at the prior year end.
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
status 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 FNB, 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,
however, that economic conditions will not adversely affect borrowers and result
in increased losses.
DEPOSITS
During 1998, the yield curve remained relatively flat, with little
incentive for customers to choose longer deposit maturities at a minimal spread
difference from shorter, more liquid products. Accordingly, retail deposit
growth was concentrated in certificates of deposit with maturities of two years
or less, as well as products such as the Money Market Investment account, which
has superior liquidity and was re-priced higher to attract more funds during
1998. The market for deposits remains fiercely competitive and FNB relies on
appropriate pricing and quality customer service to retain and increase its
retail deposit base.
For commercial customers, FNB is focused on building a total relationship,
which will foster growth in both loans and deposits. In addition to traditional
regular checking accounts, FNB offers a cash management sweep account, with
outstanding balances increasing from $9.6 million at the end of 1997 to $10.4
million in 1998. In order to attract longer term deposits, FNB joined an
electronic network which allows it to post interest rates and attract deposits
nationally. Approximately $11.5 million was attracted from this source during
1998, with a weighted average maturity of approximately two years and rates
comparable to those paid in-market.
Finally, FNB also utilized a portion of its $40 million line with the
Federal Home Loan Bank of Atlanta to fund earning assets, with a year end
balance outstanding of $15 million. Management continues to believe this is a
cost effective and prudent alternative to deposit balances, since a particular
amount and term may be selected to meet its current needs.
DEPOSIT MATURITY SCHEDULE
CERTIFICATES OF DEPOSIT -- $100,000 OR MORE
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
3 months or less............................................ $25,499
Over 3 - 12 months.......................................... 39,866
Over 12 months.............................................. 21,502
-------
Total............................................. $86,867
=======
</TABLE>
CAPITAL RESOURCES
Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The Office of the Comptroller of the Currency
("OCC") and the Federal Reserve, who have been, respectively, the primary
regulators for FNB Southeast and FNB, have adopted minimum capital regulations
or guidelines that categorize components and the level of risk associated with
various types of assets. Financial institutions are required to maintain a level
of capital commensurate with the risk profile assigned to its assets in
accordance with the guidelines.
As shown in the table below, in 1996 FNB and FNB Southeast both maintained
capital levels exceeding the minimum levels for "well capitalized" banks and
bank holding companies but, because of the growth
56
<PAGE> 63
realized during 1997, the levels fell to "adequately capitalized" by the end of
1997. In order to restore capital levels and position FNB for future growth, a
total of 897,000 additional shares of stock were sold in a public offering
during April/May, 1998, generating approximately $18.5 million in new capital,
which resulted in both FNB Southeast and FNB achieving a "well capitalized"
level of capital at year end. Effective in March 1999, FNB Southeast converted
from a national bank, regulated by the OCC, to a North Carolina bank, regulated
by the North Carolina Commissioner of Banks ("Commissioner"). FNB Southeast will
continue to be required to meet certain levels of capital.
REGULATORY CAPITAL
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
FNB....................................... $45,928 16.25% $23,938 9.88% $21,868 15.10%
FNB Southeast............................. 44,739 15.83 23,248 9.59 21,442 14.80
Tier 1 capital to risk weighted assets
FNB....................................... 43,322 15.32 21,607 8.92 19,464 13.40
FNB Southeast............................. 42,133 14.90 20,917 8.63 19,039 13.10
Tier 1 capital to average assets
FNB....................................... 43,322 10.30 21,607 7.02 19,464 9.60
FNB Southeast............................. 43,133 10.05 20,917 6.79 19,039 9.40
</TABLE>
INTEREST RATE SENSITIVITY AND LIQUIDITY MANAGEMENT
A primary objective of interest rate sensitivity management is to ensure
the stability and quality of FNB's primary earning component, net interest
income. This process involves monitoring FNB'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 to 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.
The measurement of FNB'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 table below indicates a ratio of
rate sensitive assets to rate sensitive liabilities within one year at December
31, 1998 to be 0.97%. This ratio indicates that net interest income would
decline in a rising interest rate environment, since a greater amount of
liabilities than assets would reprice more quickly over the one-year period.
Included in rate sensitive liabilities are certain deposit accounts (NOW, MMI
and savings) 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
45% of NOW and MMI accounts, and 15% of savings accounts reprice within one year
and the remaining balances reprice after one year.
The schedule also includes $29.5 million of securities that 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 FNB'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 63% of the total loan portfolio have
57
<PAGE> 64
variable rates, and reprices in accordance with the underlying rate index
subject to terms of individual note agreements.
INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
TOTAL TOTAL
1-90 91-180 181-365 SENSITIVE SENSITIVE
DAY DAY DAY WITHIN OVER
SENSITIVE SENSITIVE SENSITIVE ONE YEAR ONE YEAR TOTAL
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of non-accruals......... $160,544 $ 2,375 $ 6,098 $169,017 $ 86,455 $255,472
Taxable investment securities...... 10,707 6,007 15,523 32,237 107,251 139,488
Tax exempt investment securities... 0 0 0 0 3,815 3,815
Other investment securities........ 1,335 0 0 1,335 0 1,335
Due from FHLB...................... 269 0 0 269 0 269
-------- -------- -------- -------- -------- --------
Total interest earning
assets................. 172,855 8,382 21,621 202,858 197,521 400,379
-------- -------- -------- -------- -------- --------
Interest bearing liabilities:
Savings/NOW/MMI.................... 28,845 0 0 28,845 45,520 74,365
Other time deposits................ 63,607 42,053 61,674 167,334 64,718 232,052
Overnight borrowings............... 13,932 0 0 13,932 0 13,932
Other borrowings................... 0 0 0 0 15,000 15,000
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities............ 106,384 42,053 61,674 210,111 125,238 335,349
-------- -------- -------- -------- -------- --------
Interest sensitivity gap........... $ 66,471 $(33,671) $(40,053) $ (7,253)
======== ======== ======== ========
Cumulative interest sensitivity
gap.............................. $ 32,800 $ (7,253)
Ratio of interest sensitive assets
to interest sensitive
liabilities...................... 1.62 0.20 0.35 0.97
</TABLE>
In addition to the traditional gap analysis, FNB 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. FNB 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 FNB. 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. FNB has an
established policy to monitor interest rate risk. The policy provides guidance
for levels of interest rate risk and potential remediations, if necessary, to
mitigate excessive levels of risk. The modeling results indicate FNB is subject
to an acceptable level of interest rate risk.
Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of FNB's
customers. Deposit withdrawals, loan funding and general corporate activity
create a need for liquidity for FNB. 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.
FNB's primary source of funds has been from increased deposit and sweep
account balances. Liquidity is further enhanced by a $40.0 million line of
credit with the Federal Home Loan Bank of Atlanta collateralized by FHLB stock
and qualifying 1-4 family residential mortgage loans. There are unsecured
overnight borrowing lines available through several financial institutions. An
additional source of liquidity for 1998 was the stock issuance. While this is
not an ongoing source of liquidity, the issuance netted $18.5
58
<PAGE> 65
million in funds for FNB. Internal liquidity analysis indicates FNB 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
FNB's overall asset/liability management process. The primary oversight of
asset/liability management rests with FNB's Asset and Liability Committee, which
is comprised of senior management and members of FNB Southeast's Board of
Directors. The committee meets on a regular basis to review the asset/liability
management activities of FNB 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.
MARKET RISK
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets, over interest expense on
interest-bearing liabilities.
FNB considers interest rate risk to be its most significant market risk,
which could potentially have the greatest impact on operating earnings. FNB is
asset sensitive, which means that falling interest rates could result in a
reduced amount of net interest income. The monitoring of interest rate risk is
discussed in "Interest Rate Sensitivity and Liquidity Management". FNB is not
subject to other types of market risk, such as foreign currency exchange rate
risk, commodity or equity price risk.
The following table presents FNB's financial instruments which are
considered to be sensitive to changes in interest rates, categorized by
contractual maturities, average interest rates and estimated fair values at
December 31, 1998.
MARKET RISK OF FINANCIAL INSTRUMENTS
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
CONTRACTUAL MATURITIES AT DECEMBER 31, 1998
----------------------------------------------------------------------- AVERAGE ESTIMATED
OVER FIVE INTEREST FAIR
1999 2000 2001 2002 2003 YEARS TOTAL RATE VALUE
-------- ------- ------- ------- ------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial assets
Debt securities....... $ 60 $ 9,022 $12,521 $27,475 $36,741 $ 57,484 $143,303 5.95% $144,391
Loans:
Fixed rate.......... 9,131 14,218 13,327 11,492 9,403 36,736 94,307 9.08% 96,628
Variable rate....... 53,537 16,474 11,784 24,234 19,827 35,664 161,520 8.37% 161,216
-------- ------- ------- ------- ------- -------- -------- --------
Total.......... $ 62,728 $39,714 $37,632 $63,201 $65,971 $129,884 $399,130 7.67% $402,235
======== ======= ======= ======= ======= ======== ======== ========
Financial liabilities
NOW................... $ 23,235 $ -- $ -- $ -- $ -- $ -- $ 23,235 0.80% $ 23,235
MMI................... 35,728 -- -- -- -- -- 35,728 4.11% 35,728
Savings............... 15,402 -- -- -- -- -- 15,402 1.75% 15,402
Time Deposits......... 168,852 42,282 13,883 5,171 1,269 595 232,052 5.47% 232,615
Borrowings............ -- -- -- 10,000 5,000 -- 15,000 5.63% 15,066
Federal funds
purchased and retail
repurchase.......... 13,932 -- -- -- -- -- 13,932 4.21% 13,932
-------- ------- ------- ------- ------- -------- -------- --------
$257,149 $42,282 $13,883 $15,171 $ 6,269 $ 595 $335,349 4.79% $355,978
======== ======= ======= ======= ======= ======== ======== ========
</TABLE>
OTHER MATTERS
In November, 1997, FNB and the OCC entered into a Memorandum of
Understanding (the "MOU") under which FNB agreed to take certain actions to
improve its infrastructure, primarily necessitated by its rapid growth. FNB
believes that it has complied fully with all provisions of the MOU and, since
its
59
<PAGE> 66
conversion to a North Carolina-chartered bank in March, 1999, FNB Southeast is
no longer subject to the supervision and regulation of the OCC and the MOU no
longer binds the institution.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Based on its operations at December 31, 1998, management
does not expect this standard to have a material effect on FNB's financial
statements upon adoption.
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 affected by inflation.
SUPPLEMENTARY FINANCIAL DATA
The following table sets forth certain supplementary financial data on a
quarterly basis:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income................... $7,910 $8,083 $7,854 $6,828 $6,370 $5,509 $4,939 $4,199
Interest expense.................. 4,148 4,337 4,070 3,562 3,209 2,560 2,321 1,966
------ ------ ------ ------ ------ ------ ------ ------
Net interest income............... 3,762 3,746 3,784 3,266 3,161 2,949 2,618 2,233
Provision for loan losses......... 205 345 315 265 300 230 150 80
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses....... 3,557 3,401 3,469 3,001 2,861 2,719 2,468 2,153
------ ------ ------ ------ ------ ------ ------ ------
Other income...................... 770 601 448 435 396 357 347 254
------ ------ ------ ------ ------ ------ ------ ------
Other expenses.................... 2,753 2,494 2,466 2,257 2,309 2,033 1,886 1,675
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes........ 1,574 1,508 1,451 1,179 948 1,043 929 732
Income taxes...................... 485 478 498 404 278 359 312 226
------ ------ ------ ------ ------ ------ ------ ------
Net income........................ $1,089 $1,030 $ 953 $ 775 $ 670 $ 684 $ 617 $ 506
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share:
Basic............................. $ 0.32 $ 0.30 $ 0.30 $ 0.31 $ 0.27 $ 0.28 $ 0.24 $ 0.21
Diluted........................... 0.30 0.29 0.28 0.29 0.25 0.26 0.23 0.19
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
Summary
Net income for the quarter ended March 31, 1999 of $860,000 was 11.0% more
than the $775,000 earned in the first quarter last year. FNB experienced a
reduction in deposits and assets due to lower volumes of certificates of
deposits and the sale of investment securities to fund the repurchase of common
stock. Certificates of deposit declined due to the repricing in this portfolio
designed to lower the overall cost of funds to FNB. During the quarter,
securities available for sale were sold to provide cash for the repurchase of
common stock. FNB funded the repurchase of 119,000 shares of common stock during
the most recent quarter.
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<PAGE> 67
Interest Income and Interest Expense
Interest income increased to $7.6 million, or 11.8% over the same quarter
last year, principally due to a 21.4% increase in average earning assets.
Average loans increased 8.2% during the quarter and income from loans was up
2.7%. The weighted average yield of 8.79% for 1999 was down from 9.27% in 1998.
Average investment securities in the first quarter were up 64.1%, principally
because of significant growth in deposits and funds borrowed and the receipt of
approximately $18.5 million from a stock issuance in the 1998 second quarter.
Interest expense in the first quarter of 1999 was 7.4% more than the 1998
first quarter. The increase was principally the result of a 16.5% increase in
average interest bearing liabilities, concentrated in money market instruments
(MMI). In the past year, FNB introduced a new MMI product that has been well
received in its markets. This product typically has a lower rate than a
certificate of deposit and has served to maintain deposit customers.
FNB has experienced downward pressure on net interest margins over the past
year resulting in a margin of 3.14% for the quarter ended March 31, 1999 versus
3.98% for the same quarter in 1998. This is primarily due to the mix of earning
assets and the growth in relatively more expensive certificates of deposit. The
earning asset mix has been affected due to the relative increase in investment
securities, compared to growth in the loan portfolio. The investment portfolio
has a lower yield than the loan portfolio, and has had the effect of lowering
the overall earning asset yield. Due to the growth and liquidity in the
investment portfolio, management restructured the investment portfolio during
the second half of 1998. This involved the sale of U.S. Government agency
securities and the purchase of mortgage-backed securities. Also, FNB has
repriced downward maturing certificates of deposit over the last several months.
As a result of actively managing the certificate of deposit portfolio, overall
certificates of deposit at March 31, 1999 have increased less than 1.0% compared
to one year earlier.
Noninterest Income and Expense
Noninterest income in the first quarter this year increased 30.1%, to
$566,000 compared to $435,000 in the first three months last year. The increase
in 1999 is primarily attributed to increases in deposit service charges, up
$56,000 or 23.0% and bankcard fees, up $28,000 or 34.1%. Gains on sale of
securities increased to $95,000 in 1999 compared to $10,000 in 1998. The
increase in securities gains was partially offset by a $42,000 decrease in gains
on sale of mortgage loans to $7,000 for the 1999 quarter.
Noninterest expense was up 25.6% in the 1999 first quarter to $2.8 million
versus $2.2 million for the comparable quarter last year. Personnel expense
increased by 16.0% to $1.7 million due to increases in staffing levels, merit
compensation increases and increased cost of associated benefits. Furniture and
fixture expenses increased $125,000 to $300,000 for the respective quarters,
primarily attributable to higher depreciation expenses associated with a company
wide personal computer network installed in 1998. Noninterest expense also
included a $58,000 loss on the sale of other real estate owned during the
quarter.
The provision for loan losses was funded at $228,000 for the first quarter
of 1999, compared to $265,000 in the first quarter of 1998. The amount of
provision charged to operations was lower, primarily due to lower loan growth.
Income tax expense of $448,000 in the first quarter of 1999 was 10.8% more
than the $404,000 booked in the first quarter of 1998. Income prior to tax was
up 10.9%, resulting in an effective tax rate of approximately 34.2% for both
periods.
Financial Condition
FNB's total assets at March 31, 1999, were $413.3 million and $421.7
million at December 31, 1998. Average earning assets for the first quarter were
$393.6 million, or 21.4% higher than the $324.4 million during the same quarter
last year.
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<PAGE> 68
Loans at March 31, 1999 totaled $265.1 million versus $247.5 million one
year earlier, an increase of 7.1%. Year to date, loans have increased 3.6% from
$255.8 million at December 31, 1998. Investment securities of $126.4 million
represent a 32.0% increase over $95.8 million one year ago. At March 31, 1999,
investment securities had declined 13.2%, from $145.7 million at December 31,
1998. The sale of securities generated liquidity needed to fund the run off in
deposits and stock repurchases of $2.0 million.
Average interest bearing liabilities for the first quarter were $330.2
million, or 16.5% higher than the $283.4 million for the same quarter last year.
Total deposits were $338.2 million at March 31, 1999, a 7.3% increase versus one
year ago, and a 2.0% decrease from the $345.0 recorded at December 31, 1998.
During the quarter ending March 31, 1999, certificates of deposit decreased
approximately $7.8 million. During the first quarter, borrowings at the Federal
Home Loan Bank of Atlanta increased by $5.0 million to a total of $20.0 million.
FNB has a $40.0 million line of credit, and management believes this is a cost
effective funding source.
Total equity was $42.3 million and $23.1 million, at March 31, 1999 and
1998, respectively. This represents a 83.1% increase over the first quarter last
year. Since December 31, 1998, equity decreased $2.3 million, or 5.1%. The year
over year increase is primarily attributable to the stock offering completed in
the second quarter of 1998. Proceeds from the stock offering netted FNB $18.5
million in additional capital. The decrease since December 31, 1998 is primarily
due to the share repurchase program.
Asset Quality
The allowance as a percentage of outstanding loans at March 31, 1999 was
1.03% compared to 1.02% at December 31, 1998, and 1.03% at March 31, 1998. For
the first three months of 1999, the provision for loan losses was $228,000
compared to $265,000 for the same period in 1998. During 1999, FNB has
experienced charge-offs of $111,000 and recoveries of $17,000, or $94,000 in net
charge-offs. This equates to an annualized net charge-off ratio of 0.15% based
on average loans outstanding during the three month period. This compares to
$46,000 net charge-offs in the same period last year.
FNB's allowance for loan loss is analyzed quarterly by management. This
analysis includes a methodology that segments the loan portfolio by selected
types and considers the current status of the portfolio, historical charge-off
experience, current levels of delinquent, impaired and non-performing loans, as
well as economic and inherent risk factors. It is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology employed and other analytical measures in comparison
to a group of peer banks. Management believes the allowance for loan losses is
sufficient to absorb probable losses in the portfolio.
Other real estate owned stood at $929,000 at March 31, 1999 compared to
$50,000 one year earlier. The balance at the end of the first quarter represents
a decrease of $522,000 from the $1,451,000 balance at December 31, 1998. The
decline from the most recent year end is attributable to the sale of property
held in this account. A loss of $58,000 was recorded as a result of selling
these pieces of property. FNB is undertaking reasonable steps to liquidate the
remaining balances in this category.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The Office of the Commissioner of Banks in North
Carolina and the Federal Reserve Board, who are the primary regulators for FNB,
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are required to maintain a level of capital commensurate
with the risk profile assigned to its assets in accordance with the guidelines.
As
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<PAGE> 69
shown in the table below, FNB has capital levels exceeding the minimum levels
for "well capitalized" banks and bank holding companies as of March 31, 1999.
<TABLE>
<CAPTION>
REGULATORY GUIDELINES
-------------------------- ACTUAL
WELL- ADEQUATELY ---------------------
RATIO CAPITALIZED CAPITALIZED FNB FNB SOUTHEAST
- ----- ----------- ----------- ---- -------------
<S> <C> <C> <C> <C>
Total Capital................................... 10.0% 8.0% 15.6% 15.1%
Tier 1 Capital.................................. 6.0% 4.0% 14.6% 14.2%
Leverage Capital................................ 5.0% 4.0% 10.2% 9.8%
</TABLE>
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of FNB's
customers. Deposit withdrawal, loan funding, dividends to shareholders, and
general corporate activities create a need for liquidity for FNB. Liquidity is
derived from sources such as deposit growth, maturity, calls and sales of
investment securities, principal and interest payments on loans, access to
borrowed funds or lines of credit, and profits. FNB believes that it has the
ability to generate sufficient amounts of cash to cover day-to-day activity and
fund earning assets growth over the twelve month period analyzed.
Year 2000
As the Year 2000 approaches, FNB has taken, and continues to take, steps to
become Year 2000 compliant. FNB primarily utilizes a third party vendor for
processing its primary banking applications. In addition, FNB also utilizes
third party vendor application software for all ancillary computer applications.
The third party vendor for FNB's banking applications is in the process of
modifying, upgrading or replacing its computer applications to ensure Year 2000
compliance.
The vendor has advised FNB that the vendor has hired the services of a
consultant to review the plan and assist such vendor in achieving Year 2000
compliance.
The Federal Financial Institutions Examination Council recognizes five
phases that banks must complete to achieve Year 2000 readiness: 1) Awareness of
the potential risks associated with Year 2000; 2) Assessment of all information
and environmental systems needing enhancements; 3) Renovation of the systems
that are not Year 2000 ready; 4) Validation of the renovated systems to assure
Year 2000 readiness; and 5) Implementation of the renovated product into the
ongoing operations. By the end of September 1998, FNB had completed the
awareness, assessment, and renovation phases for its core processing systems.
FNB completed the validation and implementation phase for its core processing
applications, and other mission critical applications during the fourth quarter
of 1998. Also by the end of 1998, FNB had completed the awareness, assessment
and renovation phases for non-mission critical applications. By March 31, 1999
FNB has substantially completed the validation and implementation phases for
non-mission critical applications.
FNB also uses non-computer systems, such as ATMs, security systems,
telecommunications systems and alarm systems that may contain embedded
technology. FNB completed the implementation phase for non-computer systems
during the first quarter 1999.
Cost of Year 2000 compliance is not expected to be material to the result
of operations. Year 2000 costs are budgeted at $35,000 for 1999, and at the end
of the first quarter no Year 2000 expenses have been incurred. These costs only
reflect external costs of Year 2000 compliance, and do not include personnel
expense based on time devoted to this effort by employees since FNB does not
track these internal costs separately.
As a lending institution, FNB is also exposed to potential risk if
borrowers suffer Year 2000 related difficulties and are unable to repay their
loans. FNB is discussing the Year 2000 with borrowers as part of the loan
granting or renewal process. At this time, it is impossible to determine what
impact, if any the Year 2000 will have on the loan payment performance of FNB's
borrowers. No single borrower is significant
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<PAGE> 70
enough to materially impact the financial position of FNB. Thus far, however,
none of FNB's borrowers have reported the expectation of material adverse
impacts as a result of the Year 2000.
In addition to the above noted efforts, FNB is also developing contingency
plans in the event one or more systems would fail. The most reasonably likely
worst case scenario is that FNB's core banking applications fail to function
properly at or near the century date change. In this scenario, FNB would not be
able to process daily transactions as normal. A Year 2000 Contingency Planning
Team is developing procedures for key areas in the event that one or more
computer systems fail. These contingency plans and procedures do not involve
standard and ordinary computer processing. By utilizing these procedures,
management feels FNB would be able to operate until the problems are resolved.
However, this may result in delays of updating records and FNB may incur
additional expenses operating under such conditions.
Recent Events
In December 1998, FNB announced that the Board of Directors had authorized
the purchase of up to 170,000 shares of FNB's common stock through December 31,
2001. Through the end of the first quarter 1999, FNB had purchased a total of
119,000 shares, or 70.0% of the total shares authorized, at an average price per
share of $17.51.
In March, 1999, FNB's bank subsidiary converted from a national charter to
a North Carolina-chartered bank and, at the same time, changed its name to FNB
Southeast. As a North Carolina bank and member of the Federal Reserve, FNB
Southeast is supervised and examined by the Federal Reserve and the Commissioner
and is also subject to the supervisory authority of the Federal Deposit
Insurance Corporation.
In April 1999, FNB Southeast received regulatory approved from the
Commissioner and the Federal Reserve to close a branch located in Eden, North
Carolina. The bank will continue to serve these customers through two other
branches in the same city and located less than three miles from the closing
branch. Customers were notified by letter, and the bank anticipates closing the
branch in July 1999.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets, over interest expense on
interest-bearing liabilities.
FNB considers interest rate risk to be its most significant market risk,
which could potentially have the greatest impact on operating earnings. FNB is
asset sensitive, which means that falling interest rates could result in a
reduced amount of net interest income. The monitoring of interest rate risk is
part of FNB's overall asset/liability management process. The primary oversight
of asset/liability management rests with FNB's Asset and Liability Committee.
The committee meets on a regular basis to review asset/liability activities and
to monitor compliance with established policies.
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<PAGE> 71
ABOUT BLACK DIAMOND
GENERAL INFORMATION
Black Diamond is a federally chartered savings bank and has been in
operation since 1973. Black Diamond has been a member of the Federal Home Loan
Bank ("FHLB") system since 1973. Its deposits have been federally insured since
1973 and are now insured by the Savings Association Insurance Fund (the "SAIF")
of the FDIC to the maximum amount permitted by law.
Black Diamond conducts business through its main office in Norton,
Virginia. Its branch offices are in Harrisonsburg, Pennington Gap, Richlands and
Norton, Virginia. Its primary market areas are Wise, Tazewell, Russell, Lee,
Rockingham and Augusta Counties in Virginia. At March 31, 1999, Black Diamond
had total assets of $130.7 million, loans of $106.2 million, deposits of $117.7
million and equity of $9.3 million which is 7.1% of total assets.
Black Diamond is engaged primarily in the business of attracting retail
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. Black Diamond makes mortgage loans secured by
residential real property including one-to-four family residential real estate
loans and residential commercial property, home equity line of credit loans and
other subordinated loans secured by improved nonresidential real property, loans
secured by undeveloped real property and construction loans. Black Diamond also
makes a limited number of loans which are not secured by real property, such as
loans secured by savings accounts. Black Diamond's primary source of revenue is
interest income from its lending activities. Black Diamond's other sources of
revenue are interest and dividend income from securities and interest income
from its interest-bearing deposit balances in other depository institutions and
fee income from its lending and deposit activities. The major expenses of Black
Diamond are interest on deposits and noninterest expenses such as compensation
and fringe benefits, federal deposit insurance premiums, data processing
expenses and occupancy and related expenses.
As a Federally-chartered savings bank, Black Diamond is subject to
examination and regulation by the FDIC and the OTS. The business and regulation
of Black Diamond are subject to legislation and regulatory changes from time to
time, such as those resulting from the Financial Institutions Reform, Recovery
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("1991 Banking Law").
Black Diamond's loans and deposits are primarily generated from the areas
where its offices are located. It does not accept deposits and loans outside its
primary market area and does not use brokers to obtain deposits. The counties
Black Diamond serves are largely rural with the exception of its Harrisonburg
branch in Rockingham. Its economy is diversified among coal mining,
manufacturing, trade and services. Major area employers include Tysons, Coors
and A&G Coal Company. Within the past few years, several coal mining companies
have closed operations resulting in the loss of jobs. Over the past several
years the local economy has weakened as a result of layoffs and closings by
local employers. Population and household growth and per capita income levels
for the counties Black Diamond serves are generally lower than comparable levels
for Virginia, with the exception of Rockingham County, while unemployment levels
are generally higher. Management regards its market areas as a moderate growth
area in which there is significant competition among financial services
providers for market share.
DIRECTORS OF FNB FOLLOWING THE MERGER
FNB will appoint two of Black Diamond's directors, Don M. Green and Gary
Blosser, to serve on its board of directors after the merger. The following
paragraphs set forth certain information, as of June 30, 1999, for Messrs. Green
and Blosser. Similar information on FNB's directors can be found in FNB's Annual
Report on Form 10-K for the year ended December 31, 1998, which FNB has
incorporated by reference into this Joint Proxy Statement/Prospectus. See "Where
You Can Find More Information" on page 99.
Don M. Green, 58, is the President and Chief Executive Officer of Black
Diamond and has served as a director of Black Diamond since 1983.
Gary Blosser, 51, is President and owner of STM Landscape Services, Inc.
and B&B Landscape, Inc. and has served as a director of Black Diamond since
1992.
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<PAGE> 72
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, based on information as of June 30, 1999,
the beneficial ownership of Black Diamond common stock and the anticipated
beneficial ownership, after giving effect to the merger, of FNB common stock by
each director of Black Diamond and all directors and officers of Black Diamond
as a group.
<TABLE>
<CAPTION>
OWNERSHIP BEFORE
THE MERGER OWNERSHIP AFTER THE MERGER
---------------- ---------------------------
FNB COMMON STOCK
---------------------------
BLACK DIAMOND NUMBER PERCENT
COMMON STOCK+ OF SHARES OF CLASS(%)(1)
---------------- --------- --------------
<S> <C> <C> <C>
Harold Armsey........................................ 1,291 1,720 *
Gary Blosser (2)..................................... 57,701 76,915 1.7
Don Green (2)........................................ 63,287 84,361 1.9
Orden Harman......................................... 15,139 20,180 *
Louise Hunter........................................ 12,207 16,271 *
Jack Kennedy......................................... 16,786 22,375 *
Gerald Myers......................................... 21,484 28,638 *
Ben Sergent.......................................... 31,966 42,610 *
Jerry Wharton........................................ 39,064 52,702 1.2
All current Black Diamond directors and officers as a
group (15 Persons)................................. 322,039 429,278 9.4
</TABLE>
- ---------------
* Percentage of ownership is less than one percent of the outstanding shares
of Common Stock.
+ Amounts disclosed include shares of Black Diamond common stock issuable upon
the exercise of stock options exercisable within 60 days of June 30, 1999,
as follows: Mr. Green -- 55,000 shares, Mr. Sergent -- 10,153 shares, and
all directors and officers as a group -- 91,388.
(1) Assumes 4,457,326 shares of FNB common stock issued and outstanding after
the merger.
(2) Director of FNB following the consummation of the merger.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As disclosed above, Gary Blosser, a director of Black Diamond, and Don
Green, President and Chief Executive Officer and a director of Black Diamond,
beneficially own 6.9% and 7.6% of the outstanding shares of Black Diamond common
stock. To Black Diamond's knowledge, no other person owns five percent or more
of the outstanding shares of Black Diamond common stock.
EXECUTIVE OFFICER COMPENSATION
The following table presents information concerning the compensation of Don
Green, who is, and will serve as following the merger, President and Chief
Executive Officer of Black Diamond.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ------------------
OTHER ANNUAL
NAME AND COMPEN-
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) SATION($) ALL OTHER
------------------ ---- ------------ -------- ------------ COMPENSATION($)(1)
<S> <C> <C> <C> <C> <C>
Don M. Green.................... 1998 155,249 4,944 * 10,000
President and Chief Executive 1997 141,516 2,801 * 9,500
Officer of Black Diamond 1996 132,725 2,538 * 9,500
</TABLE>
- ---------------
* All benefits that might be considered of a personal nature did not exceed the
lesser of $50,000 or 10% of total annual salary and bonus for all the
officers named in the table.
(1) Amounts represent Black Diamond's matching contributions to its 401k plan.
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<PAGE> 73
STOCK OPTIONS
Black Diamond did not grant any stock options during 1998. The following
table sets forth information with respect to exercised and unexercised options
held by Mr. Green as of December 31, 1998. No stock options were exercised by
Mr. Green in 1998.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998(#)(1) DECEMBER 31, 1998($)(2)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Don M. Green................... 73,332 -- 498,657 --
</TABLE>
- ---------------
(1) The total number of securities underlying unexercised options has been
adjusted to reflect the exchange ratio.
(2) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between (i) the fair market value
of common stock underlying the options at December 31, 1998 and (ii) the
exercise price of the options, which have been adjusted to reflect the
exchange ratio.
EMPLOYMENT AGREEMENTS
As a condition to the obligations of FNB under the merger agreement, Mr.
Green, Ben Sergent, Black Diamond's Chief Operating Officer, and Esther W.
Bolling, Black Diamond's Chief Financial Officer, must enter into new employment
agreements with Black Diamond that will begin on the Effective Date. For
additional information regarding the terms of these employment agreements, see
"The Merger -- Interests of Persons in the Merger Other Than as Shareholders".
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Black Diamond's officers, directors and other corporations, business
organizations and persons with which certain of Black Diamond's officers and
directors are associated customarily have banking transactions with Black
Diamond. All such transactions have been made in the ordinary course of business
on substantially the same terms, including interest rates and security for
loans, as those prevailing at the time for comparable transactions with others
and have not involved more than the normal risk of collectibility or presented
other unfavorable features.
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<PAGE> 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING
RESULTS
The purpose of this discussion and analysis is to aid in the understanding
and evaluation of the financial conditions and changes therein and the results
of operations of Black Diamond. This discussion and analysis is intended to
complement the financial statements and footnotes appearing elsewhere in this
document, and should be read in conjunction therewith.
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999
AND 1998
NET INCOME. Net income for the three-month periods ended March 31, 1999
and March 31, 1998 was $272,593 and $237,506 respectively. Net income increased
in 1999 from 1998 primarily due in part to a higher net interest income due to a
larger interest rate spread in 1999. The increase in net income due to yield was
slightly offset by an increase in noninterest expenses. See table on page 69 for
certain performance ratios.
NET INTEREST INCOME. Net interest income amounted to $987,965 and $918,186
during the three-month periods ended March 31, 1999 and 1998, respectively. The
average balances of interest earning assets and interest bearing liabilities
decreased by a net of $3.0 million during 1999; however, Black Diamond's
interest rate spread increased from 3.09% in 1998 to 3.38% in 1999 as a result
of an decrease in Black Diamond's cost of funds coupled with a slight increase
in Black Diamond's yield on interest earning assets. The increase in Black
Diamond's spread in 1999 had a positive impact on net interest income and more
than offset the higher balances of net interest earning assets and liabilities
outstanding during 1999.
See the table on page 70 which analyzes the dollar amount of changes in
interest income and interest expense for major components of interest earning
assets and interest bearing liabilities. The table distinguishes between (i)
changes attributable to volume (changes in volume multiplied by the prior
period's rate), (ii) changes attributable to rate (changes in rate multiplied by
the prior period's volume) and (iii) mixed changes (changes in volume multiplied
by changes in rate).
INTEREST INCOME. Interest income amounted to $2,461,302 and $2,383,679 for
the three-month periods ended March 31, 1999 and 1998, respectively, an increase
of $77,623 or 3.3%. Black Diamond experienced a 4 basis point increase in total
yield along with a $3.2 million increase in the average balances of interest
earning assets. The increase in average balances was primarily in loans while
investments and interest bearing deposits experienced an $11.6 million decline.
INTEREST EXPENSE. Interest expense increased $7,844 for the three-month
period ended March 31, 1999 to $1,473,337 from $1,465,493 for the same period
ended March 31, 1998. Black Diamond's average balance of outstanding deposits
increased $3.7 million, while the average cost of funds decreased from 5.24%
during 1998 to 4.99% during 1999. Additionally, Black Diamond borrowed
$2,500,000 in advances from the FHLB. The decrease in cost of funds was
primarily in certificates of deposit which decreased from 5.83% during 1998 to
5.66% during 1999. The increase in outstanding average balances was primarily
due to transaction accounts while certificates of deposits remained stable.
Management believes Black Diamond's cost of funds was indicative of changes in
overall market rates.
See the table on page 71 for additional information concerning Black
Diamond's yields on interest earning assets and cost of funds on interest
bearing liabilities for the three-month periods ended March 31, 1999 and 1998.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY Black Diamond's provision for
loan losses amounted to $800 in 1999 and $7,478 in 1998. The provision charged
to operations and the resulting loan loss allowances are amounts Black Diamond's
management believes will be adequate to absorb probable losses on existing loans
that may become uncollectible. Loans are charged off against the allowance when
management believes that collection is unlikely. The provision and resulting
allowance are based both on prior loan loss experience and other factors, such
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, and current economic conditions. During the three months ended March
31, 1999 management determined that its allowance for loan losses was adequate.
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<PAGE> 75
Black Diamond's level of nonperforming loans, defined as loans past due 90
days or more, has amounted to 1.15%, 1.02% and 1.08% at March 31, 1999 and
December 31, 1998 and 1997 as a percentage of total gross loans outstanding.
Black Diamond had loans amounting to $1,281,126 which were in nonaccrual status
or accruing and past due more than 90 days at March 31, 1999. In addition, Black
Diamond had $144,465 of real estate owned at March 31, 1999. Black Diamond
adopted policies which it believes provides for prudent and adequate levels of
loan loss allowances.
At March 31, 1999, Black Diamond's level of general valuation allowances
for loan losses amounted to $837,628 which management believes is adequate to
absorb probable losses in its loan portfolio. Additionally, Black Diamond's
allowance for losses on foreclosed real estate totaled $51,438 at March 31,
1999.
NONINTEREST INCOME. Noninterest income amounted to $118,116 and $93,200
for the three-month periods ended March 31, 1999 and 1998, respectively.
Noninterest income consists primarily of service charges and fees associated
with Black Diamond's checking accounts and loans. Black Diamond's level of
noninterest income has remained fairly stable over the periods.
NONINTEREST EXPENSE. Noninterest expense consists primarily of operating
expenses for compensation and employee benefits, occupancy, federal deposit
insurance premiums, data processing charges and other operating expense.
Noninterest expense amounted to $704,688 and $637,402 for the three month period
ended March 31, 1999 and 1998, respectively. Compensation increased $14,631 for
the three-month period ended March 31, 1999 from the comparable period ended
1998 primarily due to inflationary increases. Occupancy expenses increased
$28,270 while data processing and federal insurance premium expense increased
nominally during the three months ended March 31, 1999 compared to 1998.
INCOME TAXES. Black Diamond's effective income tax rate was 32.0% and
35.2% for the three month periods ended March 31, 1999 and 1998 and reflect
normal expected rates on taxable income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. Net income for the years ended December 31, 1998 and 1997
amounted to $1,174,351 and $1,036,841, respectively. Net interest income
increased $344,891 in 1998 from 1997 as interest income increased $474,954,
offset by an increase in interest expense of $130,063. Black Diamond also
incurred an increase in noninterest expenses of $137,710 during 1998 which
represents a 5.1% increase from 1997. The following table presents selected
performance ratios for the three month periods ended March 31, 1999 and 1998 and
the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
---------------- --------------
1999 1998 1998 1997
------ ------ ----- -----
<S> <C> <C> <C> <C>
Return on average assets.................................... 0.85% 0.78% 0.95% 0.89%
Return on average equity.................................... 11.82% 11.76% 13.87% 14.32%
Average equity to average assets............................ 7.2% 6.7% 6.9% 6.2%
</TABLE>
NET INTEREST INCOME. Net interest income for the years ended December 31,
1998 and 1997 amounted to $3,981,006 and $3,636,115, respectively. The increase
in the average outstanding balance of interest earning assets exceeded the
increase in the interest bearing liabilities by $5.6 million during 1998. Black
Diamond's interest rate spread decreased to 3.33% in 1998 from 3.62% in 1997.
The narrowing of Black Diamond's interest rate spread in 1998 had a negative
impact on net interest income, but was more than offset by $5.6 million increase
in net average balances of interest earning assets and liabilities.
69
<PAGE> 76
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest earning assets and
interest bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume) and (iii) mixed changes (changes in volume multiplied by
changes in rate).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
1999 VS 1998 1998 VS 1997
----------------------------------- ------------------------------------
INCREASE (DECREASE) ATTRIBUTABLE TO INCREASE (DECREASE) ATTRIBUTABLE TO
----------------------------------- ------------------------------------
VOLUME RATE RATE/VOLUME NET VOLUME RATE RATE/VOLUME NET
------ ----- ----------- ---- ------ ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits.......... $(174) $ 11 $ 120 $(43) $(120) $ 54 $ (28) $ (94)
Investments, at cost............... (462) 193 177 (92) (158) 39 (6) (125)
Mortgage-backed securities......... (13) (21) 26 (8) (42) (17) 5 (54)
Loans receivable................... 1,352 (406) (726) 220 1,624 (729) (147) 748
------ ----- ----- ---- ------ ----- ----- -----
Total interest income on
interest-earning assets.......... 703 (223) (403) 77 1,304 (653) (176) 475
------ ----- ----- ---- ------ ----- ----- -----
Interest expense on:
Passbook accounts.................. 4 (27) 17 (6) 3 (12) (1) (10)
Transaction accounts............... 28 (13) (12) 3 23 (12) (2) 9
Certificates of deposit............ 80 (156) 57 (19) 174 (63) (2) 109
FHLB advances and other............ 0 0 30 30 0 0 22 22
------ ----- ----- ---- ------ ----- ----- -----
Total interest expense on
interest-bearing liabilities..... 112 (196) 92 8 200 (87) 17 130
------ ----- ----- ---- ------ ----- ----- -----
Increase (decrease) in net interest
income............................. $ 591 $ (27) $(495) $ 69 $1,104 $(566) $(193) $ 345
====== ===== ===== ==== ====== ===== ===== =====
</TABLE>
INTEREST INCOME. Interest income amounted to $9,881,983 and $9,407,029 for
the years ended December 31, 1998 and 1997, respectively. Black Diamond's
average yield on interest earning assets decreased to 8.52% in 1998 from 8.94%
in 1997. The primary interest earning asset is loans which experienced a
decrease in average yield and its average outstanding balances increased $16.5
million during 1998. The average yield on loans decreased from 9.86% in 1997 to
8.97% in 1998 but was more than offset by the increases in average outstanding
balances resulting in an increase in interest income of $747,863 in 1998. This
increase in loan income was partially offset by decreases in average outstanding
balances in interest bearing deposits and investment securities.
INTEREST EXPENSE. Interest expense amounted to $5,900,977 and $5,770,914
for the years ended December 31, 1998 and 1997, respectively. Interest expense
increased in 1998 as a $5.1 million increase in average outstanding balances was
slightly offset by a decrease in cost of funds to 5.20% from 5.32% for the year
ended 1997. Certificates of deposit average outstanding balances increased $2.9
million during this period of time and the cost of funds on certificates of
deposit decreased to 5.87% during 1998 from 5.94% during 1997.
The following table provides additional information concerning Black
Diamond's yields on interest earning assets and cost of funds on interest
bearing liabilities for the three-month periods ended March 31, 1999 and 1998
and for the years ended December 31, 1998 and 1997.
70
<PAGE> 77
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(4) BALANCE INTEREST RATE(4)
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning cash.................... $ 1,148 $ 17 5.95% $ 4,206 $ 60 5.67%
Investments(1)........................... 8,000 132 6.60% 16,504 224 5.43%
Mortgage backed securities............... 1,433 15 4.19% 1,664 23 5.46%
Loans receivable, net(5)................. 107,043 2,297 8.58% 92,061 2,077 9.02%
-------- ------ -------- ------
Total interest earning assets... 117,624 2,461 8.37% 114,434 2,384 8.33%
------ ------
Noninterest earning assets............... 11,200 6,910
-------- --------
Total........................... $128,824 $121,344
======== ========
Liabilities and retained earnings:
Passbook................................. $ 5,506 34 2.47% $ 5,375 40 2.97%
Transaction.............................. 13,198 38 1.16% 11,032 35 1.28%
Certificates of deposit.................. 96,819 1,371 5.66% 95,439 1,390 5.83%
FHLB advances............................ 2,516 30 4.79% 0 0
-------- ------ -------- ------
Total interest bearing
liabilities................... 118,039 1,473 4.99% 111,846 1,465 5.24%
------ ------
Noninterest bearing liabilities.......... 1,557 1,416
Equity................................... 9,228 8,082
-------- --------
Total........................... $128,824 $121,344
======== ========
Net interest income and net yield on
interest earning assets(3)............. $ 988 3.36% $ 919 3.21%
====== ======
Interest rate spread(2).................. 3.38% 3.09%
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning cash.................... $ 2,123 $ 136 6.39% $ 4,430 $ 230 5.18%
Investments(1)........................... 14,183 878 6.19% 16,839 1,003 5.96%
Mortgage backed securities............... 1,530 72 4.72% 2,303 126 5.47%
Loans receivable, net(5)................. 98,100 8,796 8.97% 81,632 8,049 9.86%
-------- ------ -------- ------
Total interest earning assets... 115,936 9,882 8.52% 105,204 9,407 8.94%
------ ------
Noninterest earning assets............... 7,440 11,592
-------- --------
Total........................... $123,376 $116,796
======== ========
Liabilities and retained earnings:
Passbook................................. $ 5,456 151 2.77% $ 5,369 161 3.00%
Transaction.............................. 12,662 158 1.25% 10,992 149 1.35%
Certificates of deposit.................. 94,942 5,570 5.87% 92,018 5,461 5.94%
FHLB advances............................ 466 22 4.78% 0 0
-------- ------ -------- ------
Total interest bearing
liabilities................... 113,526 5,901 5.20% 108,379 5,771 5.32%
------ ------
Noninterest bearing liabilities.......... 1,386 1,174
Equity................................... 8,464 7,243
-------- --------
Total........................... $123,376 $116,796
======== ========
Net interest income and net yield on
interest earning assets(3)............. $3,981 3.43% $3,636 3.46%
====== ======
Interest rate spread(2).................. 3.33% 3.62%
</TABLE>
- ---------------
(1) Includes investment securities and FHLB of Atlanta common stock.
(2) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(3) Net yield on interest earning assets represents net interest income divided
by average interest earning assets.
(4) Average yield/rate for the three months ended March 31, 1999 and 1998 have
been annualized.
(5) Loans placed in nonaccrual status have been included in the computation of
average balance.
71
<PAGE> 78
PROVISION FOR LOAN LOSSES AND ASSET QUALITY. Black Diamond had provisions
(recoveries) for loan losses in 1998 and 1997 totaling $41,133 and $(74,389),
respectively. The loan loss allowances are amounts Black Diamond's management
believes will be adequate to absorb potential losses on existing loans that may
become uncollectible. Black Diamond charged off $60,498 and $94,919 during the
years ended December 31, 1998 and 1997, respectively, while recovering $11,528
and $239,647 on previously written off portfolio. Black Diamond recovered
$232,627 on certain one to four family loans to one borrower in 1997. Loans are
charged off against the allowance when management believes that collection is
unlikely. The provisions and resulting allowance are based both on portfolio
quality and current economic conditions. Additionally, Black Diamond provided
provisions for losses on foreclosed real estate of $4,135 and $41,414 for the
years ended December 31, 1998 and 1997, respectively.
Black Diamond's level of nonperforming loans, defined as loans past due 90
days or more, has amounted to 1.15%, 1.02% and l.08% at March 31, 1999, December
3l, 1998 and 1997, as a percentage of total gross loans outstanding. Loans
outstanding which were in nonaccrual status or accruing and past-due more than
90 days were approximately $1,108,576 and $1,299,977 at December 31, 1998 and
1997, respectively. Foreclosures or real estate transfers in lieu of
foreclosures amounted to $67,435 and $276,935 in 1998 and 1997, respectively.
Black Diamond has adopted policies which it believes provide for prudent and
adequate levels of loan loss allowances.
At December 31, 1998 Black Diamond's allowance for loan losses amounted to
$846,353, which management believes is adequate to absorb potential losses in
its loan portfolio. Additionally, Black Diamond's allowance for losses in
foreclosed real estate totaled $5l,438 at December 31, l998.
NONINTEREST INCOME. Noninterest income amounted to $630,519, and $561,917
for the years ended December 31, 1998 and 1997, respectively. Noninterest income
consists primarily of service charges and fees associated with Black Diamond's
checking accounts and loans. Black Diamond's level of noninterest income has
remained fairly stable over the two years ended December 31, 1998.
NONINTEREST EXPENSE. Noninterest expense consists primarily of operating
expenses for compensation and employee benefit, occupancy, federal deposit
insurance premiums, data processing charges and other operating expenses.
Noninterest expense amounted to $2,863,078 and $2,725,368 for the years ended
December 31, 1998 and 1997, respectively. Compensation expense increased $28,732
during the year ended December 31, 1998. The increase was due to inflationary
increases and additional pension expense. Occupancy expenses, data processing,
federal insurance premium and other operating expenses increased nominally
during the two year period ended December 31, 1998.
INCOME TAXES. Black Diamond's effective income tax rate was 31.2% and
33.0% for the years ended December 31, 1998 and 1997, respectively, and reflect
normal expected rates on taxable income.
CAPITAL RESOURCES AND LIQUIDITY. The objective of Black Diamond's
liquidity management is to ensure the availability of sufficient cash flows to
meet all of its financial commitments. Liquidity management addresses Black
Diamond's ability to meet deposit withdrawals either on demand or at contractual
maturity, to repay borrowings, if any, as they mature and to originate new loans
and make investments as opportunities arise.
Significant liquidity sources for Black Diamond are cash provided by new
savings deposits and operating activities. Cash flow from investing activities
typically are dependent on the level of loan demand and the amount of new
savings deposits that Black Diamond is able to generate. During the three months
ended March 31, 1999 new savings deposits provided $2,905,153 in net cash inflow
while operating and investment activities (used) provided funds totaling
$147,840 and $(420,977) respectively. These funds were used primarily to
increase liquidity by investing in interest earning deposits and to provide
funding for loan originations. During 1998 new savings deposits provided
$2,755,083 in funds and operating activities provided $1,016,073 while investing
activities generated a net outflow of cash amounting to $7,896,681 with cash
being invested in originations of loan receivables. During 1998 loan demand
increased Black Diamond's loan portfolio by $15,416,086.
72
<PAGE> 79
Cash provided by operations and deposit growth has enabled Black Diamond to
place little dependence on borrowed funds for its liquidity needs; however,
Black Diamond does maintain readily available sources with the FHLB of Atlanta
in the event it needs to borrow funds. Black Diamond had $2,500,000 in
borrowings outstanding during 1998. Black Diamond's primary source of financing
activities is its deposit accounts.
Levels of deposit accounts are impacted primarily by overall market rates
and the pricing policies that Black Diamond sets to attract or maintain its
deposits, which are affected by Black Diamond's demand for loans and its other
liquidity needs. Approximately 57.7% of Black Diamond's certificates of deposit
outstanding at March 31, 1999 are scheduled to mature within the next year.
Management believes that substantially all of these deposits will be renewed and
intends to price such deposits at competitive rates in order to ensure that
these deposits are renewed. Black Diamond does not hold brokered deposits or
significant levels of public deposits which are less likely to renew if a higher
rate of interest can be obtained elsewhere. Liquidity levels and Black Diamond's
operations would be significantly hindered should a sizable portion of these
deposits not be renewed.
Cash provided by operating and financing activities has historically been
used by Black Diamond to make new loans to its customers. Excess cash will be
used in the future to make new loans as demand warrants and to maintain Black
Diamond's liquid investment portfolios by offsetting maturities which are timed
to provide needed cash flows to meet anticipated short term liquidity
requirements.
As a federally chartered savings bank, Black Diamond must meet certain
liquidity requirements. Black Diamond's liquidity ratio at March 31, 1999, as
computed under such regulations, was considerably in excess of such
requirements. Given its excess liquidity and its ability to borrow from the FHLB
of Atlanta, Black Diamond believes that it will have sufficient funds available
to meet anticipated future loan commitments, unexpected deposit withdrawals, or
other cash requirements.
ASSET/LIABILITY MANAGEMENT. Black Diamond's asset/liability management, or
interest rate risk management, is focused primarily on evaluating and managing
Black Diamond's net interest income given various risk criteria. Factors beyond
Black Diamond's control, such as the effects of changes in market interest rates
and competition, may also have an impact on the management of interest rate
risk.
In the absence of other factors, Black Diamond's overall yield on interest
earning assets will increase as will its cost of funds on its interest bearing
liabilities when market rates increase over an extended period of time.
Inversely, Black Diamond's yields and cost of funds will decrease when market
rates decline. Black Diamond is able to manage these swings to some extent by
attempting to control the maturity or rate adjustments of its interest earning
assets and interest bearing liabilities over given periods of time. Black
Diamond's "gap" is typically described as the difference between the amounts of
such assets and liabilities which reprice within a period of time. In a
declining interest rate environment, a negative gap, or a situation where Black
Diamond's interest-bearing liabilities subject to repricing exceed the level of
interest earning assets which will mature or reprice, will have a favorable
impact on Black Diamond's net interest income. At March 31, 1999, Black Diamond
had a one-year sensitivity gap of negative 24.6%. Conversely, an increase in
general market rates over a sustained period of time will tend to affect Black
Diamond's net interest income adversely.
In order to minimize the potential effects of adverse material and
prolonged increases or decreases in market interest rate on Black Diamond's
operations, management has implemented an asset/liability program designed to
stabilize Black Diamond's interest rate gap. The program emphasizes the
investment of excess cash in short or intermediate term interest-earning assets,
and the solicitation of transaction deposit accounts which are less sensitive to
changes in interest rates and can be repriced rapidly.
In addition to shortening the average repricing period of its assets, Black
Diamond has sought to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit, which
provides higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
73
<PAGE> 80
Although Black Diamond's asset/liability management program has generally
helped to decrease the exposure of its earnings to interest rate increases,
Black Diamond continues to have a negative gap position which will be adversely
impacted during prolonged periods of rising interest rates and positively
affected during prolonged periods of interest rate declines.
The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at March 31, 1999, which are projected
to reprice or mature in each of the future time periods shown. The computations
were made without using assumptions for loan repayments or deposit decline.
Except as stated below, the amounts of assets and liabilities shown which
reprice or mature within a given period were determined in accordance with
contractual terms of the assets or liabilities. In making the computations, all
adjustable rate loans were considered to be due at the end of the next upcoming
adjustment period. Fixed rate loans are reflected at their contractual
maturities with consideration given to scheduled payments. Marketable equity
securities and savings accounts with no stated maturities are subject to
immediate repricing and availability and have been classified in the earliest
category. FHLB of Atlanta stock must be maintained at certain regulatory levels
and is classified in the more then ten-year category. The interest rate
sensitivity of Black Diamond's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differs from that indicated by such assumptions.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-------------------------------------------------------------------
ONE YEAR 1 YEAR TO 3 YEARS TO 5 YEARS TO OVER 10
OR LESS 3 YEARS 5 YEARS 10 YEARS YEARS TOTAL
-------- --------- ---------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans Receivable
Residential mortgage loans...... $ 18,457 $ 1,891 $ 1,598 $ 9,381 $39,831 $ 71,158
Commercial mortgage loans....... 5,883 515 287 1,852 2,069 10,606
Construction loans.............. 3,271 -- -- -- -- 3,271
Consumer loans.................. 7,700 5,759 4,481 2,048 772 20,760
Other loans..................... 235 42 176 635 283 1,371
-------- -------- -------- -------- ------- --------
Total loans................ 35,546 8,207 6,542 13,916 42,955 107,166
Cash and cash equivalents.......... 863 -- -- -- -- 863
Federal Home Loan Bank stock....... -- -- -- -- 705 705
Investment securities
Available for sale.............. 1,020 661 4,352 1,313 255 7,601
Mortgage backed securities(2)...... 390 -- 126 68 609 1,193
-------- -------- -------- -------- ------- --------
Total interest earning assets...... 37,819 8,868 11,020 15,297 44,524 117,528
-------- -------- -------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
NOW and commercial checking..... 11,827 -- -- -- -- 11,827
Money market deposit accounts... 1,480 -- -- -- -- 1,480
Passbook savings................ 5,581 -- -- -- -- 5,581
Certificates of deposit......... 57,914 30,579 10,142 -- -- 98,635
-------- -------- -------- -------- ------- --------
Total deposits............. 76,802 30,579 10,142 -- -- 117,523
Advances from Federal Home Loan
Bank............................ 2,500 -- -- -- -- 2,500
-------- -------- -------- -------- ------- --------
Total interest bearing
liabilities.............. 79,302 30,579 10,142 -- -- 120,023
-------- -------- -------- -------- ------- --------
</TABLE>
74
<PAGE> 81
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-------------------------------------------------------------------
ONE YEAR 1 YEAR TO 3 YEARS TO 5 YEARS TO OVER 10
OR LESS 3 YEARS 5 YEARS 10 YEARS YEARS TOTAL
-------- --------- ---------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitivity gap per
report............................. $(41,483) $(21,711) $ 878 $ 15,297 $44,524 $ (2,495)
======== ======== ======== ======== ======= ========
Cumulative interest sensitivity
gap................................ (41,483) (63,194) (62,316) (47,019) (2,495)
======== ======== ======== ======== =======
Cumulative gap as a percentage of
total interest earning assets...... (35.30)% (53.77)% (53.02)% (40.01)% (2.12)%
Cumulative interest earning assets as
a percentage of interest bearing
liabilities........................ 47.69% 42.49% 48.08% 60.83% 97.92%
</TABLE>
- ---------------
(1) Interest earning assets are included in the period in which the balances are
expected to be redeployed and/or repriced as a result of scheduled rate
adjustments and contractual maturities.
(2) Based upon historical repayment experience.
CHANGES IN FINANCIAL CONDITION
Total assets of Black Diamond amounted to $130,692,669 at March 31, 1999
which is an increase of $3,283,918 or 2.6% from total assets of Black Diamond at
December 31, 1998. Black Diamond's total assets increased by $6,569,590 or 5.4%
from total assets of $120,839,161 outstanding at December 31, 1997. The growth
from December 31, 1998 to March 31, 1999 can primarily be attributed to the
increase in cash and cash equivalents and loans receivable, funded by savings
deposits growth and by a $1,141,562 decrease in securities available for sale.
The growth from December 31, 1997 to December 31, 1998 was funded by an increase
in savings deposits, internal operating profits and a decrease in securities
available for sale and was utilized to fund growth in the loans receivable
portfolio.
The principal category of earnings assets is loans receivable which
amounted to $106,220,704, $104,893,001 and $89,476,915 at March 31, 1999,
December 31, 1998 and 1997 respectively. Black Diamond was able to increase the
size of its loan portfolio during 1999 and 1998 primarily through its marketing
efforts in the origination of permanent residential 1-4 family mortgages. All
other categories of Black Diamond's loan portfolio have remained fairly
consistent from 1997 to 1999. Loan originations for the three months ended March
31, 1999 totaled $19,241,332 and were funded primarily by saving deposit growth,
a decrease in securities and loan principal repayments as the loan portfolio
increased by $1,327,703. Loan originations for the year ended December 31, 1998
totaled $55,706,137 for a net increase in the loan portfolio of $15,416,086 over
1997. The growth was primarily in the residential 1-4 family category.
Management believes that its marketing efforts, competitive rates and contacts
within its community contributed to the increased loan demand in 1999 and 1998.
Black Diamond maintains underwriting and credit standards designed to maintain
the quality for the loan portfolio. Nonperforming loans at March 31, 1999,
December 31, 1998 and 1997 totaled $1,281,216, $1,108,576 and $1,299,977,
respectively, and were 1.15%, 1.02% and 1.08% of total loans, respectively.
75
<PAGE> 82
The following table sets forth the composition of Black Diamond's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------ ----- ------------ ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans
(principally conventional):
Principal balances:
Secured by one-to-four family
residences................. $ 71,158,081 67.0% $ 69,970,547 66.7% $60,181,240 67.3%
Secured by commercial real
estate..................... 10,606,083 10.0% 10,198,985 9.7% 8,054,454 9.0%
Secured by other
properties................. 1,370,570 1.3% 846,995 0.8% 1,286,825 1.4%
Construction loans........... 7,096,528 6.6% 7,739,600 7.4% 4,521,600 5.1%
------------ ----- ------------ ----- ----------- -----
90,231,262 84.9% 87,909,132 84.6% 74,044,119 82.8%
------------ ----- ------------ ----- ----------- -----
Consumer and other loans:
Principal balances:
Automobile................... 3,866,723 3.6% 3,941,875 3.8% 3,827,113 4.3%
Home equity and second
mortgage................... 4,237,229 4.0% 4,246,399 4.0% 2,873,275 3.2%
Improvements................. 11,271,096 10.6% 10,267,388 9.8% 10,420,465 11.6%
Other........................ 1,400,278 1.4% 1,590,446 1.5% 949,448 1.1%
------------ ----- ------------ ----- ----------- -----
20,775,326 19.6% 20,046,108 19.1% 18,070,301 20.2%
------------ ----- ------------ ----- ----------- -----
Allowance for loan losses.... (837,628) (0.8)% (846,353) (0.8)% (854,190) (1.0)%
Undisbursed portion of
construction and consumer
loans...................... (3,825,747) (3.6)% (2,921,193) (2.8)% (1,462,005) (1.6)%
Unearned discounts........... (14,870) -- (23,365) -- (112,004) (0.1)%
Net deferred loan origination
fees....................... (107,639) (0.1)% (118,323) (0.1)% (209,306) (0.2)%
------------ ----- ------------ ----- ----------- -----
(4,785,884) (4.5)% (3,909,234) (3.7)% (2,637,505) (2.9)%
------------ ----- ------------ ----- ----------- -----
$106,220,704 100.0% $104,046,006 100.0% $89,476,915 100.0%
============ ===== ============ ===== =========== =====
</TABLE>
The following table sets forth the time to contractual maturity of Black
Diamond's loan portfolio at March 31, 1999. Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change while fixed rate and other loans are shown as due over the contractual
maturity. Demand loans, loans having no stated maturity and overdrafts are
reported as due in one year or less. The table does not include prepayments,
however, it does include scheduled principal repayments. Prepayments and
scheduled repayments in the loan portfolio totaled $9.0 million, $21.4 million,
$22.9 million, in the three
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<PAGE> 83
months ended March 31, 1999 and the fiscal years ended December 31, 1998 and
1997, respectively. Amounts in the table are net of loans in process and
unamortized loan fees.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS
ONE YEAR TO TO TO OVER 10
OR LESS 3 YEARS 5 YEARS 10 YEARS YEARS TOTAL
-------- ------- ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Loans:
Residential mortgage............ $18,457 $1,891 $1,598 $ 9,381 $39,831 $ 71,158
Commercial mortgage............. 5,883 515 287 1,852 2,069 10,606
Construction.................... 3,271 -- -- -- -- 3,271
Consumer............................. 7,700 5,759 4,481 2,048 772 20,760
Other................................ 235 42 176 635 283 1,371
Allowance for loan losses............ (838) -- -- -- -- (838)
Deferred loan fees................... (108) -- -- -- -- (108)
------- ------ ------ ------- ------- --------
Totals............................... $34,600 $8,207 $6,542 $13,916 $42,955 $106,220
======= ====== ====== ======= ======= ========
</TABLE>
The following table sets forth the dollar amount at March 31, 1999 of all
loans maturing or repricing on or after March 31, 2000 which have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
FIXED ADJUSTABLE
RATES RATES
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans.............................................. $52,419 $5,005
Other loans................................................. 14,196 --
------- ------
$66,615 $5,005
======= ======
</TABLE>
The following table sets forth information with respect to nonperforming
assets identified by Black Diamond; including nonperforming loans and real
estate owned at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------
1999 1998 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Nonaccrual loans................................. $ 1,217,000 $ 1,047,000 $ 1,236,000
Accruing loans past due 90 days or more.......... 64,126 61,576 63,977
Foreclosed real estate........................... 144,465 67,435 276,935
------------ ------------ ------------
Total nonperforming assets....................... $ 1,425,591 $ 1,176,011 $ 1,576,912
============ ============ ============
Ratio of nonperforming loans to total gross
loans.......................................... 1.15% 1.02% 1.08%
============ ============ ============
Ratio of nonperforming assets to total assets.... 1.09% 0.92% 1.3%
============ ============ ============
Total assets..................................... $130,692,669 $127,408,751 $120,839,161
Total gross loans................................ $111,006,588 $108,802,235 $ 92,114,420
</TABLE>
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<PAGE> 84
The following table describes the activity related to Black Diamond's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- --------------------
1999 1998 1998 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of year.................... $846,353 $854,190 $854,190 $783,851
Provision (recovery) charged to operations.... 800 7,478 41,133 (74,389)
-------- -------- -------- --------
Charge-offs:.................................. -- -- --
One-to-four family......................... (40,336)
Consumer................................... (9,545) (8,156) (60,498) (54,583)
-------- -------- -------- --------
Total loans charged off............... (9,545) (8,156) (60,498) (94,919)
Recoveries:
One-to-four family......................... -- -- -- 232,627
Consumer................................... 20 11,692 11,528 7,020
-------- -------- -------- --------
Total recoveries...................... 20 11,692 11,528 239,647
-------- -------- -------- --------
Balance, ending................................. $837,628 $865,204 $846,353 $854,190
======== ======== ======== ========
Ratio of net charge-offs (recoveries) loans to
average loans................................. .01% .00% .05% (.18)%
======== ======== ======== ========
Ratio of allowance to year-end loans............ .78% .94% .81% .95%
======== ======== ======== ========
</TABLE>
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<PAGE> 85
The following table sets forth the comparison of the allowance for loan
losses by type of loan at the dates indicated. The allowance is allocated to
specific categories of loans for statistical purposes only, and may be applied
to loan losses incurred in any loan category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
AMOUNT OF AMOUNT OF AMOUNT OF
AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO
ALLOWANCE GROSS LOANS ALLOWANCE GROSS LOANS ALLOWANCE GROSS LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential............. $287 64.10% $295 64.49% $347 65.33%
Commercial.............. 127 9.55% 122 9.40% 101 8.74%
Other................... 14 1.23% 8 0.78% 13 1.40%
Construction............ -- 6.39% -- 6.86% -- 4.91%
---- ------ ---- ------ ---- ------
Total real
estate
loans......... 428 81.28% 425 81.53% 461 80.38%
---- ------ ---- ------ ---- ------
Consumer loans:
Automobile.............. 39 3.48% 39 3.63% 38 4.15%
Home equity............. 42 3.82% 43 3.91% 29 3.12%
Improvements............ 161 10.15% 156 9.46% 141 12.34%
Other................... 14 1.26% 16 1.47% 9 1.03%
---- ------ ---- ------ ---- ------
Total consumer
loans......... 256 18.72% 254 18.48% 217 19.61%
---- ------ ---- ------ ---- ------
Unallocated............... 154 167 176
---- ------ ---- ------ ---- ------
Total allowance for loan
losses.................. $838 100.00% $846 100.00% $854 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
In addition to loans, Black Diamond invests in U.S. Government and Federal
agency securities, obligations of state obligations, corporate debentures and
mortgage backed securities. Management does not engage in the practice of
trading securities, rather Black Diamond's investment portfolio consists
primarily of securities designated as available for sale. Investment securities,
excluding interest-bearing deposits and FHLB stock, at March 31, 1999, December
31, 1998 and 1997 totaled $8,794,592, $9,936,154 and $17,390,869, respectively.
The securities portfolio decreased $1,141,562 for the three month period ended
March 31, 1999 from December 31, 1998 as $2,215,000 of securities matured and
$1,200,000 of new securities were purchased. The securities portfolio decreased
$7,454,715 from $17,390,869 at 1997 to $9,936,154 at 1998 as $12,581,113
securities matured and $5,497,000 in new securities were purchased.
The following table sets forth certain information regarding Black
Diamond's amortized cost and market values of Black Diamond's investment and
mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1999 COSTS GAINS LOSSES VALUE
- -------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
U. S. Government and federal agencies
obligations................................ $4,024,141 $ 5,740 $(15,480) $4,014,401
Obligations of state and political
subdivisions............................... 2,284,693 27,543 -- 2,312,236
Corporate debentures......................... 1,275,467 7,571 (8,054) 1,274,984
Mortgage-backed securities................... 1,207,388 3,069 (17,486) 1,192,971
---------- ------- -------- ----------
$8,791,689 $43,923 $(41,020) $8,794,592
========== ======= ======== ==========
</TABLE>
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<PAGE> 86
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of Black Diamond's
investment and mortgage-backed securities as of March 31, 1999.
<TABLE>
<CAPTION>
AFTER ONE YEAR TO AFTER FIVE YEARS
ONE YEAR OR LESS FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
--------------------- --------------------- --------------------- --------------------- ----------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE
---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Government and
federal agencies
obligations........ $ 495,141 4.30% $3,270,901 6.17% $ 248,359 6.00% $ -- -- $4,014,401
Obligations of state
and political
subdivisions....... 171,210 4.00% 1,385,459 6.15% 501,042 4.88% 254,525 6.70% 2,312,236
Corporate
debentures......... 353,500 9.63% 357,405 6.64% 564,079 6.07% -- -- 1,274,984
Mortgage-backed
securities......... -- -- -- -- -- -- 1,192,971 6.10% 1,192,971
---------- ---- ---------- ---- ---------- ---- ---------- ---- ----------
Total........ $1,019,851 6.08% $5,013,765 6.19% $1,313,480 5.61% $1,447,496 6.20% $8,794,592
========== ==== ========== ==== ========== ==== ========== ==== ==========
<CAPTION>
TOTAL
--------
WEIGHTED
AVERAGE
YIELD
--------
<S> <C>
U.S Government and
federal agencies
obligations........ 5.92%
Obligations of state
and political
subdivisions....... 5.77%
Corporate
debentures......... 7.20%
Mortgage-backed
securities......... 6.10%
----
Total........ 6.09%
====
</TABLE>
Cash and cash equivalents for Black Diamond have increased from $8,499,385
at December 31, 1997 to $9,583,589 at March 31, 1999 as Black Diamond has sought
to increase liquidity to have funds available for future expanded loan growth.
These increases were funded by savings deposit growth and decreases in
securities available for sale.
Black Diamond has experienced substantial growth in savings deposits. At
March 31, 1999 and December 31, 1998 Black Diamond has increased deposits
$2,905,153 and $2,755,083 to $117,744,597 and $114,839,444, respectively. Black
Diamond priced its deposits in a fashion to be at or near the top of the market
because of its dependence on the local market for fund availability.
Black Diamond's equity which consists entirely of common stock, additional
paid-in capital, retained earnings and unrealized gain on securities available
for sale, net of tax amounted to $9,302,171, $9,064,637 and $7,885,862 at March
31, 1999, December 31, 1998 and 1997, respectively.
IMPACT OF THE YEAR 2000
A lot of attention has been given to the impact that the year 2000 date
change will have on businesses, utilities and other organizations that rely on
computerized systems to help run their operations. The year 2000 date change can
affect any system that uses computer software or computer chips including
automated equipment and machinery. For example, many computer programs and
computer chips store the calendar year portion of the date as two digits rather
than four digits. These software programs and chips record the year 1999 as
"99". This approach works until the year 2000 when the "00" may be interpreted
as the year 1900 instead of the year 2000. Banks use computer systems to perform
financial calculations, transfer funds, record deposits and loan payments, run
security systems and vaults and a myriad of other functions. Because banks rely
heavily on their computer systems, The Federal Financial Institutions
Examination Council ("FFIEC") has placed significant emphasis on the problems
surrounding the year 2000 issues and has required financial institutions to
document the assessment, testing and corrections made to ready their computer
systems and programs for the year 2000 date change. The FFIEC has strict
regulations, guidelines, and milestones in place that each FDIC insured
financial institution must follow in order to remain operational. Black
Diamond's board of directors has remained informed of Black Diamond's position
and progress in its year 2000 project.
Black Diamond's Year 2000 project remains on schedule according to
guidelines set forth by the FFIEC. Black Diamond's most critical exposure to
year 2000 system problems is with its data processing provider, BISYS. BISYS has
renovated its systems, and Black Diamond has successfully tested its year 2000
interface with the processing provider. Although they are continually testing,
BISYS regards its systems as year 2000 compliant, and they were the first data
processing provider to be endorsed by the ABA as year 2000 ready.
Notwithstanding, in the event that BISYS is unable to make the necessary changes
to accommodate the year 2000, Black Diamond will process data manually in
accordance with its contingency plan, until a permanent
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<PAGE> 87
year 2000 compliant system can be restored. Black Diamond has contacted its
major vendors and customers to inquire about their progress in addressing the
year 2000 problem, and does not believe that the problems of such customers and
vendors will have a material adverse effect on Black Diamond or its operations.
Black Diamond will continue to monitor the progress of these parties in
addressing the year 2000 problem as the new millennium approaches. Black Diamond
completely upgraded all computer systems before the year 2000 project began.
Aside from the fee charged by BISYS, Management believes that expenses relevant
to the year 2000 project will not exceed $10,000.
The year 2000 problems can affect Black Diamond's operation in a number of
ways but the mission critical issue is maintaining customers' account
information including tracking deposits, interest accruals and loan payments.
Black Diamond is dependent upon electricity, telephone lines, computer hardware
and BISYS data processing capability.
Black Diamond is not aware of any major year 2000 problems that exist with
its electric utility and phone company. Black Diamond is encouraged that both
companies will have all material year 2000 problems addressed well before
December 31, 1999. However, Black Diamond believes that a temporary
unavailability of electrical power will not hinder safe and secure operations.
Black Diamond will rely on manual operations and all of the necessary supplies
will be stored on hand by September 1, 1999 at each location. To prevent
difficulties in the event there is an unforeseen interruption in either
telephone or electrical service when the year changes, Black Diamond will print
hard copies of all account information. Processes will then be implemented that
will allow bank personnel to extract customer information without regard to
outside sources.
IMPACT OF INFLATION AND CHANGING PRICES. The financial statements and
accompanying footnotes have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The assets and liabilities of Black Diamond are primarily monetary in nature and
changes in market interest rates have a greater impact on Black Diamond's
performance than do the effects of inflation.
DISSENTERS' RIGHTS
The FNB shareholders do not have dissenters' rights of appraisal if they
object to the merger. Black Diamond shareholders do have such rights and what
follows is a summary of the material terms of the statutory procedures that a
Black Diamond shareholder must follow in order to dissent from the merger and
perfect dissenters' rights under regulations of the OTS. A copy of such
regulations is attached as Appendix C to this Joint Proxy Statement/Prospectus.
Any Black Diamond shareholder who objects to the merger (a "Dissenting
Shareholder") and who complies with the regulations of the OTS, as described in
the Code of Federal Regulations (12 C.F.R. sec.552.14) may demand the right to
receive a cash payment, if the merger is consummated, for the fair value of his
or her stock immediately before the effective time of the merger.
In order to receive payment, a Dissenting Shareholder must deliver to Black
Diamond prior to the shareholders' meeting a written notice identifying himself
or herself and stating his or her intent to dissent and to demand payment for
his or her shares if the merger is consummated (an "Intent to Demand Payment")
and must not vote his or her shares in favor of the merger. The Intent to Demand
Payment must be in addition to and separate from any proxy or vote against the
merger and should be addressed to Esther W. Bolling, Chief Financial Officer,
Black Diamond Savings Bank, F.S.B., 600 Trent Street, Norton, Virginia 24273. A
VOTE AGAINST THE MERGER WILL NOT ITSELF CONSTITUTE THE REQUIRED WRITTEN NOTICE,
AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN NOTICE OF INTENT TO
DEMAND PAYMENT.
After consummation of the merger, the Dissenting Shareholder must properly
comply with various procedural requirements, including responding to certain
notices received from FNB.
The foregoing discussion is a summary of the material provisions of 12
C.F.R. sec.552.14, which summarizes dissenters' rights applicable to the merger.
Black Diamond shareholders are strongly encouraged
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<PAGE> 88
to review carefully the full text of 12 C.F.R. sec.552.14, which is included as
Appendix C to this Joint Proxy Statement/Prospectus. The provisions of 12 C.F.R.
sec.552.14 are technical and complex, and a shareholder failing to comply
strictly with them may forfeit his or her Dissenting Shareholder's rights. Any
shareholder who intends to dissent from the merger should review the text of
those provisions carefully and also should consult with his or her attorney. NO
FURTHER NOTICE OF THE EVENTS GIVING RISE TO DISSENTERS' RIGHTS OR ANY STEPS
ASSOCIATED THEREWITH WILL BE FURNISHED TO BLACK DIAMOND'S SHAREHOLDERS, EXCEPT
AS INDICATED ABOVE OR OTHERWISE REQUIRED BY LAW.
Any Dissenting Shareholder who perfects his or her right to be paid the
fair value of his or her shares will recognize gain or loss, if any, for federal
income tax purposes upon the receipt of cash for his or her shares. The amount
of gain or loss and its character as ordinary or capital gain or loss will be
determined in accordance with applicable provisions of the Internal Revenue
Code. See "The Merger -- Material Federal Income Tax Considerations."
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<PAGE> 89
DESCRIPTION OF FNB CAPITAL STOCK
The following summary of certain provisions of FNB's Amended and Restated
Articles of Incorporation (the "FNB Articles") does not purport to be complete
and is qualified in its entirety by reference to such instrument.
FNB is currently authorized to issue 40,000,000 shares of common stock of
which, as of June 30, 1999 3,343,929 shares were issued and outstanding and held
of record by 890 persons, and 692,732 shares were reserved for issuance under
FNB's various equity compensation plans. After giving effect to the merger,
there will be approximately 4,457,326 shares of FNB common stock issued and
outstanding and 915,411 shares reserved for issuance under FNB'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 FNB common stock is
entitled to share equally in dividends from sources legally available therefor
when, as and if declared by the FNB board of directors. Upon liquidation or
dissolution of FNB, whether voluntary or involuntary, each share of FNB common
stock is entitled to share equally in the assets of FNB available for
distribution to holders of FNB's common stock. No conversion rights or
redemption or sinking fund provisions, are applicable to the FNB common stock.
The holders of FNB common stock do not have any preemptive right to purchase any
stock or other securities of FNB. The FNB board of directors is authorized to
issue without shareholder action additional shares of FNB common stock within
the limits authorized by the FNB Articles. All outstanding shares of common
stock are, and the shares of FNB common stock to be issued in the merger will
be, upon issuance in accordance with the terms of the merger agreement, validly
issued, fully paid and non-assessable.
In addition, FNB is authorized to issue up to 10,000,000 shares of
preferred stock. The shares of preferred stock could be issued by FNB without
shareholder approval from time to time in one or more classes or series. The FNB
board of directors is authorized to determine and fix the characteristics or
features 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 FNB; the rights
and priorities of shares, if any, over or otherwise in relation to other classes
or series of capital stock of FNB and among classes and series of preferred
stock as to dividends and amounts payable upon liquidation, dissolution or
winding up of FNB; 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 FNB board of
directors.
The existence of authorized but unissued shares of FNB common stock and the
authorized but unissued shares of FNB preferred stock could have the effect of
discouraging unsolicited takeover attempts. Such shares could be issued to a
purchaser who might cooperate with the FNB board of directors in opposing an
attempt by a third party to gain control of FNB. The FNB 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 FNB 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 FNB
board of directors and may benefit management. Certain other provisions of FNB's
Articles and bylaws may delay or prevent takeover attempts not first approved by
the FNB board of directors (including takeovers which certain shareholders may
deem to be in their best interests). These provisions could also delay or
frustrate the removal of incumbent directors or the assumption of control by
shareholders. In addition, certain of the laws applicable to FNB may have the
effect of preventing, discouraging or delaying a change in control in FNB. See
"Comparison of Rights of Holders of FNB Common Stock and Black Diamond Common
Stock."
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<PAGE> 90
REGULATION AND SUPERVISION
REGULATION OF FNB
FNB is extensively regulated under both federal and state law. Generally,
these laws and regulations are intended to protect depositors and borrowers, not
shareholders. 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. Any change in applicable law or
regulation may have a material effect on the business of FNB and/or Black
Diamond.
STATE LAW. FNB's wholly-owned subsidiary bank, FNB Southeast, is subject
to extensive supervision and regulation by the North Carolina Commissioner of
Banks. The Commissioner oversees state laws that set specific requirements for
bank capital and regulate deposits in, and loans and investments by, banks,
including the amounts, types, and in some cases, rates. The Commissioner
supervises and performs periodic examinations of North Carolina-chartered banks
to assure compliance with state banking statutes and regulations, and FNB
Southeast is required to make regular reports to the Commissioner describing in
detail the resources, assets, liabilities and financial condition of FNB
Southeast. Among other things, the Commissioner regulates mergers and
consolidations of state-chartered banks, the payment of dividends, loans to
officers and directors, record keeping, types and amounts of loans and
investments, and the establishment of branches.
DEPOSIT INSURANCE. As a member institution of the FDIC, FNB Southeast's
deposits are insured up to a maximum of $100,000 per depositor through the Bank
Insurance Fund, administered by the FDIC, and each member institution is
required to pay semi-annual deposit insurance premium assessments to the FDIC.
The BIF assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. Banks with no premium are subject to an annual statutory
minimum assessment.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1," or core capital, includes common equity,
qualifying noncumulative perpetual preferred stock and minority interests in
equity accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions. "Tier 2," or supplementary capital,
includes among other things, limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations and less
required deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant.
The federal banking agencies have adopted regulations specifying that they
will include, in their evaluations of a bank's capital adequacy, an assessment
of the bank's interest rate risk ("IRR") exposure. The standards for measuring
the adequacy and effectiveness of a banking organization's IRR management
include a measurement of board of director and senior management oversight, and
a determination of whether a banking organization's procedures for comprehensive
risk management are appropriate for the circumstances of the specific banking
organization.
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<PAGE> 91
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of FNB to grow and could restrict the amount of profits, if any,
available for the payment of dividends to the shareholders.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things:
- publicly available annual financial condition and management reports for
certain financial institutions, including audits by independent
accountants,
- the establishment of uniform accounting standards by federal banking
agencies,
- the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with
greater scrutiny and restrictions placed on depository institutions with
lower levels of capital,
- additional grounds for the appointment of a conservator or receiver, and
- restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
MISCELLANEOUS. The dividends that may be paid by FNB Southeast are subject
to legal limitations. In accordance with North Carolina banking law, dividends
may not be paid unless FNB Southeast's capital surplus is at least 50% of its
paid-in capital.
Shareholders of banks may be compelled by bank regulatory authorities to
invest additional capital in the event their bank's capital shall have become
impaired by losses or otherwise. Failure to pay such an assessment could result
in a forced sale of a shareholder's bank stock.
The earnings of FNB Southeast will be affected significantly by the
policies of the Federal Reserve, which is responsible for regulating the United
States money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market transactions in United States government securities, changes in the rate
paid by banks on bank borrowings, and changes in
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reserve requirements against bank deposits. These techniques are used in varying
combinations to influence overall growth and distribution of bank loans,
investments, and deposits, and their use may also affect interest rates charged
on loans or paid for deposits.
The monetary policies of the Federal Reserve have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and money markets, as well as the effect of actions by monetary and
fiscal authorities, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of FNB
Southeast.
BANK HOLDING COMPANY REGULATION. FNB, as a bank holding company, is also
subject to examination, regulation and periodic reporting under the Bank Holding
Company Act of 1956, as amended ("BHC Act"), as administered by the Federal
Reserve. The Federal Reserve has adopted capital adequacy guidelines for bank
holding companies on a consolidated basis.
FNB is required to obtain the prior approval of the Federal Reserve to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior Federal Reserve approval is required for FNB to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than five percent of any class of voting
shares of such bank or bank holding company.
FNB is required to give the Federal Reserve prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of FNB's consolidated net worth. The Federal
Reserve may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, Federal Reserve order or directive, or any condition imposed
by, or written agreement with, the Federal Reserve. Such notice and approval is
not required for a bank holding company that would be treated as "well
capitalized" under applicable regulations of the Federal Reserve, that has
received a composite "1" or "2" rating at its most recent bank holding company
inspection by the Federal Reserve, and that is not the subject of any unresolved
supervisory issues.
The status of FNB as a registered bank holding company under the BHC Act
does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging
in, or acquiring five percent or more of any class of voting securities of any
company engaged in, non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve has
determined by regulation to be so closely related to banking as to be a proper
incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to
promote community welfare; and
- acquiring a savings and loan association.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, depository institutions are liable to the FDIC for losses suffered or
anticipated by the FDIC in connection with the default of a commonly controlled
depository institution or any assistance provided by the FDIC to such an
institution in
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danger of default. This law would be applicable to the extent that FNB maintains
as a separate subsidiary a depository institution in addition to FNB Southeast.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and Federal Reserve regulations limit the amounts of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of FNB or
FNB Southeast and related interests of such persons. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in connection
with any extension of credit, lease or sale of property or furnishing of
services.
REGULATION OF BLACK DIAMOND
GENERAL. Black Diamond is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Black Diamond is subject to broad federal
regulation and oversight extending to all its operations. Black Diamond is a
member of the FHLB of Atlanta and is subject to certain limited regulation by
the Federal Reserve Board. Black Diamond is a member of the SAIF. The deposits
of Black Diamond are insured by the SAIF of the FDIC. As a result, the FDIC has
certain regulatory and examination authority over Black Diamond.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Black Diamond is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
Black Diamond to provide for higher general or specific loan loss reserves.
The OTS also has extensive enforcement authority over all savings
institutions, including Black Diamond. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Black
Diamond is prescribed by federal laws, and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. Black Diamond
is in compliance with the noted restrictions.
Black Diamond's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
March 31, 1999, Black Diamond's lending limit under this restriction was $1.4
million. Black Diamond is in compliance with the loans-to-one-borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails
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to comply with these standards must submit a capital compliance plan. A failure
to submit a plan or to comply with an approved plan will subject the institution
to further enforcement action. The OTS and the other federal banking agencies
have also adopted additional guidelines on asset quality and earnings standards.
The guidelines are designed to enhance early identification and resolution of
problem assets. The guidelines are not expected to materially effect Black
Diamond.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The FDIC is an
independent federal agency that insures deposits of banks and thrift
institutions up to certain specified limits and regulates such institutions for
safety and soundness. The FDIC administers two separate insurance funds, Bank
Insurance Fund ("BIF") for commercial banks and state savings banks, and the
SAIF for savings associations such as Black Diamond and banks that have acquired
deposits from savings associations. The FDIC is required to maintain designated
levels of reserves in each fund.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the BIF and members of the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time, and may decrease these rates if the target level has been met. The FDIC
has established a risk-based assessment system for both SAIF and BIF members.
Under this system, assessments vary depending on the risk the institution poses
to its deposit insurance fund. An institution's risk level is determined based
on its capital levels, and the FDIC's level of supervisory concern about the
institution.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as Black Diamond, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. Generally, these
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
On March 31, 1999, Black Diamond had total risk based capital of $10.1
million (including approximately $9.3 million in core capital and $800,000 in
qualifying supplementary capital) and risk-weighted assets of $78.7 million
(with no converted off-balance sheet assets); or total capital of 12.8% of
risk-weighted assets. This amount was $3 million above the 8% requirement in
effect on that date.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% is exempt from this requirement unless the OTS
determines otherwise.
THRIFT CHARTER. Congress has been considering legislation in various forms
that would require federal thrifts, such as Black Diamond, to convert their
charters to national or state bank charters. Legislation enacted in 1996
required the Treasury Department to prepare for Congress a comprehensive study
on development of a common charter for federal savings associations and
commercial banks; and provided for the merger of the BIF and the SAIF into a
single deposit insurance fund on January 1, 1999 provided the thrift charter was
eliminated. Black Diamond cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect Black Diamond and FNB.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-
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based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital
ratio that is less than 4.0% is considered to be undercapitalized. A savings
institution that has total risk-based capital of less than 6.0%, a Tier 1 core
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized," and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
At March 31, 1999, Black Diamond was categorized as "well capitalized,"
meaning that Black Diamond's total risk-based capital ratio exceeded 10.0%, Tier
I risk-based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%,
and Black Diamond was not subject to a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital measure.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
applicable to Black Diamond govern capital distributions by savings
institutions, which include cash dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account of a savings institution to make
capital distributions. Generally, the regulations create a safe harbor for
specified levels of capital distributions for institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Institutions and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Pursuant to a recent revision to these regulations, effective April 1,
1999, a "well capitalized" savings association, such as Black Diamond, will be
permitted to make capital distributions during a calendar year in an amount up
to the savings association's net income for the year plus the savings
association's retained net income for the preceding two years, without filing an
application for approval of the capital distribution with the OTS.
LIQUIDITY. All savings associations, including Black Diamond, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At March 31, 1999, Black Diamond was in compliance with both
requirements, with an overall liquid asset ratio of 13% and a short-term liquid
assets ratio of 9%.
ACCOUNTING. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which may
be more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic
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substance and inherent risk and that financial reports must incorporate any
other accounting regulations or orders prescribed by the OTS. Black Diamond is
in compliance with these amended rules.
QUALIFIED THRIFT LENDER TEST. All savings associations, including Black
Diamond, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At March 31, 1999, Black Diamond met the
test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of Black Diamond, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by Black Diamond. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, Black Diamond may be required to devote additional funds for
investment and lending in its local community. Black Diamond was examined for
CRA compliance in April 1998 and received a rating of "outstanding."
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Generally, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
However, recent regulations now permit executive officers and directors to
receive loans with the same terms as those widely available to other employees
through benefit or compensation plans, as long as the director or executive
officer is not given preferential treatment compared to the other participating
employees.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At March 31, 1999, Black Diamond was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "-- Liquidity."
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Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. Black Diamond is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, Black Diamond is required to purchase and maintain stock in
the FHLB of Atlanta. At March 31, 1999, Black Diamond had $7 million of FHLB
stock, which was in compliance with this requirement. In past years, Black
Diamond has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 7.25% and were 7.44% for fiscal 1998.
For the fiscal year ended December 31, 1998, dividends paid by the FHLB of
Atlanta to Black Diamond totaled approximately $46,370, which constitutes a
$1,649 increase over the amount of dividends received in fiscal year 1997. No
assurance can be given that such dividends will continue in the future at such
levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Black Diamond's FHLB stock may result in a corresponding
reduction in Black Diamond's capital.
COMPARISON OF THE RIGHTS OF HOLDERS OF FNB COMMON STOCK
AND BLACK DIAMOND COMMON STOCK
Upon consummation of the merger, the shareholders of Black Diamond, a
federal savings bank, will become shareholders of FNB, a North Carolina
corporation. The rights of such shareholders will be governed by North Carolina
law, including the North Carolina Business Corporation Act (the "NCBCA"), and by
the FNB Articles and FNB bylaws. The Homeowners' Loan Act, as amended ("HOLA"),
regulations issued by the OTS pursuant to HOLA, and the charter and bylaws of
Black Diamond will no longer apply to the rights of the former holders of Black
Diamond common stock after the merger.
The following is only a general summary of certain material differences in
the rights of FNB's and Black Diamond's shareholders and is not intended to be
complete. Please refer to the FNB Articles, the Black Diamond charter, FNB's and
Black Diamond's respective bylaws and the other governing instruments of FNB and
Black Diamond, the HOLA, the OTS regulations and the NCBCA for a more complete
description of such differences. Black Diamond shareholders should also consult
with their own legal counsel with respect to specific differences and changes in
their rights as shareholders that will result from the merger.
AUTHORIZED CAPITAL STOCK
FNB is currently authorized to issue 40,000,000 shares of common stock, of
which 3,343,929 shares were issued and outstanding as of June 30, 1999, and
10,000,000 shares of preferred stock, none of which were outstanding at that
date.
The FNB board of directors is authorized to determine and fix the
designations, relative rights, preferences and limitations of shares in each
class or series of preferred stock. Subject to the provisions of
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the NCBCA and the Nasdaq listing requirements, shares of FNB common stock and
each such class or series of preferred may be issued from time to time without
shareholder approval at such times, for such purposes and for such consideration
as the FNB board of directors deems desirable. 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 FNB. FNB has no present intention to issue any preferred stock.
Black Diamond is currently authorized to issue 2,000,000 shares of common
stock, of which 835,069 shares were issued and outstanding as of June 30, 1999.
Black Diamond is not authorized to issue shares of preferred stock.
NUMBER OF DIRECTORS
Under FNB's bylaws, there must be at least five directors but not more than
25 directors on the FNB board of directors, with the actual number of directors
to be fixed at any annual or special meeting of shareholders within the
specified range. The number of directors on the FNB board is currently fixed at
11, with two seats vacant to be filled by Black Diamond designees.
Under Black Diamond's bylaws, the Black Diamond board of directors consists
of nine members.
CLASSIFIED BOARD OF DIRECTORS
A classified board of directors is one to which a certain number, but not
all, of the directors are elected on a rotating basis each year. A North
Carolina corporation may classify its board into two, three or four classes. The
FNB Articles divide the FNB board of directors into three classes as nearly
equal in number as possible. Each director serves 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 FNB board of directors,
approximately one-third of the members of the FNB board of directors will be
elected each year, and, two annual meetings will be required for FNB's
shareholders to change a majority of the members constituting the FNB board of
directors.
The Black Diamond board of directors is divided into three classes as
nearly equal in number as possible. The members of each class are elected for a
term of three years and until their successors are elected and qualify. One
class is elected by ballot annually. As a result of the classification of the
Black Diamond board of directors, approximately one-third of the members of the
Black Diamond board of directors is elected each year, and two annual meetings
will be required for Black Diamond's shareholders to change a majority of the
members constituting the Black Diamond board of directors.
CUMULATIVE VOTING
Cumulative voting permits a shareholder to cumulate his total shareholder
votes for a single candidate in the election of directors. Cumulative voting
could increase the changes that a minority shareholder could designate a member
to the board. Under North Carolina law, the right to cumulative voting depends
upon the date of incorporation and a corporation's status as a public or private
company. FNB shareholders do not have the right to cumulate their votes in the
election of directors.
Under Black Diamond's bylaws, every shareholder entitled to vote at an
election of directors has the right to vote, in person or by proxy, the number
of shares he or she owns for as many persons as there are directors to be
elected and for whose election the shareholder has a right to vote, or to
cumulate his or her votes by giving one candidate a total number of votes equal
to the number of directors to be elected multiplied by the number of shares held
by the shareholder. Alternatively, each shareholder can distribute such votes on
the same principle among any number of candidates.
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REMOVAL OF DIRECTORS
FNB's bylaws provide that (i) FNB 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 (ii) 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.
Black Diamond's bylaws provide that (i) Black Diamond shareholders may
remove any director for cause; (ii) a director may be removed 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 unless the
meeting was called expressly for such purpose.
VACANCIES
FNB's bylaws require a vacancy created by an increase in the authorized
number of directors to be filled only by election at an annual meeting or at a
special meeting of FNB shareholders called for that purpose. A majority of the
remaining FNB directors, even though less than a quorum, or the sole remaining
director, can fill other vacancies occurring in the FNB board of directors. FNB
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. There are currently two vacancies on FNB's Board of Directors,
both of which are expected to be filled with Black Diamond nominees.
Under Black Diamond's bylaws, vacancies occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors,
even if less than a quorum, until the next election of directors by
shareholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Any amendment to the FNB Articles requires the approval of a majority of
the outstanding stock entitled to vote. Under North Carolina law, holders of the
shares of an outstanding class are entitled to vote as a separate voting group
on a proposed amendment to the FNB Articles, whether or not otherwise entitled
to vote thereon, if, among other things, the amendment would increase or
decrease the aggregate number of shares of the class or otherwise change the
rights of the class. Subject to certain restrictions described below, either a
majority of the FNB board of directors or of the FNB shareholders may amend the
FNB bylaws. A majority of the FNB board of directors may amend the FNB bylaws
and adopt new bylaws except that the FNB 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 FNB otherwise than by its
board of directors or its executive or other committees; (iii) increasing or
decreasing the number of directors authorized by the FNB bylaws; and (iv)
classifying and staggering the election of directors. In addition, a bylaw
adopted or amended by the FNB shareholders may not be altered or repealed by the
FNB board of directors. Generally, FNB shareholders may adopt, amend, or repeal
FNB's bylaws in accordance with the NCBCA.
No amendment to Black Diamond's charter may be made unless it is first
proposed by the Board of Directors, then preliminarily approved by the OTS, and
thereafter approved by the holders of a majority of the total votes eligible to
be cast at a meeting of the Shareholders. The bylaws of Black Diamond generally
may be amended by either the board of directors or the shareholders by a
majority vote.
SUPERMAJORITY APPROVAL REQUIRED FOR CERTAIN BUSINESS COMBINATIONS
FNB's Articles generally provide that FNB 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 FNB, 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
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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 FNB
shareholders entitled to vote thereon other than controlling shareholders, (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 FNB (a "controlling shareholder"), and (ii) if, prior to the
acquisition of 20% of the voting power of FNB by a shareholder, the FNB board of
directors 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, FNB officer, or otherwise pursuant to an employee
benefit plan of FNB or of an affiliate of FNB shall not be deemed to be
beneficially owned by any person.
Federal regulations generally require the approval of two-thirds of the
directors of Black Diamond and the holders of two-thirds of the outstanding
stock of Black Diamond entitled to vote thereon for mergers, consolidations and
sales of all or substantially all of Black Diamond's assets. Such regulations
permit Black Diamond to merge with another corporation without obtaining the
approval of its shareholders if: (i) it does not involve an interim savings
association; (ii) Black Diamond's charter is not changed; (iii) each share of
Black Diamond common stock outstanding immediately prior to the effective date
of the transaction is to be an identical outstanding share or a treasury share
of Black Diamond after such effective date; and (iv) either: (A) no shares of
voting stock of Black Diamond and no securities convertible into such stock are
to be issued or delivered under the plan of combination or (B) the authorized
unissued shares or the treasury shares of voting stock of Black Diamond to be
issued or delivered under the plan of combination, plus those initially issuable
upon conversion of any securities to be issued or delivered under such plan, do
not exceed 15% of the total shares of voting stock of Black Diamond outstanding
immediately prior to the effective date of the transaction.
STATUTORY ANTI-TAKEOVER PROTECTION
The North Carolina Shareholder Protection Act (the "Shareholder Protection
Act"), which is applicable to FNB, 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 FNB'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 FNB's
voting shares or which is an affiliate of FNB 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 FNB's annual earnings per share
by the price/earnings multiple, if any, of the acquiror.
In addition, the procedural provisions require that: (i) the FNB 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 FNB 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
FNB prior to consumption of the business transaction; (v) the acquiror must not,
prior to consummation of the business transaction, make a major change in FNB'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.
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<PAGE> 101
The cumulative effect of the "supermajority" provision in the FNB Articles,
together with the Shareholder Protection Act combine to make it more difficult
to effect a merger, tender offer or proxy contest involving FNB, or an
acquisition of control of FNB by the holder of a large block of FNB common
stock. Further, such provisions make more difficult any attempt to remove
incumbent management. These provisions have the above effect even in the
situation where the proposed action or transaction is arguably favorable to, or
in the best interests of, FNB's shareholders.
Black Diamond, as a federally chartered savings bank, is subject to the
regulations of the OTS, which do not contain similar anti-takeover protection
provisions.
SPECIAL MEETINGS OF SHAREHOLDERS
FNB's bylaws provide that special meetings of shareholders may be called
only by FNB's President, Secretary or board of directors, or by any FNB
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 FNB common stock from compelling shareholder consideration of any
proposal (such as a proposal for a merger or business combination) over the
opposition of FNB's board of directors.
Black Diamond's bylaws provide that special meetings of the shareholders
for any purpose or purposes, unless otherwise proscribed by the regulations of
the OTS, which includes the FDIC, may be called at any time by the Chairman of
the Board, the President, or a majority of the board of directors, and must be
called by the Chairman of the Board, the President, or the Secretary upon the
written request of the holders of not less than one-tenth of all of the
outstanding capital stock of the savings bank entitled to vote at the meeting.
Such written request must state the purpose or purposes of the meeting and must
be delivered to the home office of Black Diamond addressed to the Chairman of
the Board, the President or the Secretary.
SHAREHOLDER ACTION WITHOUT MEETING
Under North Carolina law, shareholders may act without a meeting if a
consent in writing to such action is signed by all shareholders entitled to vote
on the matter. FNB's bylaws provide that any action which may be taken at a
meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken is signed by all of the persons who
would be entitled to vote upon such action at a meeting and is filed with FNB's
corporate minutes.
Black Diamond's bylaws provide that any action required to be taken at a
meeting of the shareholders, or any other action which may be taken at a meeting
of shareholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, is given by all of the shareholders entitled to vote
with respect to the subject matter.
INDEMNIFICATION AND LIMITATION OF LIABILITY
North Carolina law permits a corporation to indemnify its directors,
officers, employees or agents under either or both a statutory or non-statutory
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, employee or agent 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 the proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(1) conducted himself in good faith, (2) 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 (3) 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
95
<PAGE> 102
conduct for the type of indemnification set forth above is determined by the
corporation's board of directors, a committee of directors, special legal
counsel or the stockholders in accordance with the statute. 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, North Carolina law permits a corporation to
indemnify or agree to indemnify any of its directors, officers, employees or
agents against liability and expenses (including attorneys 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. FNB's bylaws provide for
indemnification to the fullest extent permitted under North Carolina law for
persons who serve as directors or officers of FNB or at the request of FNB serve
as an officer, director, agent, partner, trustee, administrator or employee for
any other foreign or domestic entity. Accordingly, FNB may indemnify its
directors, officers, and employees in accordance with either the statutory or
non-statutory standard.
In addition, North Carolina law requires 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.
Finally, North Carolina law provides that a corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee or agent to the corporation against certain liabilities incurred by
such persons, whether or not the corporation is otherwise authorized under North
Carolina law to indemnify such party. FNB currently maintains directors' and
officers' insurance policies covering its directors and officers.
As permitted by North Carolina law, the FNB Articles limit the personal
liability of directors for monetary damages for breaches of duty as a director
whether by or in the right of FNB or otherwise, provided that such limitation
will not apply to (1) acts or omissions that the director at the time of the
breach knew or believed were clearly in conflict with FNB's best interests, (2)
any liability for unlawful distributions under North Carolina law, (3) any
transaction from which the director derived an improper personal benefit or (4)
acts or omissions occurring prior to the date the provision became effective. In
addition, the FNB Articles also provide that the FNB board of directors shall
have the authority to adopt resolutions approving the indemnification, to the
fullest extent provided under North Carolina law, 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 FNB.
Black Diamond's bylaws provide that Black Diamond will indemnify any person
against whom an action is brought or threatened because that person is or was a
director, officer or employee of Black Diamond ("Indemnified Persons") for (i)
any amount for which such person becomes liable under a judgment in such action,
and (ii) reasonable costs and expenses, including reasonable attorney's fees,
actually paid or incurred by such person in defending or settling such action,
or in enforcing his or her rights under the bylaws if he or she attains a
favorable judgment in such enforcement action. Such indemnification shall be
made only if (i) final judgment on the merits is in favor of the Indemnified
Person, or (ii) in case of a settlement, final judgment against the Indemnified
Person or final judgment in favor of the Indemnified Person, other than on the
merits, if a majority of the disinterested directors of Black Diamond determine
that the Indemnified Person was acting in good faith within the scope of his or
her employment or authority as he or she could reasonably perceive it.
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<PAGE> 103
DIVIDENDS AND REPURCHASES OF SHARES
Under North Carolina law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and redemption or
repurchase of its shares) if it would result in either: (1) the corporation
being unable to pay its debts as they become due or (2) the corporation's assets
being less than the sum of its liabilities plus any preferential liquidation
rights of shareholders. A director of a North Carolina corporation may be
personally liable to the corporation to the extent that the amount of the
distribution exceeds such permissible amounts if it is established that he did
not perform his duties as a director in good faith with reasonable care in a
matter which he believes to be in the best interests of the corporation. A
director held liable for unlawful distributions is entitled to contribution from
other directors voting in favor of the distribution and reimbursement from each
shareholder of the amount which the shareholder accepted with knowledge the
distribution was unlawful.
Capital distributions by Black Diamond, as a federally chartered savings
bank, to its shareholders are subject to federal regulations. OTS regulations
applicable to Black Diamond govern capital distributions by savings
institutions, which include cash dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account of a savings institution to make
capital distributions. Generally, the regulations create a safe harbor for
specified levels of capital distributions for institutions meeting at least
their minimum capital requirements, so long as these institutions notify the OTS
and receive no objection to the distribution from the OTS. Institutions and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Pursuant to a recent revision to these regulations, effective April 1,
1999, a "well capitalized" savings association, such as Black Diamond, will be
permitted to make capital distributions during a calendar year in an amount up
to the savings association's net income for the year plus the savings
association's retained net income for the preceding two years, without filing an
application for approval of the capital distribution with the OTS.
DISSENTERS' APPRAISAL RIGHTS
Under North Carolina law, a shareholder of a corporation participating in
certain major corporate transactions may, under varying circumstances be
entitled to dissenters' appraisal rights, pursuant to which such shareholder may
receive cash in the amount of the fair market value of his or her shares in lieu
of the consideration he or she would otherwise receive in the transaction. In
North Carolina, dissenters' appraisal rights are also available for certain
amendments to a corporation's articles of incorporation.
Under OTS regulations, a shareholder of a federally chartered savings bank
may, under certain circumstances, be entitled to dissenter and appraisal rights.
Specifically, any shareholder of a federal savings association that has entered
into a merger or consolidation with another depository institution, or an
acquisition of all or substantially all of its assets or assumption of all or
substantially all of its liabilities by another depository institution, will
have the right to demand payment of the fair or appraised value of his or her
stock. These dissenter and appraisal rights, which are available to Black
Diamond's shareholders in the merger, are discussed in further detail under the
heading "Dissenters' Rights" on page 81.
FUTURE SHAREHOLDER PROPOSALS
If the merger is consummated, the Black Diamond shareholders will become
shareholders of FNB. Pursuant to Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, FNB shareholders may present proposals for inclusion in
the FNB proxy statement for consideration at the next annual meeting of its
shareholders by submitting their proposals to FNB in a timely manner. Black
Diamond shareholders who become shareholders of FNB may present proposals for
inclusion in the FNB proxy statement for its 2000 annual meeting. Any such
proposal must comply with Rule 14a-8.
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<PAGE> 104
LEGAL MATTERS
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., will issue a
legal opinion concerning the legality of the shares of FNB to be issued to Black
Diamond shareholders. Certain of the tax consequences of the merger will be
passed upon by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., as
counsel to FNB.
EXPERTS
The consolidated financial statements of FNB as of December 31, 1998 and
for the year then ended included herein have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of FNB as of December 31, 1997 and
for each of the two years in the period then ended included herein have been so
included in reliance on the report of Cherry, Bekaert & Holland, L.L.P.,
independent auditors, given on the authority of said firm as experts in auditing
and accounting.
The financial statements of Black Diamond as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998 included
herein have been so included in reliance on the report of McGladrey & Pullen,
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE> 105
WHERE YOU CAN FIND MORE INFORMATION
FNB files annual, quarterly and other periodic reports, proxy statements
and other information with the SEC. You may read and copy any of these materials
at the SEC's public reference room in Washington, D.C., New York, New York and
Chicago, Illinois. You may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. You also can find FNB's SEC
filings beginning in 1996 on the SEC's web site at http://www.sec.gov or from
commercial document retrieval services. Reports, proxy statements and other
information with respect to FNB are also available for inspection at the office
of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
The SEC allows FNB to "incorporate by reference" into this Joint Proxy
Statement/Prospectus the information it files with them. This means that we can
disclose important information to you about FNB by referring you to those
documents. Any information we incorporate by reference is considered part of
this Joint Proxy Statement/Prospectus, and any information we later file with
the SEC will automatically update and supersede the information in this Joint
Proxy Statement/Prospectus.
We incorporate by reference in this Joint Proxy Statement/Prospectus and
refer you to the documents listed below:
1. FNB's Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
2. FNB's Quarterly Report of Form 10-Q for the fiscal quarter ended March
31, 1999;
3. The description of FNB common stock contained in its Registration
Statement on Form S-14, filed with the SEC; and
4. All other documents FNB files with the SEC pursuant to Section 13(a),
13(c) or 15(d) of the Securities Exchange Act of 1934 after the date of
this Joint Proxy Statement/Prospectus and before the end of the FNB
special meeting.
You may request a copy of these filings, at no cost, by writing or
telephoning FNB at the following:
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
Attention: Robert F. Albright
(336) 342-3346
If you request any incorporated documents from FNB, they will be mailed to you
by first class mail, or another equally prompt means, within one business day
after your request is received. In order to obtain timely delivery prior to the
special meetings, please make your requests for documents by [ ].
You should also note that the SEC considers this Joint Proxy
Statement/Prospectus to be part of a registration statement filed with the SEC
(Registration No.333- ). Since this Joint Proxy Statement/ Prospectus
omits certain portions of the information provided in the registration
statement, we also refer you to that document.
FNB has supplied the information contained in this Joint Proxy
Statement/Prospectus relating to FNB and Black Diamond has supplied the
information relating to Black Diamond.
Any statement contained in a document incorporated, or deemed to be
incorporated, by reference herein or contained in this Joint Proxy
Statement/Prospectus shall be deemed to be modified or superseded for purposes
of this Joint Proxy Statement/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 such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FNB FINANCIAL SERVICES CORPORATION
Report of Independent Accountants........................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets December 31, 1998 and 1997...... F-4
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996.............. F-6
Consolidated Statements of Cash Flows Years ended December
31, 1998, 1997 and 1996................................... F-7
Notes to Consolidated Financial Statements.................. F-8
Consolidated Balance Sheets March 31, 1999 (unaudited) and
December 31, 1998......................................... F-25
Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 1999 and 1998 (unaudited).... F-26
Consolidated Statements of Changes in Shareholders' Equity
March 31, 1999 (unaudited) and December 31, 1998.......... F-27
Consolidated Statement of Cash Flows Three months ended
March 31, 1999 and 1998 (unaudited)....................... F-28
Notes to Consolidated Financial Statements (unaudited)...... F-30
BLACK DIAMOND SAVINGS BANK, F.S.B.
Independent Auditors' Report................................ F-33
Statements of Financial Condition March 31, 1999
(unaudited), December 31, 1998 and 1997................... F-34
Statements of Income and Comprehensive Income Three months
ended March 31, 1999 and 1998 (unaudited) and years ended
December 31, 1998 and 1997................................ F-35
Statements of Stockholders' Equity Three months ended March
31, 1999 (unaudited) and years ended December 31, 1998 and
1997...................................................... F-37
Statements of Cash Flows Three months ended March 31, 1999
and 1998 (unaudited) and years ended December 31, 1998 and
1997...................................................... F-39
Notes to Financial Statements (unaudited)................... F-43
</TABLE>
F-1
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
FNB Financial Services Corporation
and Subsidiary
Reidsville, North Carolina
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of FNB Financial Services Corporation and Subsidiary at
December 31, 1998, and the results of their operations and their cash flows for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of the 1998
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 5, 1999
F-2
<PAGE> 108
[Letterhead of Cherry Bekaert & Holland]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FNB Financial Services Corporation
and Subsidiary
Reidsville, North Carolina
We have audited the accompanying consolidated balance sheet of FNB Financial
Services Corporation and Subsidiary as of December 31, 1997 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the two-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 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 the
consolidated results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Reidsville, North Carolina
February 10, 1998
F-3
<PAGE> 109
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 8,854 $ 9,612
Investment securities:
Available for sale........................................ 144,391 77,346
Federal Home Loan Bank and Federal Reserve Bank stock..... 1,335 1,392
Loans, net of allowance for credit losses of $2,606 in 1998
and $2,331 in 1997........................................ 253,221 226,384
Property and equipment, net................................. 7,295 6,490
Accrued income and other assets............................. 6,613 3,927
-------- --------
Total assets...................................... $421,709 $325,151
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 38,588 $ 31,464
Interest-bearing.......................................... 306,417 240,810
-------- --------
Total deposits.................................... 345,005 272,274
Federal funds purchased and retail repurchase agreements.... 13,932 13,720
Other borrowings............................................ 15,000 15,000
Accrued expenses and other liabilities...................... 3,206 1,639
-------- --------
Total liabilities................................. 377,143 302,633
-------- --------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, no par value; Authorized -- 10,000,000
shares; none issued....................................... -- --
Common stock, $1.00 par value;
Authorized -- 40,000,000 shares; Outstanding --
3,429,564 in 1998 and 2,493,680 in 1997................. 3,430 2,494
Paid-in capital............................................. 21,359 3,287
Retained earnings........................................... 19,113 16,541
-------- --------
43,902 22,322
Accumulated other comprehensive income...................... 664 196
-------- --------
Total shareholders' equity........................ 44,566 22,518
-------- --------
Total liabilities and shareholders' equity........ $421,709 $325,151
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 110
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans..................................................... $23,190 $17,616 $12,092
Federal funds sold........................................ 213 133 53
Investment securities:
Taxable................................................ 6,912 2,800 2,480
Tax exempt............................................. 271 358 657
Other..................................................... 89 110 78
------- ------- -------
Total interest income............................. 30,675 21,017 15,360
------- ------- -------
Interest expense
Deposits.................................................. 14,600 9,287 6,449
Federal funds purchased and other borrowings.............. 1,517 769 313
------- ------- -------
Total interest expense............................ 16,117 10,056 6,762
------- ------- -------
Net interest income......................................... 14,558 10,961 8,598
Provision for credit losses................................. 1,130 760 415
------- ------- -------
Net interest income after provision for credit losses....... 13,428 10,201 8,183
------- ------- -------
Other income
Service charges on deposit accounts....................... 1,107 896 746
Other service charges and fees............................ 206 168 164
Bankcard fees............................................. 427 213 19
Net gain on sales of loans................................ 92 39 16
Net gain on securities available for sale................. 422 38 307
------- ------- -------
Total other operating income...................... 2,254 1,354 1,252
------- ------- -------
Other expenses
Salaries and employee benefits............................ 5,939 4,709 3,630
Occupancy expense......................................... 611 529 345
Furniture and equipment expense........................... 836 628 465
Insurance expense, including FDIC assessment.............. 97 62 35
Marketing expense......................................... 140 154 97
Printing and supply expenses.............................. 206 251 205
Bankcard processing....................................... 402 185 31
Other expenses............................................ 1,739 1,385 1,196
------- ------- -------
Total other expenses.............................. 9,970 7,903 6,004
------- ------- -------
Income before income taxes.................................. 5,712 3,652 3,431
Income tax expense.......................................... 1,865 1,175 1,021
------- ------- -------
Net income.................................................. 3,847 2,477 2,410
Other comprehensive income (loss)........................... 468 40 (311)
------- ------- -------
Comprehensive income........................................ $ 4,315 $ 2,517 $ 2,099
======= ======= =======
Net income per share, basic................................. $ 1.23 $ 1.00 $ 0.98
======= ======= =======
Net income per share, diluted............................... $ 1.16 $ 0.93 $ 0.96
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 111
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Common stock
Balance at beginning of year.............................. $ 2,494 $ 1,383 $ 1,098
Stock split effected in the form of a stock dividend...... -- 1,082 275
Stock issuance............................................ 897 -- --
Dividend reinvestment plan................................ 13 6 3
Exercise of stock options................................. 19 11 7
Employee 401(k) plan...................................... 6 12 --
Employee stock awards..................................... 1 -- --
------- ------- -------
Balance at end of year.................................... 3,430 2,494 1,383
------- ------- -------
Paid-in capital
Balance at beginning of year.............................. 3,287 2,728 2,580
Stock issuance............................................ 17,546 -- --
Dividend reinvestment plan................................ 266 156 60
Exercise of stock options................................. 52 92 84
Employee 401(k) plan...................................... 202 308 --
Employee stock awards..................................... 6 3 4
------- ------- -------
Balance at end of year.................................... 21,359 3,287 2,728
------- ------- -------
Retained earnings
Balance at beginning of year.............................. 16,541 16,119 14,837
Net income................................................ 3,847 2,477 2,410
Cash paid for fractional shares........................... -- (14) (5)
Cash dividends paid ($.40 per share in 1998, $.39 in 1997,
and $.34 in 1996)...................................... (1,275) (959) (848)
Stock split effected in the form of a stock dividend...... -- (1,082) (275)
------- ------- -------
Balance at end of year.................................... 19,113 16,541 16,119
------- ------- -------
Accumulated other comprehensive income
Balance at beginning of year.............................. 196 156 467
Other comprehensive income................................ 468 40 (311)
------- ------- -------
Balance at end of year.................................... 664 196 156
------- ------- -------
Total shareholders' equity........................ $44,566 $22,518 $20,386
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 112
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received......................................... $ 28,374 $ 19,247 $ 14,685
Fees and commission received.............................. 2,427 1,951 1,627
Interest paid............................................. (15,945) (9,499) (6,660)
Noninterest expense paid.................................. (8,877) (6,749) (5,264)
Income taxes paid......................................... (1,831) (1,538) (1,493)
Proceeds from mortgage loans.............................. 13,220 3,963 3,122
--------- -------- --------
Net cash provided by operating activities.......... 17,368 7,375 6,017
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale...... 93,200 55,427 43,707
Proceeds from maturities of securities available for
sale.................................................... 8,713 17,617 7,887
Purchases of securities................................... (168,345) (99,330) (47,933)
Capital expenditures...................................... (1,510) (2,291) (1,532)
Sales of assets........................................... -- 269 --
(Increase) decrease in other real estate owned............ (1,419) 3 158
Net (increase) decrease in loans.......................... (40,331) (88,505) (36,268)
--------- -------- --------
Net cash used in investing activities.............. (109,692) (116,810) (33,981)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest checking
accounts................................................ 29,604 12,381 4,217
Net increase in time deposits............................. 44,017 80,514 20,764
Net increase in other borrowings.......................... -- 15,000 --
Net increase in federal funds purchased and retail
repurchase agreements................................... 212 5,070 5,498
Purchase of fractional shares............................. -- (14) (5)
Proceeds from issuance of common stock.................... 19,008 588 158
Dividends paid............................................ (1,275) (959) (848)
--------- -------- --------
Net cash provided by financing activities.......... 91,566 112,580 29,784
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (758) 3,145 1,820
Cash and cash equivalents, beginning of year................ 9,612 6,467 4,647
--------- -------- --------
Cash and cash equivalents, end of year...................... $ 8,854 $ 9,612 $ 6,467
========= ======== ========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate........ $ 1,448 $ 107 $ 24
========= ======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income................................................ $ 3,847 $ 2,477 $ 2,410
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses........................... 1,130 760 415
Depreciation.......................................... 680 474 376
Accretion and amortization............................ 387 282 288
Gain on sale of securities available for sale......... (422) (38) (307)
(Gain) loss on sale of mortgage loans................. (92) (39) (16)
Proceeds from mortgage loans.......................... 13,220 3,963 3,122
(Gain) loss on other assets........................... 6 39 84
Deferred tax (benefit) provision...................... -- (338) (384)
Increase in accrued income and other assets........... (1,398) (803) (631)
Increase in accrued expenses and other liabilities.... 10 598 660
--------- -------- --------
Net cash provided by operating activities.......... $ 17,368 $ 7,375 $ 6,017
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 113
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 the time of purchase
into three categories as follows:
-- held-to-maturity -- reported at amortized cost,
-- trading -- reported at fair value with unrealized gains and losses
included in earnings, or
-- available-for-sale -- reported at fair value with unrealized gains
and losses reported in other comprehensive income.
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-8
<PAGE> 114
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.
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.
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 judgments 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 non-deductible expenses) 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
F-9
<PAGE> 115
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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: basic net income per share of
common stock and diluted net income per share of common stock. Basic 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. Diluted net income per share of common stock 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. 1996 earnings per share amounts have been restated in
order to comply with the new accounting standard.
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.
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.
Segment Information
During the year ended December 31, 1998, the Bank adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement requires that public business enterprises report
certain information about operating segments in their annual financial
statements and in condensed financial statements for interim periods issued to
stockholders. It also requires that the public business enterprises report
related disclosures and descriptive information about products and services
provided by significant segments, geographic areas, and major customers,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company has determined that it has one significant operating
segment, the providing of general commercial financial services to customers
located in Reidsville, Madison, Eden, Ruffin, Greensboro and Wilmington, North
Carolina and surrounding communities. The various products are those generally
offered by community banks, and the allocation of resources is based on the
overall performance of the Company, versus the individual branches or products.
There are no differences between the measurements used in reporting segment
information and those used in the Company's general-purpose financial
statements.
F-10
<PAGE> 116
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. This standard establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Based on its operations at December
31, 1998, management does not expect this standard to have a material effect on
the Company's financial statements upon adoption.
Reclassification
Certain items for 1996 and 1997 have been reclassified to conform with the
1998 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,
1998 and 1997 were $373,000 and $362,000, respectively.
NOTE 3 -- INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Available for sale:
U.S. government agency securities..... $139,488 $ 863 $ 71 $140,280
State and municipal obligations....... 3,815 296 -- 4,111
-------- ------ ---- --------
143,303 1,159 71 144,391
Federal Home Loan Bank and Federal
Reserve Bank stock.................... 1,335 -- -- 1,335
-------- ------ ---- --------
Total investment securities... $144,638 $1,159 $ 71 $145,726
======== ====== ==== ========
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
Federal Home Loan Bank and Federal
Reserve Bank stock.................... 1,392 -- -- 1,392
-------- ------ ---- --------
Total investment securities... $ 78,416 $ 421 $ 99 $ 78,738
======== ====== ==== ========
</TABLE>
F-11
<PAGE> 117
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The amortized cost and estimated market value of debt securities at
December 31, 1998, 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 FAIR VALUE
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less..................................... $ 60 $ 61
Due after one through five years............................ 85,759 86,418
Due after five through ten years............................ 45,769 46,220
Due after ten years......................................... 11,715 11,692
-------- --------
$143,303 $144,391
======== ========
</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>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales................................... $93,200 $55,427 $43,707
Gross realized gains.................................. 424 226 376
Gross realized losses................................. 2 188 69
Applicable income tax on net realized gains........... 164 15 120
</TABLE>
At December 31, 1998 and 1997, investment securities with a carrying value
of approximately $28,113,000 and $24,195,000 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,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial, financial and agricultural...................... $ 45,141 $ 54,294
Consumer.................................................... 52,387 46,078
Real estate:
Residential mortgage...................................... 50,121 58,238
Commercial mortgage....................................... 83,202 51,022
Construction.............................................. 24,976 19,083
-------- --------
Total............................................. $255,827 $228,715
======== ========
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans that were
considered impaired was approximately $355,000 and $1,250,000, respectively. The
related allowance for loan losses on these impaired loans was approximately
$60,000 and $188,000, respectively. The average recorded investment in impaired
loans for the years ended December 31, 1998 and 1997 was approximately $703,000
and $625,000, respectively. There were no loans on nonaccrual status that were
not considered impaired at December 31, 1998. However, such loans totaled
$12,000 at December 31, 1997.
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, 1998 and 1997 were $23,241,000
and $18,816,000, respectively.
F-12
<PAGE> 118
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................. $2,331 $1,638 $1,258
Provision for credit losses.............................. 1,130 760 415
Recoveries............................................... 93 93 54
Losses charged off....................................... (948) (160) (89)
------ ------ ------
Balance at end of year................................... $2,606 $2,331 $1,638
====== ====== ======
</TABLE>
NOTE 6 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,657 $ 1,202
Building and leasehold improvements......................... 4,749 4,724
Equipment................................................... 5,396 4,405
Construction in progress.................................... 28 28
------- -------
11,830 10,359
Less accumulated depreciation and amortization.............. 4,535 3,869
------- -------
$ 7,295 $ 6,490
======= =======
</TABLE>
NOTE 7 -- DEPOSITS
The aggregate amount of jumbo CDs, each with a minimum denomination of
$100,000, was approximately $86,867,000 and $59,700,000 in 1998 and 1997,
respectively.
At December 31, 1998 the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1999................................................... $168,852
2000................................................... 42,282
2001................................................... 13,883
2002................................................... 5,171
2003................................................... 1,269
Thereafter............................................. 595
--------
$232,052
========
</TABLE>
F-13
<PAGE> 119
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- FEDERAL FUNDS PURCHASED, RETAIL 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>
1998
Federal funds purchased and securities
sold under agreements to repurchase..... $13,932 4.21% $13,008 4.92% $17,366
FHLB borrowings........................... 15,000 5.63 15,000 4.74 15,000
------- ------- -------
Total................................ $28,932 $28,008 $32,366
======= ======= =======
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
======= ======= =======
</TABLE>
At December 31, 1998, 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 $10 million maturing in 2002
and $5 million maturing in 2003. 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. The borrowing maturing in 2003 has an
identical call feature in 2000.
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>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense
Federal............................................ $1,825 $1,448 $1,212
State.............................................. 40 149 193
------ ------ ------
Total current.............................. 1,865 1,597 1,405
------ ------ ------
Deferred tax expense (benefit)
Federal............................................ -- (341) (308)
State.............................................. -- (81) (76)
------ ------ ------
Total deferred............................. -- (422) (384)
------ ------ ------
Total income tax expense................... $1,865 $1,175 $1,021
====== ====== ======
</TABLE>
F-14
<PAGE> 120
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The sources of deferred tax assets and liabilities and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................... $ 527 $ 754
Non-qualified deferred compensation plans................. 642 391
------ ------
Total............................................. 1,169 1,145
------ ------
Deferred tax liabilities:
Depreciable basis of property and equipment............... 329 271
Net unrealized gain on securities available for sale...... 370 125
Other..................................................... 28 8
------ ------
Total............................................. 727 404
------ ------
Net deferred tax assets (liabilities)....................... $ 442 $ 741
====== ======
</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 Company's history of taxable income and estimates of future
taxable income.
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>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax based on statutory rates......................... $1,942 $1,242 $1,166
Increase (decrease) resulting from:
Effect of tax-exempt income........................ (95) (104) (199)
State income taxes, net of federal benefit......... (40) 111 122
Other, net......................................... 58 (74) (68)
------ ------ ------
$1,865 $1,175 $1,021
====== ====== ======
</TABLE>
NOTE 10 -- LEASE COMMITMENTS
The minimum annual lease commitments under noncancelable operating leases
in effect at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------------
(IN THOUSANDS)
<S> <C>
1999........................................................ $192
2000........................................................ 200
2001........................................................ 199
2002........................................................ 188
2003........................................................ 192
Thereafter.................................................. 982
----
</TABLE>
Rental expense was $206,000 in 1998, $131,000 in 1997, and $71,000 in 1996.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to principal officers and directors and
their affiliated companies of approximately $3,241,000 and $3,272,000 at
December 31, 1998 and 1997, respectively. During 1998, additions to such loans
were $1,951,000 and repayments were $1,982,000. Such loans were made
F-15
<PAGE> 121
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 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.
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.
All per share data in the financial statements has been adjusted to reflect
these three splits.
Stock grants
During 1998, 1997, and 1996, stock grants to employees amounted to 95, 75,
and 85 common shares, respectively.
Stock option plans
In 1996, the Company adopted 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
1998, 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>
1998 1997 1996
------------------------ ------------------------ ------------------------
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................ 452,918 $13.25 384,864 $10.66 164,101 $ 6.99
Granted................ 95,100 24.87 90,330 23.11 233,942 12.80
Exercised.............. (26,378) 8.39 (13,001) 7.99 (13,179) 12.24
Forfeited.............. (10,273) 12.04 (9,275) 12.03 -- --
------- ------- -------
Outstanding -- End of
year................... 511,367 $15.64 452,918 $13.25 384,864 $10.66
======= ======= =======
Exercisable -- End of
year................... 218,491 $11.54 155,378 $ 9.21 72,718 $ 6.90
Weighted average fair
value of options
granted during the
year................... $ 7.09 $ 6.73 $ 6.66
</TABLE>
F-16
<PAGE> 122
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following is a summary of information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ ----------------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- --------------- ----------- --------------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.75-12.52 179,899 6.48 $ 9.21 122,891 $ 8.57
12.94-25.25 331,468 8.85 19.13 95,600 15.35
------- -------
511,367 218,491
======= =======
</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
SFAS No. 123, the Company's net income and basic net income per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income -- as reported.................... $3,847,000 $2,477,000 $2,410,000
Net income -- pro forma...................... 3,270,000 2,068,000 2,153,000
Basic net income per share -- as reported.... 1.23 1.00 0.98
Basic net income per share -- pro forma...... 1.06 0.84 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 1998, 1997 and 1996: dividend yield of 3.20%,
expected volatility of 29.0% for 1998, 34.0%, for 1997 and 1996, risk-free
interest rates of 5.55% for 1998, 5.70% for 1997 and 6.20% for 1996, and
expected lives of 7 years for 1998 options, and 4 years for 1997 and 1996
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, 1997
and 1998 vest ratably over a four year period; however, no option will be
exercisable after ten years from the date granted.
NOTE 13 -- OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes requirements for
the disclosure of comprehensive income in the Company's consolidated financial
statements. Comprehensive income is defined as net income plus transactions and
other occurrences which are the result of nonowner changes in equity. As
required by SFAS No. 130, prior period consolidated financial statements have
been reclassified to reflect application of the provisions of this statement.
Other comprehensive income is defined as comprehensive income exclusive of
net income. Unrealized gains (losses) on available for sale investment
securities represent the sole component of the Company's other comprehensive
income. Other comprehensive income (loss) consists of the following.
<TABLE>
<CAPTION>
1998 1997 1996
------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year... $1,188 $105 $(203)
Reclassification adjustment for gains included in net
income.................................................... 422 38 307
------ ---- -----
Other comprehensive income (loss) before tax................ 766 67 (510)
Income tax expense (benefit) related to other comprehensive
income.................................................... 298 27 (199)
------ ---- -----
Other comprehensive income.................................. $ 468 $ 40 $(311)
====== ==== =====
</TABLE>
F-17
<PAGE> 123
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of basic
net income per share of common stock and diluted net income per share of common
stock as required by SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------
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...... $3,847,000 3,130,380 $1.23
=====
Effect of Dilutive Securities:
Stock options................................ -- 179,823
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion......................... $3,847,000 3,310,203 $1.16
========== ========= =====
</TABLE>
<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>
<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>
F-18
<PAGE> 124
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- 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>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Assets
Cash and due from banks................................... $ 1,058 $ 653 $ 374
Securities................................................ 12 12 13
Investment in wholly-owned subsidiary..................... 43,407 21,829 19,960
Other assets.............................................. 89 -- 39
------- ------- -------
$44,566 $22,494 $20,386
======= ======= =======
Shareholders' equity...................................... $44,566 $22,494 $20,386
======= ======= =======
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiary................................... $ 1,271 $ 698 $ 835
Amortization and other expenses............................. (92) (74) (74)
------- ------- -------
Income before tax benefit................................... 1,179 624 761
Income tax benefit.......................................... 30 25 25
------- ------- -------
Income before equity in undistributed net income of
subsidiary................................................ 1,209 649 786
Equity in undistributed net income of subsidiary............ 2,638 1,828 1,624
------- ------- -------
Net income.................................................. $ 3,847 $ 2,477 $ 2,410
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received from subsidiary........................ $ 1,271 $ 698 $ 835
Cash paid for franchise tax, registration cost,
acquisition cost and other............................. (92) (74) (74)
(Increase) decrease in other assets....................... (89) 12 --
Loss on asset sales....................................... -- 2 --
Refundable income taxes................................... 25 25 6
------- ------- -------
Net cash provided by operating activities.............. 1,115 663 767
------- ------- -------
CASH USED IN INVESTING ACTIVITIES
Investment in subsidiary.................................. (18,443) -- --
Purchase of real estate................................... -- -- (14)
------- ------- -------
Net cash used in investing activities.................. (18,443) -- (14)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance.............................. $18,443 -- --
Dividends paid, net of DRIP............................... (996) (797) (785)
Proceeds from Employee 401(k)............................. 208 320 --
Proceeds from employee stock awards....................... 7 4 4
Exercise of stock options................................. 71 103 91
Purchase of fractional shares............................. -- (14) (5)
------- ------- -------
Net cash provided by (used in) financing activities.... 17,733 (384) (695)
------- ------- -------
Net increase in cash........................................ 405 279 58
Cash at beginning of year................................... 653 374 316
------- ------- -------
Cash at end of year......................................... $ 1,058 $ 653 $ 374
======= ======= =======
RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING
ACTIVITIES
Net income.................................................. $ 3,847 $ 2,477 $ 2,410
Adjustments to reconcile net income to net cash provided
by operating activities
(Increase) decrease in other assets.................... (94) 14 (19)
Equity in undistributed net income of subsidiary....... (2,638) (1,828) (1,624)
------- ------- -------
Net cash provided by operating activities................... $ 1,115 $ 663 $ 767
======= ======= =======
</TABLE>
F-19
<PAGE> 125
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit.
A summary of the Bank's commitments and contingent liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
--------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit................................ $56,245 $42,250
Standby letters of credit................................... 166 13
------- -------
$56,411 $42,263
======= =======
</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 17 -- 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 consist primarily of cash and cash
equivalents, U. S. government securities, and common stocks.
F-20
<PAGE> 126
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table outlines the changes in the Company's pension plan
obligations, assets and funded status for the years ended December 31, 1998 and
1997 and the assumptions and components of net periodic pension cost for the
three years in the period ended December 31, 1998 (in thousands).
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 2,761 $2,409
Service cost................................................ 123 99
Interest cost............................................... 196 177
Actuarial loss.............................................. 101 168
Benefits paid............................................... (114) (92)
------- ------
Benefit obligation at end of year........................... 3,067 2,761
------- ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 2,412 2,289
Actual return on plan assets................................ 248 21
Employer contribution....................................... 123 194
Benefits paid............................................... (114) (92)
------- ------
Fair value of plan assets at end of year.................... 2,669 2,412
------- ------
(398) (349)
FUNDED STATUS
Unrecognized net actuarial gain............................. 132 106
Unrecognized prior service cost............................. 110 121
------- ------
Pension liability........................................... $ (156) $ (122)
======= ======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................... 7.00% 7.00% 7.00%
Expected return on plan assets.............................. 7.00% 7.00% 7.00%
Rate of compensation increase............................... 5.00% 5.00% 5.00%
COMPONENTS OF NET PERIODIC PENSION COST
Service cost................................................ $ 123 $ 99 $ 60
Interest cost............................................... 196 177 158
Expected return on plan assets.............................. (173) (153) (148)
Amortization of prior service cost.......................... 11 11 11
----- ----- -----
Net periodic pension cost................................... $ 157 $ 134 $ 81
===== ===== =====
</TABLE>
In 1994 the Company adopted a Supplemental Executive Retirement Plan
("SERP"). The SERP allows the Company to supplement the level of certain
executives' retirement income over that which is obtainable through the
tax-qualified retirement plan. Contributions to the SERP totaled $170,000 for
1998, $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 $80,000, $58,000, and
$49,000 for 1998, 1997 and 1996, 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
F-21
<PAGE> 127
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $398,000, $304,000 and $207,000 at
December 31, 1998, 1997 and 1996, respectively.
NOTE 18 -- 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. 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. In March 1999, the Bank converted to a state charter
and is no longer under the supervision and regulation of the OCC. Accordingly,
the MOU is no longer binding on the Company.
The primary source of funds for the dividends paid by the Company to its
shareholders is dividends received from its banking subsidiary. The Bank is
restricted as to dividend payout by state laws applicable to banks and may pay
dividends only out of undivided profits. Additionally, dividends paid by the
Company may be limited due to maintaining minimum capital requirements imposed
by banking regulators. Management does not expect any of these restrictions to
materially limit its ability to pay dividends comparable to those paid in the
past. At December 31, 1998, the Bank had undivided profits of approximately
$21.0 million.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possible additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1998, 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, 1998, the Bank's ratio of total capital to risk weighted
assets was 15.8%, which places it into the well capitalized classification.
F-22
<PAGE> 128
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Bank's actual capital amounts and ratios, on a consolidated basis and
for the Bank alone, 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, 1998:
Total Capital (To Risk Weighted Assets)
Consolidated.......................... $45,928 16.3% $22,617 >8.0% $ N/A
-
Subsidiary Bank....................... 44,739 15.8% 22,614 >8.0% 28,268 >10.0%
- -
Tier I Capital (To Risk Weighted Assets)
Consolidated.......................... 43,322 15.3% 11,309 >4.0% N/A
-
Subsidiary Bank....................... 42,133 14.9% 11,307 >4.0% 16,961 > 6.0%
- -
Tier I Capital (To Average Assets)
Consolidated.......................... 43,322 10.3% 16,818 >4.0% N/A
-
Subsidiary Bank....................... 42,133 10.1% 16,771 >4.0% 20,964 > 5.0%
- -
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%
- -
</TABLE>
NOTE 19 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
for each class of financial instruments.
Cash and cash equivalents. For cash on hand and amounts due from banks the
carrying value is considered to be a reasonable estimate of fair value.
Investment securities. The fair value of investment securities is based on
quoted market prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. The
fair value of equity investments in the restricted stock of the Federal Reserve
and Federal Home Loan Bank equals the carrying value.
Loans. The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of residential mortgage loans held for sale is based on quoted
market prices and the fair value of variable rate loans with frequent repricing
and negligible credit risk approximates book value.
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.
Federal Funds Purchased and Retail Repurchase Agreements. The carrying
value of federal funds purchased and retail repurchase agreements is considered
to be a reasonable estimate of fair value.
F-23
<PAGE> 129
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Other borrowings. Other borrowings consists of FHLB borrowings with
varying maturities. The fair values of these liabilities are estimated using the
discounted values of the contractual cash flows. The discount rate is estimated
using the rates currently in effect for similar borrowings.
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 16.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents............. $ 8,854 $ 8,854 $ 9,612 $ 9,612
Investment securities
Available for sale.................. 143,303 144,391 77,346 77,346
Other equity securities............. 1,335 1,335 1,392 1,392
Loans................................. 255,827 257,844 228,715 227,998
FINANCIAL LIABILITIES:
Deposits.............................. 345,005 345,567 272,274 269,068
Federal funds purchased and retail
repurchase agreements............... 13,932 13,932 13,720 13,720
Other borrowings...................... 15,000 15,066 15,000 14,907
</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 based on 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 20 -- 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-24
<PAGE> 130
FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Unaudited; in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 10,765 $ 8,854
Securities available for sale 124,215 144,391
Other equity securities, at cost 2,234 1,335
Loans 265,120 255,827
Less: Allowance for loan losses 2,740 2,606
--------- ---------
Net Loans 262,380 253,221
Property and equipment, net 7,352 7,295
Intangible assets 557 580
Accrued income and other assets 5,817 6,033
--------- ---------
Total Assets $ 413,320 $ 421,709
========= =========
Liabilities and Shareholders Equity
Deposits
Noninterest bearing $ 38,623 $ 38,588
Savings/NOW/MMI 75,301 74,365
Other time account 224,296 232,052
--------- ---------
Total deposits 338,220 345,005
Federal funds purchased and securities
sold under repurchase agreements 10,103 13,932
Other borrowings 20,000 15,000
Accrued expense and other liabilities 2,708 3,206
--------- ---------
Total Liabilities 371,031 377,143
--------- ---------
Shareholders Equity
Preferred stock, authorized 10,000,000 shares;
none issued and outstanding 0 0
Common stock, $1.00 par; authorized
40,000,000 shares; 3,325,355 shares issued
in 1999; 3,429,564 shares issued in 1998 3,325 3,430
Paid in capital 19,576 21,359
Retained earnings 19,610 19,113
--------- ---------
42,511 43,902
Accumulated other comprehensive income (loss) (222) 664
--------- ---------
Total shareholders equity 42,289 44,566
--------- ---------
Total Liabilities and Shareholders equity $ 413,320 $ 421,709
========= =========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 131
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income
Interest and fees on loans $ 5,696 $ 5,547
Interest on federal finds sold and other deposits 21 50
Interest and dividends in investments:
U.S. Treasury securities 0 45
Federal Agency securities 1,834 1,086
State, County and Municipal securities 54 75
Other securities 27 25
---------- ----------
Total Interest Income 7,632 6,828
Interest expense
Interest on savings, NOW and MMI deposits 484 287
Interest on other time deposits 2,986 2,917
Interest on federal funds purchased, borrowed funds, and
securities sold under agreement to repurchase 357 358
---------- ----------
Total Interest Expense 3,827 3,562
Net Interest Income 3,805 3,266
Provision for loan losses 228 265
---------- ----------
Net interest income after loan loss provision 3,577 3,001
Noninterest income
Deposit service charge 300 244
Bankcard fees 110 82
Net securities gains/(losses) 95 10
Net gain/(loss) on sale of mortgages 7 49
Other operating income 54 50
---------- ----------
Total noninterest income 566 435
Noninterest expense
Salaries and employee benefits 1,666 1,436
Net occupancy expense 154 144
Furniture and equipment expense 300 175
Insurance 14 13
Printing and supplies 51 62
Bankcard processing 82 74
Net loss on disposition of asset 58 0
Other operating expense 510 353
---------- ----------
Total noninterest expense 2,835 2,257
Income before income taxes 1,308 1,179
Income tax expense 448 404
---------- ----------
Net income 860 775
Other comprehensive income (loss) (886) (16)
---------- ----------
Comprehensive income $ (26) $ 759
========== ==========
Per share data
Net income, basic $ 0.25 $ 0.31
Net income, diluted $ 0.25 $ 0.29
Cash dividends $ 0.11 $ .10
Weighted average shares outstanding, basic 3,379,727 2,498,034
Weighted average shares outstanding, diluted 3,474,001 2,708,695
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 132
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited; in thousands)
<TABLE>
<CAPTION>
Three Months Year
Ended Ended
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Common Stock:
Beginning balance $ 3,430 $ 2,494
Stock issuance 0 897
Stock repurchase (119) 0
Dividend reinvestment plan 3 13
Exercise of stock options 9 19
Employee 401(k) plan 2 6
Employee stock awards 0 1
-------- --------
Ending balance 3,325 3,430
-------- --------
Paid in Capital:
Beginning balance 21,359 3,287
Stock issuance 0 17,546
Stock repurchase (1,881) 0
Dividend reinvestment 51 266
Exercise of stock options 13 52
Employee 401(k) plan 34 202
Employee stock awards 0 6
-------- --------
Ending balance 19,576 21,359
-------- --------
Retained Earnings:
Beginning balance 19,113 16,541
Net income 860 3,847
Cash dividends (363) (1,275)
-------- --------
Ending balance 19,610 19,113
-------- --------
Accumulated other comprehensive income (loss):
Beginning balance 664 196
Other comprehensive income (loss) (886) 468
-------- --------
Ending balance (222) 664
-------- --------
Total Shareholders' Equity $ 42,289 $ 44,566
======== ========
</TABLE>
F-27
<PAGE> 133
Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Increase/(Decrease) in Cash and Cash Equivalents:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 7,520 $ 6,871
Fees and commissions 636 565
Interest paid (4,001) (3,231)
Noninterest expense paid (2,832) (2,273)
Income taxes paid (200) 15
Proceeds from sale of mortgage loans 1,678 6,849
-------- --------
Net cash provided/(used) by operating activities: 2,801 8,796
-------- --------
Cash flow from investing activities:
Proceeds from sale/call/maturity of securities 41,414 26,266
Purchase of securities (23,719) (42,370)
Capital expenditure (262) (59)
(Increase)/Decrease in other real estate 522 (19)
(Increase)/Decrease in net loans (10,892) (25,603)
-------- --------
Net cash provided/(used) by investing activities: 7,063 (41,785)
-------- --------
Cash flows from financing activities:
Increase/(Decease) in DDA, Savings, NOW, MMI 972 8,120
Increase/(Decrease) in time deposits (7,757) 34,800
Increase/(Decrease) in federal funds and repurchase
agreements (3,830) (3,273)
Increase/(Decrease) in other borrowing 5,000 0
Proceeds from stock issuance, net of repurchase (1,975) 107
Dividends paid (363) (250)
-------- --------
Net cash provided/(used) by investing activities: 7,953 39,504
-------- --------
Net Increase/(Decrease) in cash equivalents 1,911 6,515
Cash and cash equivalents as of January 1 8,854 9,612
-------- --------
Cash and cash equivalents as of March 31 $ 10,765 $ 16,127
======== ========
Supplemental disclosures of non-cash transactions
Non-cash transfer from loans to other real estate $ 157 $ 18
</TABLE>
F-28
<PAGE> 134
FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Reconciliation of net income to net cash provided by operating activities:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Net Income $ 860 $ 775
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss 228 265
Depreciation 205 133
Accretion and amortization 136 79
(Gain)/Loss on sales of securities (95) (10)
(Gain)/Loss on sale of assets 58 (1)
(Gain)/Loss on sale of mortgages (7) (49)
Proceeds from sale of mortgage loans 1,678 6,849
(Increase)/Decrease in interest receivable 297 (290)
(Increase)/Decrease in prepaid expense (148) (106)
(Increase)/Decrease in accrued income (22) 1
(Increase)/Decrease in miscellaneous assets (431) (234)
(Increase)/Decrease in income taxes payable 248 419
Increase/(Decrease) in interest payable (174) 332
Increase/(Decrease) in accrued expenses (135) (69)
Increase/(Decrease) in prepaid income 9 12
Increase/(Decrease) in miscellaneous liabilities 94 690
--------- ---------
Net cash provided by operating activities $ 2,801 $ 8,796
========= =========
</TABLE>
F-29
<PAGE> 135
FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ending March 31, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
2. Comprehensive Income
The Company's other comprehensive income for the three months ended
March 31, 1999 and 1998 consists of unrealized gains and losses on
available for sale securities.
3. Net Income Per Share
Basic and diluted earnings per share amounts have been computed based
upon net income as presented in the accompanying income statements
divided by the weighted average number of common shares outstanding or
assumed to be outstanding as summarized below:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
--------- ----------
<S> <C> <C>
Weighted average number of shares
used in basis EPS 3,379,727 2,498,034
Effect of dilutive stock options 94,274 210,661
--------- ----------
Weighted average number of common
shares and dilutive potential common
shares used in dilutive EPS 3,474,001 2,708,695
========= =========
</TABLE>
4. Segment Reporting
The Company has determined that it has one significant operating
segment, the providing of general commercial financial services to
customers located in Reidsville, Madison, Eden, Ruffin, Greensboro and
Wilmington, North Carolina and surrounding communities.
F-30
<PAGE> 136
5. Securities Available for Sale
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Agency Securities $120,746 $120,149 $139,488 $140,280
State and Municipal Obligations 3,814 4,066 3,815 4,111
-------- -------- -------- --------
Total Available for Sale $124,560 $124,215 $143,303 $144,391
======== ======== ======== ========
</TABLE>
6. Loans
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------
<S> <C> <C>
Loan category
Real estate - commercial $ 95,701 $ 83,202
Real estate - residential 50,472 50,121
Real estate - construction 21,789 24,976
Commercial, financial and agriculture 42,917 45,141
Consumer - direct 25,218 23,908
Consumer - home equity 24,586 24,122
Consumer - other 4,437 4,357
-------- --------
Total Loans $265,120 $255,827
======== ========
</TABLE>
*The Bank has no foreign loan activity.
F-31
<PAGE> 137
7. Allocation of Allowance for Loan Loss
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------- ----------------------------
% of Loans in % of Loans in
Each Category Each Category
Balance at end of period Allowance to Totals Loans Allowance to Total Loans
applicable to: --------- --------------- --------- --------------
<S> <C> <C> <C> <C>
Real estate - construction $ 5 8% $ 4 10%
Real estate - mortgage 24 55% 27 52%
Commercial 1,798 16% 1,427 18%
Consumer 729 21% 1,066 20%
General 134 0% 57 0%
------ ------ ------ ------
Total balance sheet for allocation 2,690 100% 2,581 100%
------ ====== ------ ======
Off balance sheet commitments 50 25
------ ------
Total allocation $2,740 $2,606
====== ======
</TABLE>
8. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
Balance at beginning of period $2,606 $2,331
Charge-offs 111 73
Recoveries 17 27
------ ------
Net charge-offs 94 46
------ ------
Allowance charged to operations 228 265
------ ------
Balance at end of period $2,740 $2,550
====== ======
Annualized net charge-offs during
the period to average loans
outstanding during the period 0.15% 0.08%
====== ======
Allowance for loan loss to
month end loans 1.03% 1.03%
====== ======
</TABLE>
9. Nonperforming Assets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ----------------
<S> <C> <C>
Nonaccrual (1) $ 727 $ 355
Past due 90 days or more and
still accruing interest 0 0
Other real estate 929 1,451
Renegotiated trouble debt 0 0
</TABLE>
(1) Other than amounts listed above, there are no other loans which: (a)
represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (b) represent material credits
about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers
to comply with the loan repayment terms.
F-32
<PAGE> 138
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Black Diamond Savings Bank, FSB
Norton, Virginia
We have audited the accompanying statements of financial condition of Black
Diamond Savings Bank, FSB as of December 31, 1998 and 1997, and the related
statements of income and comprehensive income, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Black Diamond Savings Bank, FSB
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
McGladrey & Pullen, LLP
Charlotte, North Carolina
January 22, 1999, except for
Note 16 as to which the
date is May 28, 1999
F-33
<PAGE> 139
BLACK DIAMOND SAVINGS BANK, FSB
STATEMENTS OF FINANCIAL CONDITION
March 31, 1999, December 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash and cash equivalents:
<S> <C> <C> <C>
Interest-bearing deposits $ 763,206 $ 485,845 $ 4,314,945
Noninterest-bearing deposits 8,720,383 6,299,914 3,084,440
Federal funds sold 100,000 100,000 1,100,000
Certificate of deposit - - 100,000
Securities available for sale (Note 2) 8,794,592 9,936,154 17,390,869
Federal Home Loan Bank stock, at cost 705,000 639,600 606,000
Loans held for sale (Note 3) 745,539 575,400 421,175
Loans receivable, net (Note 3) 106,220,704 104,893,001 89,476,915
Accrued interest receivable (Note 4) 952,418 917,278 962,398
Real estate owned, net of allowance for losses
1999 and 1998 $51,438; 1997 $54,526 (Note 13) 144,465 67,435 276,935
Premises and equipment (Note 5) 2,016,902 2,008,889 1,893,565
Excess service fees receivable (Note 3) 57,562 59,045 68,647
Prepaid expenses and other assets 1,264,247 1,239,989 1,048,225
Deferred income taxes (Note 7) 207,651 186,201 95,047
-----------------------------------------------------
Total assets $ 130,692,669 $127,408,751 $120,839,161
=====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits (Note 6) $ 117,744,597 $114,839,444 $112,084,361
Advances from the Federal Home Loan
Bank (Note 12) 2,500,000 2,500,000 -
Advance payments by borrowers for taxes
and insurance 155,493 89,679 77,780
Accrued expenses and other liabilities 990,408 914,991 791,158
-----------------------------------------------------
Total liabilities 121,390,498 118,344,114 112,953,299
-----------------------------------------------------
Commitments (Note 10)
Stockholders' equity (Note 9):
Common stock, $2.50 par value, 2,000,000 shares
authorized at March 31, 1999, December 31,
1998 and 1997; issued and outstanding 835,069
shares in 1999 and 1998; 759,112 shares in 1997 2,087,673 2,087,673 1,897,780
Additional paid-in capital 4,806,193 4,806,193 3,666,838
Accumulated other comprehensive income, unrealized
gain on securities available for sale (Note 2) 1,800 36,859 32,435
Retained earnings, substantially restricted (Note 7) 2,406,505 2,133,912 2,288,809
-----------------------------------------------------
Total stockholders' equity 9,302,171 9,064,637 7,885,862
-----------------------------------------------------
Total liabilities and stockholders' equity $ 130,692,669 $127,408,751 $120,839,161
=====================================================
</TABLE>
See Notes to Financial Statements.
F-34
<PAGE> 140
BLACK DIAMOND SAVINGS BANK, FSB
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 1999 and 1998, and Years
Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31,
1999
- ---------------------------------------------------------------------------------------------
Interest income: (Unaudited)
<S> <C>
Loans receivable $ 2,297,187
Investment securities 132,046
Mortgage-backed securities 15,006
Other interest-bearing deposits 17,063
-----------
Total interest income 2,461,302
-----------
Interest expense:
Deposits (Note 6) 1,443,211
Federal Home Loan Bank advances (Note 12) 30,126
-----------
Total interest expense 1,473,337
-----------
Net interest income 987,965
Provision for (recovery of) loan losses (Note 3) 800
-----------
Net interest income after provision for (recovery of) loan losses 987,165
-----------
Noninterest income:
Service charges and fees 96,948
Realized gain on sale of investment securities and loans (Notes 2 and 3) 12,166
Income from foreclosed real estate 97
Other 8,905
-----------
Total noninterest income 118,116
-----------
Noninterest expense:
Compensation and employee benefits (Notes 8 and 10) 355,035
Occupancy 77,629
SAIF deposit insurance premium 17,152
Service bureau expense 83,689
Provision for loss on foreclosed real estate (Note 13) --
Other 171,183
-----------
Total noninterest expense 704,688
-----------
Income before income taxes 400,593
Income taxes (Note 7) 128,000
-----------
Net income 272,593
-----------
Other comprehensive income (loss), net of tax: Unrealized gains (losses) on
securities:
Unrealized holding gains (losses) arising during the period (56,509)
Less income tax benefit (expense) 21,450
Less reclassification adjustment for gains included in net income --
Less income tax expense --
-----------
Other comprehensive income (loss) (35,059)
-----------
Comprehensive income $ 237,534
===========
Basic earnings per share (Note 14) $ 0.33
===========
Diluted earnings per share (Note 14) $ 0.32
===========
Cash dividends per share $ --
===========
</TABLE>
See Notes to Financial Statements
F-35
<PAGE> 141
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998 1997
- ------------------------------------------------------
(Unaudited)
<S> <C> <C>
$2,077,100 $ 8,796,408 $ 8,048,545
224,178 877,664 1,002,860
22,731 72,142 125,937
59,670 135,769 229,687
- ----------------------------------------------------
2,383,679 9,881,983 9,407,029
- ----------------------------------------------------
1,465,493 5,878,690 5,770,914
- 22,287 -
- ----------------------------------------------------
1,465,493 5,900,977 5,770,914
- ----------------------------------------------------
918,186 3,981,006 3,636,115
7,478 41,133 (74,389)
- ----------------------------------------------------
910,708 3,939,873 3,710,504
- ----------------------------------------------------
81,295 469,334 388,884
5,773 80,997 39,090
3,939 448 4,855
2,193 79,740 129,088
- ----------------------------------------------------
93,200 630,519 561,917
- ----------------------------------------------------
340,404 1,485,337 1,456,605
49,359 206,994 180,920
17,663 118,990 89,129
68,390 332,753 285,900
5,000 4,135 41,414
156,586 714,869 671,400
- ----------------------------------------------------
637,402 2,863,078 2,725,368
- ----------------------------------------------------
366,506 1,707,314 1,547,053
129,000 532,963 510,212
- ----------------------------------------------------
237,506 1,174,351 1,036,841
- ----------------------------------------------------
35,080 58,358 232,060
(13,352) (19,842) (78,900)
- (51,655) (41,430)
- 17,563 14,086
- ----------------------------------------------------
21,728 4,424 125,816
- ----------------------------------------------------
$ 259,234 $ 1,178,775 $ 1,162,657
====================================================
$ 0.28 $ 1.41 $ 1.24
====================================================
$ 0.28 $ 1.37 $ 1.24
====================================================
$ - $ - $ -
====================================================
</TABLE>
F-36
<PAGE> 142
BLACK DIAMOND SAVINGS BANK, FSB
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999 (Unaudited)
and Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Paid-In
Stock Capital
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1996 $1,897,780 $3,666,838
Net income -- --
Net change in unrealized gain (loss) on securities available for
sale, net (Note 2) -- --
------------------------
Balance, December 31, 1997 1,897,780 3,666,838
Net income -- --
Stock dividend (Note 9) 189,893 1,139,355
Net change in unrealized gain on securities available for
sale, net (Note 2) -- --
------------------------
Balance, December 31, 1998 2,087,673 4,806,193
Net income -- --
Net change in unrealized gain on securities available for
sale, net (Note 2) -- --
---------------------------
Balance, March 31, 1999 (Unaudited) $2,087,673 $4,806,193
===========================
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE> 143
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income,
Unrealized
Gain (loss) on
Securities Total
Retained Available Stockholders'
Earnings For Sale Equity
- ------------------------------------------------------
<S> <C> <C>
$ 1,251,968 $(93,381) $6,723,205
1,036,841 - 1,036,841
125,816 125,816
- ------------------------------------------------------
2,288,809 32,435 7,885,862
1,174,351 - 1,174,351
(1,329,248) - -
- 4,424 4,424
- ------------------------------------------------------
2,133,912 36,859 9,064,637
272,593 - 272,593
- (35,059) (35,059)
- ------------------------------------------------------
$ 2,406,505 $ 1,800 $9,302,171
======================================================
</TABLE>
F-38
<PAGE> 144
BLACK DIAMOND SAVINGS BANK, FSB
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998 and
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31,
1999 1998
- --------------------------------------------------------------------------------------------------
(Unaudited)
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 272,593 $ 237,506
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation of premises and equipment 33,406 32,055
Amortization of excess service fees receivable 1,483 2,504
Net amortization of premiums on investments available
for sale 5,183 (5,225)
Net amortization of deferred loan fees (10,684) (13,522)
Provision (recovery) for loan losses 800 7,478
Originations of loans held for sale (4,618,673) (3,838,300)
Proceeds from sale of loans 4,460,700 3,207,234
Provision for losses on foreclosed real estate -- 5,000
Provision for losses on other assets -- --
Provision for deferred income taxes -- --
Gain on sale of securities available for sale -- --
(Gain) loss on sale of loans (12,166) (5,773)
(Gain) loss on sale of foreclosed real estate (821) --
(Increase) decrease in:
Accrued interest receivable (35,140) (510)
Prepaid expenses and other assets (24,258) (80,756)
Increase in:
Accrued expenses and other liabilities 75,417 67,119
------------------------
Net cash provided by (used in) operating activities 147,840 (385,190)
------------------------
Cash Flows From Investing Activities
Maturity of certificate of deposit -- --
Purchases of certificates of deposit -- --
Proceeds from maturities and call of securities available for sale 2,215,000 2,723,000
Purchases of securities available for sale (1,200,000) (2,244,100)
Proceeds from sale of securities available for sale -- --
Principal collected on mortgage-backed securities 64,870 208,250
Proceeds from sale (purchases) of FHLB stock (65,400) (33,600)
Net originations of loans receivable (1,399,832) (1,704,456)
Proceeds from sale of foreclosed real estate 12,969 --
Payments for improvements to foreclosed real estate (7,165) (160)
Purchase of premises and equipment (41,419) (7,452)
------------------------
Net cash used in investing activities (420,977) (1,058,518)
------------------------
</TABLE>
(Continued)
F-39
<PAGE> 145
<TABLE>
<CAPTION>
December 31,
1998 1997
- -----------------------------
<S> <C>
$ 1,174,351 $ 1,036,841
110,240 104,605
9,602 8,093
(1,278) 17,646
(1,135) (34,008)
41,133 (74,389)
(18,948,368) (13,081,818)
18,823,485 13,171,271
4,135 41,414
7,951 36,651
(93,861) (40,341)
(51,655) (41,430)
(29,342) 2,340
1,578 (10,342)
45,120 (32,997)
(199,716) (154,471)
123,833 343,770
- -----------------------------
1,016,073 1,292,835
- -----------------------------
100,000 100,000
- (100,000)
10,866,607 3,366,882
(5,497,000) (4,971,762)
1,714,506 1,103,545
430,667 1,026,217
(33,600) 50,100
(15,338,301) (4,913,378)
133,370 8,000
(47,366) (50,226)
(225,564) (82,784)
- -----------------------------
(7,896,681) (4,463,406)
- -----------------------------
</TABLE>
F-40
<PAGE> 146
BLACK DIAMOND SAVINGS BANK, FSB
STATEMENTS OF CASH FLOWS (CONTINUED)
Three Months Ended March 31, 1999 and 1998
and Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31,
1999 1998
- --------------------------------------------------------------------------------------------------------
(Unaudited)
Cash Flows From Financing Activities
<S> <C> <C>
Net increase in deposits $ 2,905,153 $ 95,395
Proceeds from advances from the FHLB - -
Increase (decrease) in advance payments by borrowers
for taxes and insurance 65,814 74,782
----------------------------
Net cash provided by financing activities 2,970,967 170,177
----------------------------
Net increase (decrease) in cash and cash equivalents 2,697,830 (1,273,531)
Cash and cash equivalents:
Beginning 6,885,759 8,499,385
----------------------------
Ending $ 9,583,589 $ 7,225,854
============================
Supplemental Schedule of Cash and Cash Equivalents
Interest-bearing deposits $ 763,206 $ 1,046,238
Noninterest-bearing deposits 8,720,383 5,079,616
Federal funds sold 100,000 1,100,000
----------------------------
$ 9,583,589 $ 7,225,854
============================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 1,501,068 $ 1,461,747
Income taxes 57,942 70,429
Supplemental Disclosure of Noncash Investing and Financing
Activities
Net change in unrealized loss on securities available for sale,
net of tax (35,059) 21,728
Real estate acquired in settlement of loans 82,013 41,341
Loans originated to finance the sale of foreclosed real estate - 76,500
Stock dividend issued - -
</TABLE>
See Notes to Financial Statements.
F-41
<PAGE> 147
<TABLE>
<CAPTION>
December 31,
1998 1997
- --------------------------------
<S> <C>
$ 2,755,083 $ 6,373,046
2,500,000 -
11,899 (32,945)
- -------------------------------
5,266,982 6,340,101
- -------------------------------
(1,613,626) 3,169,530
8,499,385 5,329,855
- -------------------------------
$ 6,885,759 $ 8,499,385
================================
$ 485,845 $ 4,314,945
6,299,914 3,084,440
100,000 1,100,000
- -------------------------------
$ 6,885,759 $ 8,499,385
================================
$ 5,888,095 $ 5,750,365
641,429 311,881
4,424 125,816
537,237 329,092
655,020 210,500
1,329,248 -
</TABLE>
F-42
<PAGE> 148
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization and nature of business: Black Diamond Savings Bank, FSB (the
"Bank") is a federally chartered savings bank primarily engaged in the business
of obtaining savings deposits and originating single-family residential loans
within its primary lending areas, the counties of Wise, Tazewell, Russell, Lee,
Rockingham and Augusta in Virginia. The Bank's underwriting policies require
such loans to be made at a maximum of 80% loan to value based on appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties.
Unaudited financial statements: The unaudited financial statements furnished
reflect all adjustments, consisting of normal recurring accruals, which are in
the opinion of management, necessary for a fair presentation of the financial
position as of March 31, 1999 and the results of operations and cash flows for
the three months ended March 31, 1999 and 1998. The results of the three month
periods are not necessarily indicative of the operating results of the Bank for
the entire year.
Basis of financial statement presentation and accounting estimates: The
accounting and reporting policies of the Bank conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the statement of financial condition and revenues and expenses for the
period. Actual results could differ from those estimates.
Cash and cash equivalents: Cash and cash equivalents consist of federal funds
sold and interest-bearing and noninterest-bearing deposits. For purposes of
reporting the statements of cash flows, the Bank considers all highly liquid
debt instruments purchased with original maturities of three months or less to
be cash equivalents. The Bank maintains deposits with financial institutions
which are in excess of the federally-insured amounts. The Bank has not
experienced any losses in such accounts.
Investment in debt securities: The Bank has investments in debt securities. Debt
securities consist primarily of obligations of the U.S. Government and federal
agencies, obligations of state and political subdivisions and mortgage-backed
securities.
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires that management
classify all debt securities and certain equity securities as trading, available
for sale, or held to maturity as individual investment securities are acquired,
and that the appropriateness of such classification be reassessed at each
statement of financial condition date. All investment securities have been
classified as available for sale.
Securities available for sale: Securities classified as available for sale are
those securities that the Bank intends to hold for an indefinite period of time
but not necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Bank's assets
and liabilities, liquidity needs, regulatory capital consideration, and other
similar factors. Securities available for sale are carried at fair value.
Premiums and discounts are amortized using the interest method over the
contractual lives. Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
F-43
<PAGE> 149
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
Home Loan Bank (FHLB) system, is required to maintain an investment in capital
stock of the FHLB in an amount equal to the greater of 1% of its outstanding
home loans or 5% of advances from the FHLB. No ready market exists for the FHLB
stock, and it has no quoted market value.
Loans held for sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated market
value. Net unrealized losses are recognized through a valuation allowance by
charges to income.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, the undisbursed portion of construction loans,
participations sold and net deferred loan origination fees, costs and discounts.
The Bank's loan portfolio consists primarily of mortgage loans collateralized by
first trust deeds on single family residences, other residential property,
commercial property and land.
Discounts on consumer loans are recognized over the lives of the loans using
methods that approximate the interest method.
Allowance for loan losses: The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb estimated losses on loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrower's ability to pay. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions.
Impaired loans: SFAS No. 114, Accounting by Creditors for Impairment of a Loan,
amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures, requires the Bank to measure the impairment of a
loan based upon the present value of the expected future cash flows or,
alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent and for which
management has determined foreclosure is probable, the measure of impairment of
those loans is to be based on the fair value of the collateral. SFAS No. 114, as
amended, also requires certain disclosures about investments in impaired loans
and the allowance for credit losses and interest income recognized on these
loans. See Note 3 for the effect of SFAS No. 114 for the three months ended
March 31, 1999 and 1998 and the years ended December 31, 1998 and 1997.
F-44
<PAGE> 150
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
Interest income: SFAS No. 118 requires the disclosure of the Bank's method of
accounting for interest income on impaired loans. Interest on loans is
recognized over the terms of the loans and is calculated using the
effective-interest method on principal amounts outstanding. For loans
contractually 90 days or more past due, including impaired loans, accrual of
interest is discontinued, whereby all interest is charged off, or an allowance
is established, on a loan when management believes, after considering collection
efforts and other factors, that the borrower's financial condition is such that
collection of interest is doubtful. Interest on these loans is recognized only
when actually paid by the borrower. Accrual of interest is resumed when, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is no longer in doubt.
Loan origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using a method which approximates the interest
method, over the contractual life of the loans.
Real estate owned: Real estate owned is initially recorded at estimated fair
value at the date of foreclosure. Subsequent to foreclosure, the carrying value
of real estate owned is reduced when it exceeds fair value minus estimated costs
to sell. Costs relating to improvement of the property are capitalized, while
holding costs of the property are charged to expense in the period incurred.
Premises and equipment: Premises and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets.
Excess service fees receivable: When participating interests in loans sold have
an average contractual interest rate, adjusted for normal servicing fees, which
differs from the agreed yield to the purchaser, gains or losses are recognized
equal to the present value of such differential over the estimated remaining
life of such loans. The resulting "excess service fee receivable" is amortized
over the estimated life using a method which approximates the interest method.
The excess service fees receivable and the amortization thereon is periodically
evaluated in relation to estimated future net servicing revenue. The Bank
evaluates the carrying value of the servicing portfolio by estimating the future
net servicing income of the portfolio based on management's estimate of
remaining loan lives.
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, is in effect for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996. The Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. The
standards are based on a control approach which requires, after a transfer of
financial assets, an entity recognize the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes assets when control
is surrendered, and derecognizes liabilities when extinguished. The Statement
provides standards to distinguish transfers of assets that are sales from
transfers that are secured borrowings. The Statement has not had an impact on
the Bank's financial statements, as they are not retaining the servicing of
loans sold.
F-45
<PAGE> 151
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Off-statement of financial condition risk: The Bank is a party to financial
instruments with off-statement of financial condition risk such as commitments
to extend credit, home equity lines of credit and letters of credit. Management
assesses the risks related to these instruments for potential losses on an
ongoing basis.
Earnings per share: SFAS No. 128, Earnings Per Share, which supersedes APB
Opinion No. 15, requires the presentation of earnings per share by all entities
that have common stock or potential common stock, such as options, warrants and
convertible securities, outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to present basic
earnings per share amounts. Basic per share amounts are computed by dividing net
income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). All other entities are required to present basic
and diluted per share amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the effect
is to reduce the loss or increase the income per common share from continuing
operations.
Fair value of financial instruments: SFAS No. 107, Disclosures about Fair Value
of Financial Instruments, requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
condition, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial assets and liabilities from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
The fair value estimates presented are based on pertinent information available
to management as of March 31, 1999 and December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amount, such amounts have not been comprehensively revalued
for purposes of these financial statements since these dates and therefore,
current estimates of fair value may differ significantly from the amounts
presented in these financial statements.
F-46
<PAGE> 152
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
Comprehensive income: The Bank adopted SFAS No. 130, Reporting Comprehensive
Income, during the year ended December 31, 1998. The Statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
Note 2. Securities Available for Sale
Amortized costs and fair values of securities available for sale as of March 31,
1999, December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1999 Costs Gains Losses Value
- ----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
U. S. Government and federal
agencies obligations $ 4,024,141 $ 5,740 $ (15,480) $ 4,014,401
Obligations of state and political
subdivisions 2,284,693 27,543 - 2,312,236
Corporate debentures 1,275,467 7,571 (8,054) 1,274,984
Mortgage-backed securities 1,207,388 3,069 (17,486) 1,192,971
---------------------------------------------------------
$ 8,791,689 $ 43,923 $ (41,020) $ 8,794,592
=========================================================
December 31, 1998
- -----------------------------------------------------------------------------------------------
U.S. Government and federal
agencies obligations $ 5,236,220 $ 16,465 $ (4,167) $ 5,248,518
Obligations of state and political
subdivisions 2,286,299 38,204 (1,681) 2,322,822
Corporate debentures 1,078,723 19,585 (3,864) 1,094,444
Mortgage-backed securities 1,275,500 3,484 (8,614) 1,270,370
---------------------------------------------------------
$ 9,876,742 $ 77,738 $ (18,326) $ 9,936,154
=========================================================
December 31, 1997
- -----------------------------------------------------------------------------------------------
U.S. Government and federal
agencies obligations $11,939,268 $ 30,924 $ (33,231) $ 11,936,961
Obligations of state and political
subdivisions 2,822,653 23,839 (547) 2,845,945
Corporate debentures 767,376 5,639 - 773,015
Mortgage-backed securities 1,809,291 6,976 (19,521) 1,796,746
Equity securities - 38,202 - 38,202
---------------------------------------------------------
$17,338,588 $105,580 $ (53,299) $ 17,390,869
=========================================================
</TABLE>
F-47
<PAGE> 153
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 2. Securities Available for Sale (Continued)
The amortized cost and fair values of securities available for sale as of March
31, 1999 and December 31, 1998 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities are not included in the maturity
categories in the following maturity summary because they do not have a single
maturity date.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------------------------------------------
(Unaudited)
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,021,991 $ 1,019,851 $ 1,537,764 $ 1,538,795
Due after one year through five years 4,997,553 5,013,765 5,947,852 5,992,441
Due after five years through ten years 1,312,697 1,313,480 863,562 875,348
Due after ten years 252,059 254,525 252,064 259,200
------------------------------------------------------------------
7,584,300 7,601,621 8,601,242 8,665,784
Mortgage-backed securities 1,207,388 1,192,971 1,275,501 1,270,370
------------------------------------------------------------------
$ 8,791,688 $ 8,794,592 $ 9,876,743 $ 9,936,154
==================================================================
</TABLE>
During the three months ended March 31, 1999 and 1998 and years ended December
31, 1998 and 1997, the gains from the sale of investment securities amounted to
$-0-, $-0-, $51,655 and $41,430, respectively.
The change in accumulated comprehensive income, which consists of unrealized
gains and losses on securities available for sale, for the three months ended
March 31, 1999 and years ended December 31, 1998 and 1997 is as shown below:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1997
----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Balance, beginning $ 36,859 $ 32,435 $ (93,381)
Change in unrealized gains (56,509) 7,131 202,799
Change in deferred income taxes 21,450 (2,707) (76,983)
-----------------------------------------------
Balance, ending $ 1,800 $ 36,859 $ 32,435
===============================================
</TABLE>
F-48
<PAGE> 154
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Loans Held for Sale
Loans receivable at March 31, 1999 and December 31, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1997
-------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
-------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans
(principally conventional):
Principal balances:
Secured by one-to-four
family residences $ 71,158,081 67.0% $ 69,970,547 66.7% $ 60,181,240 67.3%
Secured by commercial
real estate 10,606,083 10.0% 10,198,985 9.7% 8,054,454 9.0%
Secured by other
properties 1,370,570 1.3% 846,995 0.8% 1,286,825 1.4%
Construction loans 7,096,528 6.6% 7,739,600 7.4% 4,521,600 5.1%
------------------------------------------------------------------------------
90,231,262 84.9% 88,756,127 84.6% 74,044,119 82.8%
------------------------------------------------------------------------------
Consumer and other loans:
Principal balances:
Automobile 3,866,723 3.6% 3,941,875 3.8% 3,827,113 4.3%
Home equity and second
mortgage 4,237,229 4.0% 4,246,399 4.0% 2,873,275 3.2%
Improvements 11,271,096 10.6% 10,267,388 9.8% 10,420,465 11.6%
Other 1,400,278 1.4% 1,590,446 1.5% 949,448 1.1%
------------------------------------------------------------------------------
20,775,326 19.6% 20,046,108 19.1% 18,070,301 20.2%
------------------------------------------------------------------------------
Allowance for loan losses (837,628) (0.8)% (846,353) (0.8)% (854,190) (1.0)%
Undisbursed portion of
construction and
consumer loans (3,825,747) (3.6)% (2,921,193) (2.8)% (1,462,005) (1.7)%
Unearned discounts (14,870) -- (23,365) -- (112,004) (0.1)%
Net deferred loan
origination fees (107,639) (0.1)% (118,323) (0.1)% (209,306) (0.2)%
------------------------------------------------------------------------------
(4,785,884) (4.5)% (3,909,234) (3.7)% (2,637,505) (3.0)%
------------------------------------------------------------------------------
$ 106,220,704 100.0% $ 104,893,001 100.0% $ 89,476,915 100.0%
=================================================================================
</TABLE>
F-49
<PAGE> 155
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Loans Held for Sale (Continued)
The following table sets forth the time to contractual maturity of the Bank's
loan portfolio at March 31, 1999. Loans which have adjustable rates are shown as
being due in the period during which rates are next subject to change, while
fixed rate and other loans include scheduled principal repayments over the terms
of the loans but exclude estimated prepayments. Demand loans, loans having no
stated maturity and overdrafts are reported as due in one year or less. Amounts
in the table are net of loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At March 31, 1999
----------------------------------------------------------------------
One Year 1 Year to 3 Years to 5 Years to Over 10 Total
or Less 3 Years 5 Years 10 Years Years
----------------------------------------------------------------------
(Unaudited)
(In Thousands)
First Mortgage Loans:
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage $ 18,457 $1,891 $ 1,598 $ 9,381 $39,831 $ 71,158
Commercial mortgage 5,883 515 287 1,852 2,069 10,606
Construction 3,271 - - - - 3,271
Consumer 7,700 5,759 4,481 2,048 772 20,760
Other 235 42 176 635 284 1,372
Allowance for loan losses (838) - - - - (838)
Deferred loan fees (108) - - - - (108)
-----------------------------------------------------------------------
Totals $ 34,600 $8,207 $ 6,542 $ 13,916 $42,956 $106,221
=======================================================================
</TABLE>
The following table sets forth the dollar amount at March 31, 1999 of all loans
maturing or repricing on or after March 31, 2000 which have fixed or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- -----
(In Thousands)
<S> <C> <C>
Mortgage loans $ 52,419 $5,006
Other loans 14,196 -
-------- ------
$ 66,615 $5,006
======== ======
</TABLE>
F-50
<PAGE> 156
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Loans Held for Sale (Continued)
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997
---------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of year $ 846,353 $ 854,190 $ 854,190 $ 783,851
Provision (recovery) charged to
operations 800 7,478 41,133 (74,389)
--------------------------------------------------------
Charge offs:
One-to-four family - - - (40,336)
Consumer (9,545) (8,156) (60,498) (54,583)
--------------------------------------------------------
Total loans charged off (9,545) (8,156) (60,498) (94,919)
Recoveries:
One-to-four family - - - 232,627
Consumer 20 11,692 11,528 7,020
--------------------------------------------------------
Total recoveries 20 11,692 11,528 239,647
--------------------------------------------------------
Balance, ending $ 837,628 $ 865,204 $ 846,353 $ 854,190
========================================================
</TABLE>
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, requires that
the Bank establish a specific allowance on impaired loans. Such loans amounted
to $473,838, $495,237 and $496,403 at March 31, 1999, December 31, 1998 and
1997, respectively. The impaired loans had average outstanding balances of
approximately $484,800, $495,720 and $427,162 for the three months ended March
31, 1999 and the years ended December 31, 1998 and 1997, respectively. These
loans are collateral dependent and management has determined that the underlying
collateral value is in excess of the carrying amounts. No interest income was
recorded on impaired loans for the three months ended March 31, 1999 and 1998
and the years ended December 31, 1998 and 1997. During the year ended December
31, 1997, net recoveries which were charged to operations amounted to $192,291,
and charge offs amounted to $40,336.
The following is an analysis of the allowance for loan losses allocated to
impaired loans:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997
---------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance, beginning $ - $ - $ - $ -
Provision charged to operations - - - (192,291)
Charge offs - - - (40,336)
Recoveries - - - 232,627
-----------------------------------------------------------------------
Balance, ending $ - $ - $ - $ -
=======================================================================
</TABLE>
F-51
<PAGE> 157
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Loans Held for Sale (Continued)
Nonaccrual loans for which interest has been reduced totaled approximately
$1,217,000, $1,047,000 and $1,236,000 at March 31, 1999, December 31, 1998 and
1997, respectively. Interest income foregone was approximately $17,000, $27,000,
$92,000 and $146,000 for the three months ended March 31, 1999 and 1998 and the
years ended December 31, 1998 and 1997, respectively.
The following table sets forth information with respect to nonperforming assets
identified by the Bank, including nonaccrual loans and accruing loans past due
90 days or more at the date indicated:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------
1999 1998 1997
---------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Nonaccrual loans $ 1,217,000 $ 1,047,000 $ 1,236,000
Accruing loans past due 90 days or more 64,126 61,576 63,977
Foreclosed real estate 144,465 67,435 276,935
---------------------------------------------------
Total nonperforming assets $ 1,425,591 $ 1,176,011 $ 1,576,912
===================================================
Nonperforming loans to total gross loans 1.15% 1.02% 1.08%
===================================================
Nonperforming assets to total assets 1.09% 0.92% 1.30%
===================================================
Total assets $ 130,692,669 $ 127,408,751 $ 120,839,161
Total gross loans $ 111,006,588 $ 108,802,235 $ 92,114,420
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The approximate unpaid principal balances of
these loans are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------------
1999 1998 1997
------------------------------------------------------------
(Unaudited)
Mortgage loans serviced for:
<S> <C> <C> <C>
FHLMC $ 512,000 $ 529,000 $ 947,000
Other investors 2,595,000 2,831,000 2,939,000
-------------------------------------------------------------
$ 3,107,000 $ 3,360,000 $ 3,886,000
=============================================================
</TABLE>
F-52
<PAGE> 158
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Loans Held for Sale (Continued)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $9,600, $8,800 and $5,800 at March 31, 1999 and
December 31, 1998 and 1997, respectively.
Following is an analysis of the changes in excess servicing fees receivable
balances for the three months ended March 31, 1999 and the years ended December
31, 1998 and 1997:
<TABLE>
<S> <C>
Balance, January 1, 1996 $ 76,740
Amortization (8,093)
---------
Balance, December 31, 1997 68,647
Amortization (9,602)
---------
Balance, December 31, 1998 59,045
Amortization (1,483)
---------
Balance, March 31, 1999 (Unaudited) $ 57,562
=========
</TABLE>
At March 31, 1999 and December 31, 1998 and 1997, loans held for sale were
$745,539, $575,400 and $421,175, respectively. Estimated market value
approximates carrying cost, resulting in these loans being carried at cost.
Proceeds from the sale of loans were $4,460,700, $3,207,234, $18,823,485 and
$13,171,271 and the recognized gains (losses) were $12,166, $5,773, $29,342 and
$(2,340) for the three months ended March 31, 1999 and 1998 and the years ended
December 31, 1998 and 1997, respectively.
Note 4. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------
1999 1998 1997
-----------------------------------------
(Unaudited)
<S> <C> <C> <C>
Investment securities $140,007 $118,987 $247,658
Mortgage-backed securities 6,641 7,044 10,696
Loans receivable 805,770 791,247 704,044
------------------------------------------
$952,418 $917,278 $962,398
==========================================
</TABLE>
F-53
<PAGE> 159
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 5. Premises and Equipment
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------
1999 1998 1997
------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $ 678,254 $ 678,254 $ 678,254
Buildings and improvements 1,583,317 1,583,317 1,583,317
Furniture, fixtures and equipment 1,112,172 1,070,754 845,190
------------------------------------------------
3,373,743 3,332,325 3,106,761
Less accumulated depreciation 1,356,841 1,323,436 1,213,196
------------------------------------------------
$ 2,016,902 $ 2,008,889 $ 1,893,565
================================================
</TABLE>
F-54
<PAGE> 160
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 6. Deposits
Deposits are as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Percent Amount Rate Percent
----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Deposits and NOW accounts
including noninterest-
bearing deposits of
$6,030,199 in 1999 and
$6,359,292 in 1998 $ 11,827,328 1.30% 10.1% $ 12,049,746 1.25% 10.5%
Money market 1,479,608 2.50% 1.3% 1,924,260 2.35% 1.7%
Passbook savings 5,580,583 2.50% 4.7% 5,498,993 2.79% 4.8%
----------------------------------------------------------------------------
18,887,519 16.1% 19,472,999 17.0%
----------------------------------------------------------------------------
Certificates of Deposit:
3% to 3.99% 12,500 3.25% - 29,704 3.11% 0.3%
4% to 4.99% 21,785,717 4.60% 18.5% 19,755,597 4.69% 17.2%
5% to 5.99% 32,932,090 5.45% 28.0% 29,598,150 5.48% 25.8%
6% to 6.99% 34,620,891 6.25% 29.5% 35,252,083 6.27% 30.8%
7% to 7.99% 7,299,872 7.17% 6.2% 7,492,310 7.19% 6.5%
8% to 8.99% 1,983,665 8.01% 1.7% 2,988,530 8.07% 2.4%
----------------------------------------------------------------------------
98,634,735 83.9% 95,116,374 83.0%
----------------------------------------------------------------------------
117,522,254 100.0% 114,589,373 100.0%
------ ------
Accrued interest payable 222,343 250,071
------- -------
Weighted average cost of
deposits $117,744,597 5.06% $ 114,839,444 5.83%
---------------------- -----------------------
</TABLE>
F-55
<PAGE> 161
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 6. Deposits (Continued)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------
Weighted
Average
Amount Rate Percent
-------------------------------------
<S> <C> <C> <C>
Deposits and NOW accounts including noninterest-bearing
deposits of $4,874,648 in 1997 $ 9,776,642 1.13% 8.7%
Money market 1,737,988 2.50% 1.6%
Passbook savings 5,382,972 3.00% 4.8%
------------------------------------
16,897,602 15.1%
------------------------------------
Certificates of Deposit:
3% to 3.99% 45,090,339 3.09% 40.3%
4% to 4.99% 27,059,502 4.74% 24.2%
5% to 5.99% 15,984,528 5.47% 14.3%
6% to 6.99% 2,544,101 6.29% 2.3%
7% to 7.99% 3,997,579 7.19% 3.6%
8% to 8.99% 273,521 8.07% 0.2%
------------------------------------
94,949,570 84.9%
------------------------------------
111,847,172 100.0%
---------
Accrued interest payable 237,189
----------------
Weighted average cost of
deposits $ 112,084,361 5.31%
==========================
</TABLE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31,
March 31, 1999 1998 1997
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
1998 $ - $ - $ 45,090,000
1999 57,914,000 51,296,000 27,059,000
2000 27,194,000 30,151,000 15,985,000
2001 3,385,000 5,779,000 2,544,000
2002 10,142,000 7,890,000 3,998,000
Thereafter - - 274,000
----------------------------------------------------------------
$ 98,635,000 $ 95,116,000 $ 94,950,000
================================================================
</TABLE>
F-56
<PAGE> 162
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 6. DEPOSITS (CONTINUED)
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $32,893,000, $26,172,000 and
$22,552,000 at March 31, 1999, December 31, 1998 and 1997, respectively.
The aggregate amount of certificates of deposit by maturity with a minimum
denomination of $100,000 at March 31, 1999 (Unaudited) is as follows:
<TABLE>
<S> <C>
Maturity Period:
Within 3 months or less $ 4,653,000
Over 3 months through 6 months 5,568,000
Over 6 months through 12 months 6,244,000
Over 12 months 16,428,000
-----------
$32,893,000
===========
</TABLE>
Eligible savings accounts are insured up to $100,000 by the Savings Association
Insurance Fund (SAIF) which is administered by the Federal Deposit Insurance
Corporation (FDIC).
Interest expense on deposits for the three months ended March 31, and the years
ended December 31, is summarized below:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Money market & NOW $ 38,326 $ 35,244 $ 157,744 $ 148,593
Passbook savings 33,936 39,875 151,182 160,823
Certificates of deposit 1,370,949 1,390,374 5,569,764 5,461,498
--------------------------------------------------------
$1,443,211 $1,465,493 $5,878,690 $5,770,914
========================================================
</TABLE>
NOTE 7. INCOME TAX MATTERS
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to the tax bad debt reserve established for the
purpose of absorbing losses. Through 1995, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience. Legislation was
passed in 1996 that eliminated the percentage of taxable income method as an
option for computing bad debt deductions for 1996 and all future years. The Bank
is still permitted to take deductions for bad debts, but is required to compute
such deductions using an experience method.
F-57
<PAGE> 163
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 7. Income Tax Matters (Continued)
In conjunction with the changes in computing the tax bad debt deduction, the
Bank will also have to recapture its excess tax bad debt reserves which have
accumulated since 1988, amounting to approximately $132,000 over a six year
period. The tax associated with the recaptured reserve is approximately $50,000.
The recapture was scheduled to begin with the Bank's 1996 year, but was delayed
two years because the Bank originated a required minimum level of residential
mortgage loans during 1996 and 1997. Deferred income taxes have been previously
established for the taxes associated with the recaptured reserves and the
ultimate payment of the related taxes will not result in a charge to earnings.
The amount of reserve recaptured was approximately $6,000 and $22,000,
respectively, for three months ended March 31, 1999 and the year ended December
31, 1998. The associated tax was approximately $2,000 and $8,000, respectively,
for the three months ended March 31, 1999 and the year ended December 31, 1998.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987 which are in excess of recorded book loan loss
allowances. At March 31, 1999 and December 31, 1998 and 1997, retained earnings
contain certain historical additions to the bad debt reserves for income tax
purposes of approximately $42,000, the balance at December 31, 1987, for which
no deferred taxes have been provided because the Bank does not intend to use
these reserves for purposes other than to absorb losses. If amounts which
qualified as bad debt deductions are used for purposes other than to absorb
losses or adjustments arising from the carryback of net operating losses, income
taxes may be imposed at the then existing rates.
The unrecorded deferred income tax liability on the above amount was
approximately $16,000 as of March 31, 1999 and December 31, 1998 and 1997.
F-58
<PAGE> 164
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 7. Income Tax Matters (Continued)
The cumulative tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1997
-------------------------------------------------
Deferred tax assets: (Unaudited)
<S> <C> <C> <C>
Mortgage loan interest accrued $ 30,623 $ 30,623 $ 31,112
Deferred compensation 283,300 283,300 229,694
Allowance for loan losses 306,652 306,652 315,465
Provision for real estate owned 19,526 19,526 20,698
Excess 401(k) contribution 7,164 7,164 -
--------------------------------------------------
647,265 647,265 596,969
--------------------------------------------------
Deferred tax liabilities:
Premises and equipment 69,953 69,953 62,420
FHLB stock dividends and accrued cash dividends 57,426 57,426 61,408
Excess service fees receivable 22,413 22,413 26,058
Deferred loan fees 217,249 217,249 171,428
Tax bad debt reserves 71,470 71,470 160,762
Unrealized gain on investments 1,103 22,553 19,846
--------------------------------------------------
439,614 461,064 501,922
--------------------------------------------------
Net deferred tax asset $ 207,651 $ 186,201 $ 95,047
==================================================
</TABLE>
At March 31, 1999 and December 31, 1998 and 1997, no valuation allowance was
recorded for deferred tax assets.
Income tax expense (credits) consists of the following for the three months
ended March 31, and the years ended December 31:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997
--------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Current $ 128,000 $ 129,000 $ 626,824 $ 550,553
Deferred - - (93,861) (40,341)
--------------------------------------------------------------
Total $ 128,000 $ 129,000 $ 532,963 $ 510,212
==============================================================
</TABLE>
F-59
<PAGE> 165
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 7. INCOME TAX MATTERS (CONTINUED)
A reconciliation of the federal income tax rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997
-----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
State income tax, net of federal benefit 2.7 3.3 3.5 2.8
Municipal interest income (4.7) (1.6) (2.6) (2.3)
Prior year over accrual - (1.1) (3.3) (1.1)
Officer life insurance - - (1.0) (0.6)
Nondeductible expenses - 0.6 0.6 0.2
-----------------------------------------------------------------
Effective tax rate 32.0% 35.2% 31.2% 33.0%
=================================================================
</TABLE>
NOTE 8. PROFIT-SHARING PLAN
The Bank has a profit-sharing plan covering substantially all its employees
qualifying under Internal Revenue Code Section 401(k). The contributions to the
plan were $23,071, $12,311, $82,255 and $70,411 for the three months ended March
31, 1999 and 1998 and the years ended December 31, 1998 and 1997, respectively.
NOTE 9. CAPITAL
Office of Thrift Supervision (OTS) regulations require institutions to have
minimum regulatory tangible capital equal to 1.5% of total assets, a minimum 3%
of total assets for the core capital ratio and 8% of risk-weighted assets for
the risk-based capital ratio.
At March 31, 1999 and December 31, 1998 and 1997, the Bank exceeded all of the
capital requirements.
F-60
<PAGE> 166
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 9. Capital (Continued)
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under the requirement of the OTS at March 31, 1999
and December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Regulatory Capital - March 31, 1999
----------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $ 9,302 $ 9,302 $ 9,302
Unrealized (gain) on securities (2) (2) (2)
Qualifying general loan loss
allowance - - 803
------------ ----------- -----------
Regulatory capital 9,300 7.1% 9,300 7.1% 10,103 12.9%
Minimum capital requirement 1,960 1.5 3,920 3.0 6,249 8.0
------------------------------------------------------------------------------
Excess regulatory capital $ 7,340 5.6% $ 5,380 4.1% $ 3,854 4.9%
------------------------------------------------------------------------------
Total assets at March 31, 1999 $ 130,693 $ 130,693
============== ==============
Risk weighted assets at March 31, 1999 $ 78,111
=============
</TABLE>
<TABLE>
<CAPTION>
Regulatory Capital - December 31, 1998
----------------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $ 9,065 $ 9,065 $ 9,065
Unrealized (gain) on securities (37) (37) (37)
Qualifying general loan loss
allowance - - 813
---------- ----------- -----------
Regulatory capital 9,028 7.1% 9,028 7.1% 9,841 12.6%
Minimum capital requirement 1,911 1.5 3,852 3.0 6,262 8.0
--------------- -------- --------------- ------- -------------------------
Excess regulatory capital $ 7,117 5.6% $ 5,176 4.1% $ 3,579 4.6%
--------------- -------- --------------- ------- -------------------------
Total assets at December 31, 1998 $ 127,409 $ 127,409
============== ==============
Risk weighted assets at December 31, 1998 $ 78,276
==============
</TABLE>
F-61
<PAGE> 167
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 9. CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
Regulatory Capital - December 31, 1997
--------------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
--------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
GAAP capital $ 7,886 $ 7,886 $ 7,886
Unrealized (gain) on securities (32) (32) (32)
Qualifying general loan loss
allowance - - 831
--------- ---------- -----------
Regulatory capital 7,854 6.5% 7,854 6.5% 8,685 12.9%
Minimum capital requirement 1,813 1.5 3,626 3.0 5,366 8.0
---------------------- ---------------------- ---------------------------
Excess regulatory capital $ 6,041 5.0% $ 4,228 3.5% $ 3,319 4.9%
---------------------- ---------------------- ---------------------------
Total assets at December 31, 1997 $ 120,839 $ 120,839 -
============ ==============
Risk weighted assets at December 31, 1997 - - $ 67,075
===============
</TABLE>
Net income and retained earnings reported in the accompanying financial
statements agree to the Bank's Thrift Financial Report.
Under the OTS prompt corrective action regulations, a savings bank is considered
to be well capitalized if its ratio of total capital to risk-weighted assets is
at lease 10%, its ratio of core capital to risk weighted assets is at lease
6.0%, and its ratio of core capital to total average assets is at lease 5.0%.
The Bank meets all of the above requirements and is considered to be well
capitalized under the prompt corrective action regulations.
A stock dividend of 10% was declared and paid for the year ended December 31,
1998. The market value as of the declaration date of the number of new shares
issued was transferred from retained earnings to common stock and additional
paid-in capital. The Bank may not pay a cash dividend on or purchase any of its
stock if the effect would be to reduce the regulatory capital of the Bank below
the required regulatory capital requirements of the OTS.
NOTE 10. COMMITMENTS AND RELATED PARTIES
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and a letter of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
F-62
<PAGE> 168
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND RELATED PARTIES (CONTINUED)
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 and standby
letters of 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 statement of financial condition
instruments.
A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk, except for undisbursed loan funds as of March 31, 1999
and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------------------------
Fixed Rate Variable Rate Total
----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit, mortgage loans $ 7,934,000 $ 2,947,000 $ 10,881,000
Letter of credit 162,500 - 162,500
-----------------------------------------------------------
$ 8,096,500 $ 2,947,000 $ 11,043,500
===========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Fixed Rate Variable Rate Total
-------------------------------------------------------------
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit, mortgage loans $ 8,654,050 $ 5,410,450 $ 14,064,500
Letter of credit 162,500 - 162,500
--------------------------------------------------------------
$ 8,816,550 $ 5,410,450 $ 14,227,000
==============================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include real
estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. This guarantee was
issued primarily to support a noncompete agreement.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
F-63
<PAGE> 169
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND RELATED PARTIES (CONTINUED)
The Bank originates loans in Southwestern Virginia, an area dependent on the
coal mining industry, which has suffered from high unemployment.
The Bank has entered into two deferred compensation agreements providing
retirement for two employees. Vested benefits under the agreements are payable
in installments over a 10-year period upon retirement, disability, termination
or death. The present value of the liabilities for the benefits is being accrued
over the expected term of active service of the employees. The deferred
compensation expense for the employees was $38,712, $35,341, $141,219 and
$130,244 for the three months ended March 31, 1999 and 1998 and the years ended
December 31, 1998 and 1997, respectively.
The Bank has an employment agreement with its President.
The Bank has made loans to officers and directors in the normal course of
business. The following is an analysis of the loans to executive officers and
directors and their related parties for the three months ended March 31, 1999
and the years ended December 31, 1998 and 1997:
<TABLE>
<S> <C>
Balance, December 31, 1996 $ 457,218
Originations 694,002
Payments received (380,472)
-----------
Balance, December 31, 1997 770,748
Originations 1,606,198
Payments received (698,910)
-----------
Balance, December 31, 1998 1,678,036
Originations 101,522
Payments received (45,269)
-----------
Balance, March 31, 1999 $ 1,734,289
===========
</TABLE>
The Bank has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and is
developing a remediation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Bank is heavily dependent on computer processing in the conduct of its
business activities.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Bank's financial statements.
F-64
<PAGE> 170
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 11. Stock Option Plan
The Bank adopted an Incentive Stock Option Plan in 1989. On October 15, 1997,
common stock options were granted to officers and to key employees. Option
prices are required to be the fair market value of the common stock on the date
the options are granted. As of December 31, 1998, options had been granted for
91,388 shares at an option price of $13.27, as adjusted for the 10% stock
dividend declared during 1998. At March 31, 1999 and December 31, 1998, no
options have been exercised or forfeited. All options are exercisable at March
31, 1999 at an weighted average price of $13.27.
In order to determine the fair market value of the options, SFAS No. 123 does
not require a nonpublic entity to consider the expected volatility of the stock
over the expected lives of the stock options. No cash dividends were expected to
be declared over the expected lives of the stock options. No compensation costs
had been recognized for grants made to date. Had compensation cost been
determined based on the fair value method prescribed in FASB Statement No. 123,
the pro forma effect on reported net income for the year ended December 31, 1997
would be as follows:
<TABLE>
<S> <C>
Net income:
As reported $ 1,036,841
Pro forma 876,201
Earnings per share:
As reported
Basic $ 1.24
Diluted 1.24
Pro forma
Basic 1.05
Diluted 1.05
</TABLE>
In determining the fair value of the options granted as prescribed under
Statement No. 123, the Black-Scholes option pricing model was used with the
following assumptions:
<TABLE>
<CAPTION>
Risk Free Expected Expected
Number of Options Interest Rate Lives (Yrs.) Dividends
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
36,388 5.75% 3.8 $ 0.00
55,000 5.63% 5.2 $ 0.00
</TABLE>
F-65
<PAGE> 171
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 12. FEDERAL HOME LOAN BANK ADVANCES
The Bank had advances outstanding of $2,500,000 at March 31, 1999 and December
31, 1998, which bear interest at 4.79% and are due in full on October 26, 1999.
Maximum borrowings outstanding during the three months ended March 31, 1999 and
year ended December 31, 1998 were $2,500,000. Interest expense on the advances
was $30,126, $-0-, $22,287 and $-0- for the three months ended March 31, 1999
and 1998 and the years ended December 31, 1998 and 1997, respectively. Pursuant
to collateral agreements with the FHLB, advances are collateralized by the
Bank's stock in the FHLB and qualifying first mortgage loans.
NOTE 13. REAL ESTATE OWNED
Following is a summary of foreclosed real estate:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1997
--------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Real estate acquired in settlement of loans $ 195,903 $ 118,873 $331,461
Allowance for losses (51,438) (51,438) (54,526)
--------------------------------------------
$ 144,465 $ 67,435 $276,935
============================================
</TABLE>
Following is an analysis of the allowance for losses on foreclosed real estate:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997
-------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Beginning balance $ 51,438 $ 54,426 $ 54,426 $ 13,012
Provision charged to operations - 5,000 4,135 41,414
Charge offs - - (7,123) -
-------------------------------------------------
$ 51,438 $ 59,426 $ 51,438 $ 54,426
=================================================
</TABLE>
F-66
<PAGE> 172
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 14. EARNINGS PER SHARE
Earnings per share has been calculated in accordance with SFAS No. 128, Earnings
Per Share.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------------
For the Three Months Ended March 31, 1999
----------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Basic earnings per share $ 272,593 835,069 $ 0.33
=================
Effective of dilutive stock options - 16,657
-----------------------------------
Diluted earnings per share $ 272,593 851,726 $ 0.32
====================================================
<CAPTION>
For the Three Months Ended March 31, 1998
----------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Basic earnings per share $ 237,506 835,069 $ 0.28
=================
Effective of dilutive stock options - 18,388
-----------------------------------
Diluted earnings per share $ 237,506 853,457 $ 0.28
=======================================================
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 1,174,351 835,069 $ 1.41
=================
Effective of dilutive stock options - 20,622
-----------------------------------
Diluted earnings per share $ 1,174,351 855,691 $ 1.37
======================================================
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 1,036,841 835,069 $ 1.24
=================
Effective of dilutive stock options - 20
-----------------------------------
Diluted earnings per share $ 1,036,841 835,089 $ 1.24
======================================================
</TABLE>
F-67
<PAGE> 173
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximate their fair
values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held for sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated market
value. Net unrealized losses are recognized through a valuation allowance by
charges to income. The carrying amounts approximate their fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
Fair values for other loans are estimated based on discounted cash flows, using
interest rates currently being offered for loans with similar terms to borrowers
with similar credit quality. Management believes that the allowance for loan
losses is an appropriate indication of the applicable credit risk associated
with determining the fair value of its loan portfolio and has been deducted from
the estimated fair value of loans.
Accrued interest receivable: The carrying amount of accrued interest receivable
approximates its fair value.
Deposit liabilities: The fair values of demand deposits and passbook savings
equal their carrying amounts which represents the amount payable on demand. The
carrying amounts for variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair value at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Advances from the Federal Home Loan Bank: The fair value of advances from the
Federal Home Loan Bank equal their carrying value due to the short-term nature
of the agreement and market rate of interest.
Off-statement of condition instruments: Fair values for the Bank's off-statement
of condition instruments, primarily lending commitments, are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements. The fair value for such commitments are
nominal.
F-68
<PAGE> 174
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Following is a summary of the carrying amounts and approximate fair values of
the Bank's financial instruments:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------
Carrying Fair
Amount Value
--------------------------
<S> <C> <C>
Cash and cash equivalents $ 9,583,589 $ 9,583,589
Investment securities 9,499,592 9,499,592
Loans held for sale 745,539 745,539
Loans receivable 106,220,704 106,129,350
Accrued interest receivable 952,418 952,418
Deposits 117,744,597 119,050,937
Federal Home Loan Bank advances 2,500,000 2,500,000
Commitments to extend credit -- --
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Carrying Fair
Amount Value
--------------------------
<S> <C> <C>
Cash and cash equivalents $ 6,885,759 $ 6,885,759
Investment securities 10,575,754 10,575,754
Loans held for sale 575,400 575,400
Loans receivable 104,893,001 105,396,224
Accrued interest receivable 917,278 917,278
Deposits 114,839,444 116,224,084
Federal Home Loan Bank advances 2,500,000 2,500,000
Commitments to extend credit -- --
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------
Carrying Fair
Amount Value
--------------------------
<S> <C> <C>
Cash and cash equivalents $ 8,499,385 $ 8,499,385
Investment securities 17,996,869 17,996,869
Loans held for sale 421,175 421,175
Loans receivable 89,476,915 87,009,981
Accrued interest receivable 962,398 962,398
Deposits 112,084,361 112,664,638
Commitments to extend credit -- --
</TABLE>
F-69
<PAGE> 175
BLACK DIAMOND SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
Note 16. Subsequent Event - Merger
On May 28, 1999, the Board of Directors of the Bank approved the Agreement and
Plan of Reorganization and Merger whereby the Bank would become a wholly-owned
subsidiary of FNB Financial Services Corporation. The Merger will require
regulatory and shareholder approval.
F-70
<PAGE> 176
APPENDIX A
MERGER AGREEMENT
<PAGE> 177
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
BY AND AMONG
FNB FINANCIAL SERVICES CORPORATION,
FNB ACQUISITION SUB, F.S.B.
and
BLACK DIAMOND SAVINGS BANK, F.S.B.
May 28, 1999
<PAGE> 178
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Agreement and Plan of Reorganization and Merger (the "Agreement")
dated as of May 28, 1999 by and among FNB FINANCIAL SERVICES CORPORATION, a
North Carolina corporation ("FNB"), FNB ACQUISITION SUB, F.S.B. (in
organization), a federal savings bank and a wholly-owned subsidiary of FNB
("Acquisition Sub") and BLACK DIAMOND SAVINGS BANK, F.S.B., a federal savings
bank ("Black Diamond"), recites and provides:
A. The boards of directors of FNB and Black Diamond deem it advisable
to merge Acquisition Sub into Black Diamond (the "Merger") pursuant to this
Agreement and the Plan of Merger attached as Exhibit A (the "Plan of Merger"),
whereby the holders of shares of Common Stock of Black Diamond ("Black Diamond
Common Stock") will receive Common Stock of FNB ("FNB Common Stock").
B. To effectuate the foregoing, the parties desire to adopt this
Agreement and the Plan of Merger, which shall represent a plan of reorganization
in accordance with the provisions of Section 368(a) of the United States
Internal Revenue Code, as amended (the "Code").
C. The parties intend that that transactions contemplated herein
qualify for treatment as a pooling of interests pursuant to APB Opinion No. 16.
D. As further inducement and as a condition to FNB's entering into this
Agreement, FNB and Black Diamond have entered into a certain Stock Option
Agreement (the "Stock Option Agreement"), dated of even date herewith, whereby
FNB has the option to acquire certain shares of Black Diamond Common Stock under
certain conditions.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from this Agreement, and of the representations, warranties, conditions and
promises herein contained, FNB, Acquisition Sub, and Black Diamond hereby adopt
this Agreement whereby at the "Effective Time of the Merger" (as defined in
Article VI hereof) Acquisition Sub shall be merged with and into Black Diamond
(which will be the Surviving Bank, as defined in Section 1.1) in accordance with
the Plan of Merger. The outstanding shares of Black Diamond Common Stock shall
be converted into shares of FNB Common Stock as provided in this Agreement on
the basis, terms and conditions contained herein and in the Plan of Merger as
set forth as Exhibit A hereto.
In connection therewith, the parties hereto agree as follows:
<PAGE> 179
ARTICLE I
General
1.1. Merger. Subject to the provisions of this Agreement and the Plan
of Merger, at the Effective Time of the Merger the separate existence of
Acquisition Sub shall cease and Acquisition Sub shall be merged with and into
Black Diamond (the "Surviving Bank").
1.2. Issuance of FNB Common Stock. FNB agrees that at the Effective
Time of the Merger it will issue FNB Common Stock to the extent set forth in,
and in accordance with, the terms of this Agreement and the Plan of Merger.
1.3. Taking of Necessary Action. In case at any time after the
Effective Time of the Merger any further action is necessary or desirable to
carry out the purposes of this Agreement, the officers and directors of the
Surviving Bank shall take all such necessary action.
ARTICLE II
Effect of Transaction on Common Stock, Assets,
Liabilities and Capitalization of FNB,
Acquisition Sub and Black Diamond
2.1. Conversion of Stock, Exchange Ratio.
A. Conversion of Stock. At the Effective Time of the Merger,
each share of Black Diamond Common Stock outstanding immediately prior to the
Effective Time of the Merger (other than shares of Black Diamond Common Stock
held by FNB, if any, which shares shall be canceled), by virtue of the Merger
and without any action on the part of the holders thereof, shall be converted
into that number of shares of FNB Common Stock, rounded to the nearest whole
share, equal to the product of one multiplied by the Exchange Ratio (as defined
herein). As used herein, "Exchange Ratio" shall mean 1.3333.
The Exchange Ratio at the Effective Time of the Merger shall be
proportionately adjusted to reflect any consolidation, split-up, stock dividend,
subdivision or combination of FNB Common Stock subsequent to the date of this
Agreement.
B. At the Effective Time of the Merger, but after the
conversion contemplated in Section 2.1A above, each share of Acquisition Sub
common stock outstanding immediately prior to the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of the holders
thereof, shall be converted into one share of Black Diamond Common Stock.
C. No scrip or certificates representing fractional shares of
FNB Common Stock will be issued in connection with the Merger, and Black
Diamond's former shareholders shall have no right to vote or receive any
dividend or other payment or distribution on, or any
2
<PAGE> 180
other right with respect to, any fraction of a share of Black Diamond Common
Stock resulting from the Merger.
D. Prior to the Effective Time of the Merger, the Plan of
Merger shall terminate and be abandoned upon a termination of the Agreement,
notwithstanding approval of the Plan of Merger by the shareholders of Black
Diamond.
2.2. Manner of Exchange.
A. After the Effective Time of the Merger, each holder of a
certificate for theretofore outstanding shares of Black Diamond Common Stock,
upon surrender of such certificate to the agent appointed by FNB to administer
the exchange of certificates (the "Exchange Agent"), accompanied by a letter of
transmittal in the form furnished by FNB and the Exchange Agent (the "Letter of
Transmittal"), shall be entitled to receive in exchange therefor the number of
full shares of FNB Common Stock into which shares of Black Diamond Common Stock
shall be converted pursuant to Section 2.1 hereof. Until so surrendered, each
outstanding certificate which, prior to the Effective Time of the Merger,
represented Black Diamond Common Stock will be deemed to evidence the right to
receive the number of full shares of FNB Common Stock into which the shares of
Black Diamond Common Stock represented thereby may be converted in accordance
with the Exchange Ratio, and, after the Effective Time of the Merger will be
deemed for all corporate purposes of FNB to evidence ownership of the number of
full shares of FNB Common Stock into which the shares of Black Diamond Common
Stock represented thereby were converted.
B. Until outstanding certificates formerly representing Black
Diamond Common Stock are surrendered in exchange for FNB Common Stock, no
dividend payable to holders of record of FNB Common Stock for any period as of
any date subsequent to the Effective Time of the Merger shall be paid to the
holder of such outstanding certificates in respect thereof. After the Effective
Time of the Merger, there shall be no further registry of transfer on the
records of Black Diamond of shares of Black Diamond Common Stock. If a
certificate representing such shares is presented to Black Diamond or FNB, it
shall be canceled and exchanged for a certificate representing shares of FNB
Common Stock as herein provided. Upon surrender of certificates of Black Diamond
Common Stock in exchange for FNB Common Stock, there shall be paid to the
recordholder of the certificates of FNB Common Stock issued in exchange therefor
(i) the amount of dividends theretofore paid for such full shares of FNB Common
Stock as of any date subsequent to the Effective Time of the Merger which have
not yet been paid to a public official pursuant to abandoned property laws and
(ii) at the appropriate payment date, the amount of dividends with a record date
prior to surrender and a payment date subsequent to surrender. No interest shall
be payable on such dividends upon surrender of outstanding certificates.
C. At the Effective Time of the Merger, each share of Black
Diamond Common Stock held by FNB, if any, shall be canceled, retired and cease
to exist.
3
<PAGE> 181
D. Treatment of Black Diamond Options.
i) At the Effective Time of the Merger, each option
or other right to purchase shares of Black Diamond Common Stock
pursuant to stock options ("Black Diamond Options") granted by Black
Diamond under its 1989 Incentive Stock Option Plan (as amended,
referred to herein as the "Black Diamond Stock Plan"), which are
outstanding at the Effective Time of the Merger, whether or not
exercisable, shall be converted into and become rights with respect to
FNB Common Stock, and FNB shall assume each Black Diamond Option, in
accordance with the terms of the Black Diamond Stock Plan and stock
option agreement by which it is evidenced, except that from and after
the Effective Time of the Merger (A) FNB and its Compensation Committee
shall be substituted for Black Diamond and the Committee of Black
Diamond's Board of Directors (including, if applicable, the entire
Board of Directors of Black Diamond) administering the Black Diamond
Stock Plan, (B) each Black Diamond Option assumed by FNB may be
exercised solely for shares of FNB Common Stock, (C) the number of
shares of FNB Common Stock subject to such Black Diamond Option shall
be equal to the number of shares of Black Diamond Stock subject to such
Black Diamond Option immediately prior to the Effective Time of the
Merger multiplied by the Exchange Ratio and rounding to the nearest
whole share, and (D) the per share exercise price under each such Black
Diamond Option shall be adjusted by dividing the per share exercise
price under each such Black Diamond Option by the Exchange Ratio and
rounding to the nearest cent.
ii) As soon as practicable after the Effective Time
of the Merger, FNB shall deliver to the participants in the Black
Diamond Stock Plan an appropriate notice setting forth such
participant's rights pursuant thereto and the grants pursuant to the
Black Diamond Stock Plan shall continue in effect on the same terms and
conditions (subject to the adjustments required by Section 2.2D(i)
after giving effect to the Merger). At or prior to the Effective Time
of the Merger, FNB shall take all corporate action necessary to reserve
for issuance sufficient shares of FNB Common Stock for delivery upon
exercise of Black Diamond Options assumed by it in accordance with this
Section 2.2D. As soon as practicable after the Effective Time of the
Merger, FNB shall file a registration statement on Form S-3 or Form
S-8, as the case may be (or any successor or other appropriate forms),
with respect to the shares of FNB Common Stock subject to such options
and shall use its reasonable efforts to maintain the effectiveness of
such registration statement (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such
options remain outstanding.
iii) All restrictions or limitations on transfer with
respect to Black Diamond Common Stock awarded under the Black Diamond
Stock Plan or any other plan, program, or arrangement of Black Diamond,
to the extent that such restrictions or limitations shall not have
already lapsed, and except as otherwise expressly provided in such
plans, program, or arrangement, shall remain in full force and effect
with respect to shares of FNB Common Stock into which such stock is
converted pursuant to this Agreement.
4
<PAGE> 182
iv) Black Diamond agrees to cooperate with FNB to
insure the implementation of this Section 2.2D.
2.3. Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of Black Diamond Common Stock which are issued and
outstanding immediately prior to the Effective Time of the Merger and which are
held by a shareholder who has the right (to the extent such right is available
by law) to demand and receive payment of the fair value of his shares of Black
Diamond Common Stock pursuant to 12 C.F.R. ss. 552.14 (the "Dissenting Shares")
shall not be converted into or be exchangeable for the right to receive the
consideration provided in Section 2.1 of this Agreement, unless and until such
holder shall fail to perfect his or her right to dissent or shall have
effectively withdrawn or lost such right under 12 C.F.R. ss. 552.14, as the case
may be. If such holder shall have so failed to perfect his right to dissent or
shall have effectively withdrawn or lost such right, each of his shares of Black
Diamond Common Stock shall thereupon be deemed to have been converted into, at
the Effective Time of the Merger, the right to receive that number of shares of
FNB Common Stock equal to the product of one multiplied by the Exchange Ratio.
2.4. Effects of Merger. The Merger shall have the effects set forth in
12 C.F.R. ss. 552.13. As of the Effective Time of the Merger, Black Diamond
shall be a wholly-owned subsidiary of FNB.
2.5. Withholding Taxes. All payments to be made pursuant to this
Agreement shall be made less all applicable withholding taxes.
2.6 Lost Certificates. Any Black Diamond shareholder whose certificate
evidencing shares of Black Diamond Common Stock has been lost, destroyed, stolen
or otherwise is missing shall be entitled to receive a certificate representing
the shares of FNB Common Stock to which he or she is entitled in accordance with
and upon compliance with conditions imposed by the Exchange Agent or FNB
pursuant to the provisions of N.C. Gen. Stat. ss. 25-8-405 and N.C. Gen. Stat.
ss. 25-8-104 (including without limitation a requirement that the shareholder
provide a lost instruments indemnity or surety bond in form, substance and
amount satisfactory to the Exchange Agent and FNB).
ARTICLE III
Representations and Warranties
3.1. Representations and Warranties of Black Diamond. Black Diamond
represents and warrants to FNB and Acquisition Sub as follows:
A. Organization, Standing and Power. Black Diamond is a
federal savings bank duly incorporated and organized, validly existing and in
good standing under the laws of the United States and has all requisite
corporate and other power and authority to own, lease and operate its properties
and to carry on its business as now being conducted and to perform this
5
<PAGE> 183
Agreement and the Plan of Merger and to effect the transactions contemplated
hereby and thereby. Black Diamond's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the maximum extent permitted by law. Black
Diamond has delivered to FNB complete and correct copies of (i) its Charter and
(ii) its By-laws.
B. Capital Structure. The authorized capital stock of Black
Diamond consists entirely of 2,000,000 shares of Black Diamond Common Stock, par
value $2.50. On the date hereof, 835,069 shares of Black Diamond Common Stock
were issued and outstanding. All of the outstanding shares of Black Diamond
Common Stock were duly authorized and validly issued and are fully paid and
nonassessable, and all such shares were issued pursuant to and in compliance
with the requirement of a registration statement or an applicable exemption from
the registration requirements under the Securities Act of 1933, as amended (the
"1933 Act"). Except as disclosed on Schedule A, Black Diamond knows of no person
who beneficially owns 5% or more of outstanding Black Diamond Common Stock as of
the date hereof.
C. Authority. Subject to the approval of this Agreement and
the Plan of Merger by the shareholders of Black Diamond and FNB as contemplated
by Section 4.2, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and by the Plan of Merger
have been duly and validly authorized by all necessary action on the part of
Black Diamond, and this Agreement is a valid and binding obligation of Black
Diamond, enforceable in accordance with its terms, except as enforceability may
be limited by laws affecting the enforcement of creditors' rights generally and
subject to any equitable principles limiting the right to obtain specific
performance. The execution and delivery of this Agreement, the consummation of
the transactions contemplated hereby and by the Plan of Merger and compliance by
Black Diamond with any of the provisions hereof or thereof will not (i) conflict
with or result in a breach of any provision of its Charter or By-laws or, except
as set forth in Schedule B, constitute a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, debenture, mortgage, indenture, license, material
agreement or other material instrument or obligation to which Black Diamond is a
party, or by which it or any of its properties or assets may be bound, or (ii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Black Diamond or any of its properties or assets. No consent or
approval by any governmental authority, other than compliance with applicable
federal and state securities, corporate and banking laws, and regulations of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
the FDIC, the Office of Thrift Supervision ("OTS"), and the Virginia State
Corporation Commission ("VSCC") is required in connection with the execution and
delivery by Black Diamond of this Agreement or the consummation by Black Diamond
of the transactions contemplated hereby or by the Plan of Merger.
D. Investments. All securities owned by Black Diamond of
record and beneficially are free and clear of all mortgages, liens, pledges,
encumbrances or any other restriction, whether contractual or statutory, which
would materially impair the ability of Black Diamond freely to dispose of any
such security at any time, except as noted on Schedule C. Any securities owned
of record by Black Diamond in an amount equal to 5% or more of the issued and
outstanding voting securities of the issuer thereof have been noted on such
Schedule C.
6
<PAGE> 184
There are no voting trusts or other agreements or undertakings of which Black
Diamond is a party with respect to the voting of such securities. With respect
to all repurchase agreements to which Black Diamond is a party, Black Diamond
has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of the collateral securing each such repurchase agreement equals or exceeds the
amount of the debt secured by such collateral under such agreement.
E. Financial Statements. Schedule D contains copies of the
following financial statements of Black Diamond (the "Black Diamond Financial
Statements"): a) Statements of Financial Condition as of March 31, 1999
(unaudited), and December 31, 1998 and 1997 (audited); (b) Statements of
Operations for each of the three years in the period ended December 31, 1998
(audited) and the three months ended March 31, 1999 (unaudited); (c) Statements
of Changes in Stockholders' Equity for each of the three years in the period
ended December 31, 1998 (audited) and the three months ended March 31, 1999
(unaudited); and (d) Statements of Cash Flows for each of the three years in the
period ended December 31, 1998 (audited) and the three months ended March 31,
1999 (unaudited). Such financial statements and the notes thereto have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods indicated unless otherwise
noted in the Black Diamond Financial Statements and are consistent with the
books and records of Black Diamond. Each of such statements of financial
condition, together with the notes thereto, presents fairly as of its date the
financial condition and assets and liabilities of Black Diamond. The statements
of operations, changes in stockholders' equity and cash flows, together with the
notes thereto, present fairly the results of operations, changes in
stockholders' equity and cash flows of Black Diamond for the periods indicated.
Except as disclosed in the Black Diamond Financial Statements and as per
compliance with and subject to the requirements of 12 C.F.R. ss. 563.134, there
are no restrictions precluding Black Diamond from paying dividends when, as and
if declared by its Board of Directors.
F. Absence of Undisclosed Liabilities. At December 31, 1998
and March 31, 1999, Black Diamond had no material obligations or liabilities
(contingent or otherwise) of any nature which were not reflected in the Black
Diamond Financial Statements, except for those which are disclosed (including an
estimate of the amount of any such liability) in Schedules specifically referred
to herein. For purposes of this Section 3.1.F., obligations and liabilities
shall be "material" if they exceed, or are reasonably expected to exceed,
individually or in the aggregate, $50,000.
G. Tax Matters. Black Diamond has filed or caused to be filed
or (in the case of returns or reports not yet due) will file all tax returns and
reports required to have been filed by it before the Effective Time of the
Merger, and all information set forth in such returns or reports is or (in the
case of such returns or reports not yet due) will be accurate and complete in
all material respects. Black Diamond has paid or made adequate provision for, or
(with respect to returns or reports not yet filed) before the Effective Time of
the Merger will pay or make adequate provision for, all taxes, additions to tax,
penalties, and interest for all periods covered by those returns or reports.
There are, and at the Effective Time of the Merger will be, no unpaid taxes,
additions to tax, penalties, or interest due and payable by Black Diamond that
are or could
7
<PAGE> 185
become a lien on any asset, or otherwise materially adversely affect the
business, property or financial condition of Black Diamond, except for taxes and
any such related liability being contested in good faith and disclosed in
Schedule E. Black Diamond has collected or withheld, or will collect or withhold
before the Effective Time of the Merger, all amounts required to be collected or
withheld by it for any taxes, and all such amounts have been, or before the
Effective Time of the Merger will have been, paid to the appropriate
governmental agencies or set aside in appropriate accounts for future payment
when due. Black Diamond is in material compliance with, and its records contain
all information and documents (including, without limitation, properly completed
IRS Forms W-9) necessary to comply in all material respects with, all applicable
information reporting and tax withholding requirements under federal, state, and
local laws, rules, and regulations, and such records identify with specificity
all accounts subject to backup withholding under Section 3406 of the Code. The
statements of financial condition contained in the Black Diamond Financial
Statements fully and properly reflect, as of the dates thereof, the aggregate
liabilities of Black Diamond for all accrued taxes, additions to tax, penalties
and interest in accordance with GAAP. The books and records of Black Diamond
fully and properly reflect any liability for all accrued taxes, additions to
tax, penalties and interest in accordance with GAAP. Except as disclosed in
Schedule E, Black Diamond has not granted (nor is it subject to) any waiver of
the period of limitations for the assessment of tax for any currently open
taxable period, and no unpaid tax deficiency has been asserted in writing
against or with respect to Black Diamond by any taxing authority. Black Diamond
has not made or entered into, and does not hold any asset subject to, a consent
filed pursuant to Section 341(f) of the Code and the regulations thereunder or a
"safe harbor lease" subject to former Section 168(f)(8) of the Code and the
regulations thereunder. Schedule E describes all tax elections, consents and
agreements affecting Black Diamond. To the best knowledge of Black Diamond, no
Black Diamond shareholder is a "foreign person" for purposes of Section 1445 of
the Code. Black Diamond's tax returns and reports have been examined or closed
by applicable statutes of limitations through the tax year ended December 31,
1995, and Black Diamond has not received any indication of the pendency of any
audit or examination in connection with any tax return or report and has no
knowledge that any such return or report is subject to adjustment.
H. Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, rights, commitments or
agreements of any character to which Black Diamond is a party or by which it is
bound, calling for the issuance of securities of Black Diamond or any security
representing the right to purchase or otherwise receive any such security,
except as set forth on Schedule F.
I. Property. Black Diamond owns (or enjoys use of under
capital or operating leases) all property reflected on the Black Diamond
Financial Statements as of March 31, 1999 (except property sold or otherwise
disposed of in the ordinary course of business). All property shown as being
owned is owned free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except those referred to in such Black
Diamond Financial Statements or the notes thereto, liens for current taxes not
yet due and payable, any unfiled mechanics' liens and such encumbrances and
imperfections of title, if any, as are not substantial in character or amount or
otherwise materially impair the use of the subject property. The leases relating
to leased property are fairly reflected in such Black Diamond Financial
8
<PAGE> 186
Statements. All property and assets material to the business or operations of
Black Diamond are in substantially good operating condition and repair and such
property and assets are adequate for the business and operations of Black
Diamond as currently conducted.
J. Additional Schedules Furnished to FNB. In addition to any
Schedules furnished to FNB pursuant to other provisions of this Agreement, Black
Diamond has furnished to FNB the following Schedules which are correct and
complete as of the date hereof:
i) Employees. Schedule G lists as of the date hereof
(1) the names of and current annual salary rates for all present
employees of Black Diamond who received, respectively, $50,000 or more
in aggregate compensation, whether in salary or otherwise as reported
or would be reported on Form W-2, during the year ended December 31,
1998, or are presently scheduled to receive salary in excess of $50,000
during the year ending December 31, 1999; (2) the number of shares of
Black Diamond Common Stock owned beneficially by each director and five
highest compensated officers of Black Diamond as of the date hereof,
(3) the names of and the number of shares of Black Diamond Common Stock
owned by each person known to Black Diamond who beneficially owns 5% or
more of the outstanding Black Diamond Common Stock as of the date
hereof, and (4) the names of, the number of outstanding options of, and
the exercise price of, each Black Diamond Option granted to each person
under the Black Diamond Stock Plan and the exercise price of each such
Black Diamond Option.
ii) Certain Contracts. Schedule H lists all notes,
bonds, mortgages, indentures, licenses, lease agreements and other
contracts and obligations to which Black Diamond is an indebted party
or a lessee, licensee or obligee as of the date hereof (collectively,
"Contracts") except for deposits and those Contracts entered into by
Black Diamond in the ordinary course of its business consistent with
its prior practice and that do not involve an amount remaining greater
than $50,000.
iii) Employment Contracts and Related Matters. Except
in all cases as set forth on Schedule I, Black Diamond is not a party
to any employment contract not terminable at the option of Black
Diamond without liability. Except in all cases as set forth on Schedule
I, Black Diamond is not a party to (1) any retirement, profit sharing
or pension plan or thrift plan or agreement or employee benefit plan
(as defined in Section 3 of the Employee Retirement Income Security Act
of 1974 ("ERISA")), (2) any management or consulting agreement not
terminable at the option of Black Diamond without liability or (3) any
union or labor agreement. Black Diamond has paid in full to or accrued
on behalf of all its directors, officers, and employees all wages,
salaries, commissions, bonuses, fees, sick pay, severance pay, all
other amounts promised to the extent required by law or when Black
Diamond has a policy of making such payments and other direct
compensation for all services performed by them to the date of this
Agreement.
iv) Real Estate. Schedule J describes, as of the date
hereof, all interests in real property owned, leased or otherwise
claimed by Black Diamond.
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<PAGE> 187
v) Affiliates. Schedule K sets forth the names and
number of shares of Black Diamond Common Stock owned as of the date
hereof beneficially or of record by any persons Black Diamond considers
to be affiliates of Black Diamond ("Black Diamond Affiliates") as that
term is defined for purposes of Rule 145 under the 1933 Act.
K. Agreements in Force and Effect. All contracts, agreements,
plans, leases, policies and licenses of Black Diamond are valid and in full
force and effect, and, to its best knowledge, Black Diamond has not breached any
provision of, nor is in default in any respect under the terms of, any such
contract, agreement, lease, policy or license, the effect of which breach or
default would have a material adverse effect upon either the financial
condition, results of operations, or business of Black Diamond.
L. Legal Proceedings; Compliance with Laws. Schedule L
describes all legal, administrative, arbitration or other proceedings or
governmental investigations pending or threatened or, to its knowledge, probable
of assertion against Black Diamond. Except as set forth on Schedule L, no such
proceeding or investigation, if decided adversely, would have a material adverse
effect on either the financial condition, results of operations or business of
Black Diamond on a consolidated basis. Except as set forth in Schedule L, Black
Diamond has complied in all material respects with any laws, ordinances,
requirements, regulations or orders applicable to its business and properties.
Black Diamond has all licenses, permits, orders or approvals (collectively, the
"Permits") of any federal, state, local or foreign governmental or regulatory
body that are necessary for the conduct of its business; the Permits are in full
force and effect; no violations are or have been recorded in respect of any
Permits nor has Black Diamond received written notice of any violations; and no
proceeding is pending or threatened to revoke or limit any Permit. Except as set
forth in Schedule L, Black Diamond has not entered into any agreements or
written understandings with the Federal Reserve Board, the OTS, the FDIC or any
other regulatory agency having authority over it. Black Diamond is not subject
to any judgment, order, writ, injunction or decree which materially adversely
affects, or might reasonably be expected materially adversely to affect either
the financial condition, results of operations, or business of Black Diamond on
a consolidated basis.
M. Employee Benefit Plans.
i) Schedule M includes a correct and complete list
of, and FNB has been furnished a true and correct copy of (or an
accurate written description thereof in the case of oral agreements or
arrangements) (1) all qualified pension and profit-sharing plans, all
deferred compensation, consultant, severance, thrift, option, bonus and
group insurance contracts and all other incentive, welfare and employee
benefit plans, trust, annuity or other funding agreements, and all
other agreements (including oral agreements or arrangements) that are
presently in effect, or have been approved prior to the date hereof,
maintained for the benefit of employees or former employees of Black
Diamond or the dependents or beneficiaries of any employee or former
employee of Black Diamond, whether or not subject to ERISA (the
"Employee Plans"), (2) the most recent
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actuarial and financial reports prepared or required to be prepared
with respect to any Employee Plan and (3) With respect to any such
Employee Plan that is intended to be qualified under Section 401(a) of
the Code, the most recent annual reports filed with any governmental
agency, the most recent favorable determination letter issued by the
Internal Revenue Service, and any open requests for rulings or
determination letters. Schedule M identifies each Employee Plan that is
intended to be qualified under Section 401(a) of the Code and each such
plan is qualified.
ii) Neither Black Diamond nor any employee pension
benefit plan (as defined in Section 3(2) of ERISA (a "Pension Plan"))
maintained or previously maintained by it, has incurred any material
liability to the Pension Benefit Guaranty Corporation ("PBGC") or to
the Internal Revenue Service with respect to any Pension Plan. There is
not currently pending with the PBGC any filing with respect to any
reportable event under Section 4043 of ERISA nor has any reportable
event occurred as to which a filing is required and has not been made.
iii) Full payment has been made (or proper accruals
have been established) of all contributions which are required for
periods prior to the Closing Date, as defined in Section 6.1 hereof,
under the terms of each Employee Plan, ERISA, or a collective
bargaining agreement, no accumulated funding deficiency (as defined in
Section 302 of ERISA or Section 412 of the Code) whether or not waived,
exists with respect to any Pension Plan (including any Pension Plan
previously maintained by Black Diamond), and except as set forth on
Schedule M, there is no "unfunded current liability" (as defined in
Section 412 of the Code) with respect to any Pension Plan.
iv) No Employee Plan is a "multiemployer plan" (as
defined in Section 3(37) of ERISA). Black Diamond has not incurred any
liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multi-employer plan (as defined in Section 3(37) of
ERISA). Black Diamond has not participated in or agreed to participate
in a multiemployer plan (as defined in Section 3(37) of ERISA).
v) All Employee Plans that are "employee benefit
plans," as defined in Section 3(3) of ERISA, that are maintained by
Black Diamond or previously maintained by Black Diamond comply and have
been administered in compliance in all material respects with ERISA and
all other applicable legal requirements, including the terms of such
plans, collective bargaining agreements and securities laws. Black
Diamond does not have any material liability under any such plan that
is not reflected in the Black Diamond Financial Statements or on
Schedule M hereto.
vi) Except as set forth on Schedule M, no prohibited
transaction has occurred with respect to any Employee Plan that is an
"employee benefit plan" (as defined in Section 3(3) of ERISA)
maintained by Black Diamond or previously maintained by Black Diamond
that would result, directly or indirectly, in material liability under
ERISA or in the imposition of a material excise tax under Section 4975
of the Code.
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vii) Schedule M identifies each Employee Plan that is
an "employee welfare benefit plan" (as defined in Section 3(1) of
ERISA) and its funding status, whether through insurance, a trust, or
from an employee's general assets. The funding under each such plan
does not exceed the limitations under Section 419A(b) or 419A(c) of the
Code. Black Diamond is not subject to taxation on the income of any
such plan or any such plan previously maintained by Black Diamond.
viii) Schedule M identifies the method of funding
(including any individual accounting) for all post-retirement medical
or life insurance benefits for the employees of Black Diamond. Schedule
M also discloses the funded status of these Employee Plans.
ix) Schedule M identifies each corporate owned life
insurance policy, including any key man insurance policy and policy
insuring the life of any director or employee of Black Diamond, and
indicates for each such policy, the face amount of coverage, cash
surrender value, if any, and annual premiums.
x) No trade or business is, or has ever been, treated
as a single employer with Black Diamond for employee benefit purposes
under ERISA and the Code.
N. Insurance. All policies or binders of fire, liability,
product liability, workmen's compensation, vehicular and other insurance held by
or on behalf of Black Diamond are described on Schedule N and are valid and
enforceable in accordance with their terms, are in full force and effect, and
insure against risks and liabilities to the extent and in the manner customary
for the industry and are deemed appropriate and sufficient by Black Diamond.
Black Diamond is not in default with respect to any provision contained in any
such policy or binder and has not failed to give any notice or present any claim
under any such policy or binder in due and timely fashion. Black Diamond has not
received notice of cancellation or non-renewal of any such policy or binder.
Black Diamond has no knowledge of any inaccuracy in any application for such
policies or binders, any failure to pay premiums when due or any similar facts
that might form the basis for termination of any such insurance. Black Diamond
has no knowledge of any facts or of the occurrence of any event that is
reasonably likely to form the basis for any material claim against it not fully
covered (except to the extent of any applicable deductible) by the policies or
binders referred to above. Black Diamond has not received notice from any of its
insurance carriers that any insurance premiums will be materially increased in
the future or that any such insurance coverage will not be available in the
future on substantially the same terms as now in effect.
O. Loan Portfolio. Each loan outstanding on the books of Black
Diamond is in all respects what it purports to be, was made in the ordinary
course of business, was not known to be uncollectible at the time it was made,
accrues interest (except for loans recorded on Black Diamond's books as
non-accrual) in accordance with the terms of the loan, and with respect to loans
originated by Black Diamond was made in accordance with Black Diamond's standard
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loan policies as in effect at the time the loan was negotiated, except for loans
to facilitate the sale of other real estate owned ("OREO") or loans with
renegotiated terms and conditions. The records of Black Diamond regarding all
loans outstanding and OREO by Black Diamond on its books are accurate in all
material respects and the risk classifications for the loans outstanding are, in
the best judgment of the management of Black Diamond, appropriate. The reserves
for possible loan losses on the outstanding loans of Black Diamond, as reflected
in the Black Diamond Financial Statements, have been established in accordance
with generally accepted accounting principles and with the requirements of the
OTS and the FDIC. In the best judgment of the management of Black Diamond, such
reserves are adequate as of the date hereof and will be adequate as of the
Effective Time of the Merger to absorb all known and anticipated loan losses in
the loan portfolio of Black Diamond. Except as identified on Schedule O, no
loans in excess of $100,000 individually or in the aggregate have been
classified by examiners (regulatory or internal) as "Special Mention,"
"Substandard," "Doubtful," or "Loss." Except as disclosed on Schedule J, the
OREO included in any nonperforming asset of Black Diamond is recorded at the
lower of cost or fair value less estimated costs to sell based on independent
appraisals that comply with the requirements of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 and Uniform Standards of
Professional Appraisal Practice. Except as identified on Schedule O, each loan
reflected as an asset on the Black Diamond Financial Statements is the legal,
valid and binding obligation of the obligor and any guarantor, subject to
bankruptcy, insolvency, fraudulent conveyance and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity, and no defense, offset or counterclaim has been asserted
with respect to any such loan, which if successful would have a material adverse
effect on the financial condition, results of operation or business of Black
Diamond.
P. Absence of Changes. Except as identified on Schedule P,
since March 31, 1999, there has not been any material adverse change in the
aggregate assets or liabilities, earnings or business of Black Diamond, other
than changes resulting from or attributable to (i) changes since such date in
laws or regulations, generally accepted accounting principles or administrative
interpretations of any thereof that affect the banking or savings and loan
industries generally, (ii) changes since such date in the general level of
interest rates, (iii) accruals and reserves incurred or to be incurred by Black
Diamond since such date pursuant to the terms of Section 4.8 hereof, or (iv) any
other accruals, reserves or expenses incurred or to be incurred by Black Diamond
since such date with FNB's prior written consent. Since March 31, 1999, the
business of Black Diamond has been conducted only in the ordinary course.
Q. Brokers and Finders. Neither Black Diamond nor any of its
officers, directors or employees have employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated herein, except that Black Diamond has
employed Austin Financial Services, Inc. ("Austin"), and has paid or accrued
(or, prior to the Effective Time of the Merger, will pay or accrue) all amounts
due, or to be due, such advisor in connection with services rendered. True and
correct copies of all agreements between Black Diamond and Austin are attached
as Schedule Q.
R. Subsidiaries; Partnerships and Joint Ventures. Black
Diamond has no subsidiaries and does not own any interest in any partnership or
joint venture.
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S. Reports. Black Diamond has filed all material reports and
statements, together with any amendments required to be made with respect
thereto, that were required to be filed with (i) the Federal Reserve Board, (ii)
the FDIC, (iii) the OTS, and (iv) any other governmental or regulatory authority
or agency having jurisdiction over its operations. No such report or statement,
or any amendment thereto, fails to comply with the statutes, rules and
regulations enforced or promulgated by the regulatory authority with which it
was filed or contains any statement which, at the time and in light of the
circumstances under which it was made, was false or misleading with respect to
any material fact necessary in order to make the statements contained therein
not false or misleading. Except to the extent that information contained in any
such report or statement has been revised or superseded by a later filed report
or statement, none of such reports or statements (including any and all
financial statements included therein) contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Black Diamond has not
been notified by any such governmental or regulatory authority that any such
report or statement was deficient in any material respect as to form or content.
Following the date of this Agreement, Black Diamond shall deliver to FNB,
simultaneous with the filing thereof, a copy of each report, registration,
statement or other regulatory filing made by it with the Federal Reserve Board,
the FDIC, the OTS, or any other such regulatory authority. Black Diamond is not
required to file reports under Section 12(g) or 15(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act") and the regulations of the Securities
and Exchange Commission ("SEC").
T. Environmental Matters. For purposes of Article III of this
Agreement, the following terms shall have the indicated meaning: "Environmental
Law" means any federal, state or local law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any governmental entity relating
to (i) the protection, preservation or restoration of the environment
(including, without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and animal life or
any other natural resource), and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of Hazardous Substances. The term "Environmental Law" includes
without limitation (i) the Comprehensive Environmental Response, Compensation
and Liability Act, as amended, 42 U.S.C. Section 9601, et seq; the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq; the
Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq; the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section 1251, et seq; the Toxic
Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq; the
Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et
seq; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq; and all
comparable state and local laws, and (ii) any common law (including without
limitation common law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Substance. "Hazardous
Substance" means any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated
under any Environmental Law, whether by type or by quantity, including any
material containing any such substance as a component. Hazardous
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Substances include without limitation petroleum, or any derivative or by-product
thereof, asbestos, radioactive material and polychlorinated biphenyls.
For purposes of this subsection, "Loan Portfolio Properties and Other
Properties Owned" means those properties owned or operated by Black Diamond or
any of its subsidiaries, including those properties serving as collateral for
any loans made and retained by Black Diamond or for which Black Diamond serves
in a trust relationship for the loans retained in portfolio. To Black Diamond's
best knowledge, except as disclosed in Schedule R:
i) Black Diamond has not been nor is in violation of
or liable under any Environmental Law;
ii) none of the Loan Portfolio Properties and Other
Properties Owned has been or is in violation of or liable under any
Environmental Law; and
iii) there are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to
the liability of the Loan Portfolio Properties and Other Properties
Owned under any Environmental Law, including without limitation any
notices, demand letters or requests for information from any federal or
state environmental agency relating to any such liabilities under or
violations of Environmental Law.
U. Disclosure. Except to the extent of any subsequent
correction or supplement with respect thereto furnished prior to the date
hereof, no written statement, certificate, schedule, list or other written
information furnished by or on behalf of Black Diamond at any time to FNB, in
connection with this Agreement, when considered as a whole, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading. Each
document delivered or to be delivered by Black Diamond to FNB is or will be a
true and complete copy of such document, unmodified except by another document
delivered by Black Diamond.
V. Accounting; Tax; Regulatory Matters. There exists no fact
or condition (including Black Diamond's record of compliance with the Community
Reinvestment Act) relating to Black Diamond that may reasonably be expected to
(i) prevent or materially impede or delay FNB or Black Diamond from obtaining
the regulatory approvals required in order to consummate transactions described
herein, (ii) prevent the Merger from qualifying to be a reorganization under
Section 368(a) of the Code, or (iii) prevent the Merger from being treated as a
"pooling-of-interests" for accounting purposes; and, if any such fact or
condition becomes known to Black Diamond, Black Diamond shall promptly (and in
any event within three days after obtaining such knowledge) communicate such
fact or condition to FNB in writing.
W. Regulatory Approvals. Black Diamond knows of no reason why
the approvals, consents and waivers of governmental authorities referred to in
Sections 5.1F and
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5.2E hereof should not be obtained on a timely basis without the imposition of
any condition of the type referred to in Section 5.1F hereof.
X. Year 2000 Readiness. To the best knowledge of management of
Black Diamond, Black Diamond is in compliance with the OTS' and the FDIC's
guidelines on Year 2000 readiness.
Y. Insurance of Deposits. All deposits of Black Diamond are
insured by the Savings Association Insurance Fund of the FDIC to the maximum
extent permitted by law, all deposit insurance premiums due from Black Diamond
to the FDIC have been paid in full in a timely fashion, and no proceedings have
been commenced or, to the best knowledge of management of Black Diamond, are
contemplated by the FDIC or otherwise to terminate such insurance.
3.2. Representations and Warranties of FNB. FNB represents and warrants
to Black Diamond as follows:
A. Organization, Standing and Power. FNB is a corporation duly
incorporated, validly existing and in good standing under the laws of North
Carolina and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. FNB
Southeast is a wholly-owned subsidiary of FNB, and is the only subsidiary of
FNB, other than Acquisition Sub (FNB and FNB Southeast may be collectively
referred to herein as the "FNB Companies"). FNB Southeast is a commercial bank
duly incorporated, validly existing and in good standing under the laws of North
Carolina and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. FNB
has delivered to Black Diamond complete and correct copies of the Articles of
Incorporation of FNB and FNB Southeast and all amendments thereof to the date
hereof and the By-laws of FNB and FNB Southeast as amended to the date hereof.
B. Capital Structure. The authorized capital stock of FNB
consists of 40,000,000 shares of Common Stock, of which 3,377,415 shares were
issued and outstanding as of February 16, 1999 and 10,000,000 shares of
Preferred Stock, of which 0 shares were issued and outstanding as of February
16, 1999. The authorized capital stock of FNB Southeast consists of 742,500
shares of common stock, and all of the issued and outstanding shares of FNB
Southeast's capital stock are owned by FNB. All of the issued and outstanding
shares of FNB Common Stock and FNB Southeast common stock were validly issued,
fully paid and nonassessable at such date, and all such shares were issued
pursuant to and in compliance with the requirement of a registration statement
or an applicable exemption from the registration requirements under the 1933
Act.
C. Authority. Subject to the approval of this Agreement and
the Plan of Merger by the shareholders of Black Diamond and FNB as contemplated
by Section 4.2, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of FNB; and this Agreement is a
valid and binding obligation of FNB, enforceable in accordance
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with its terms except as enforceability may be limited by laws affecting the
enforcement of creditors' rights generally and subject to any equitable
principles limiting the right to obtain specific performance. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and compliance by FNB with any of the provisions hereof will not (i)
conflict with or result in a breach of any provision of its Articles of
Incorporation or By-laws or a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, agreement or other instrument
or obligation to which any of the FNB Companies is a party, or by which any of
them or any of their respective properties or assets may be bound or (ii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to any of the FNB Companies or any of their respective properties or
assets. No consent or approval by any governmental authority, other than
compliance with applicable federal and state securities and banking laws, the
rules of the National Association of Securities Dealers, Inc. (the "NASD") and
regulations of the Federal Reserve Board, the OTS, the FDIC, the VSCC, and the
North Carolina Banking Commission is required in connection with the execution
and delivery by FNB of this Agreement or the consummation by FNB of the
transactions contemplated hereby or by the Plan of Merger.
D. Brokers and Finders. Neither FNB nor any of its respective
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated herein, except that FNB has employed Equity
Research Services, Inc. and will be liable for its fees.
E. Absence of Changes. Except as identified on Schedule S,
since March 31, 1999, there has not been any material adverse change in the
consolidated assets or liabilities, earnings or business of FNB, other than
changes resulting from or attributable to (i) changes since such date in laws or
regulations, generally accepted accounting principles or administrative
interpretations of any thereof that affect the banking or savings and loan
industries generally, or (ii) changes since such date in the general level of
interest rates. Other than acquisitions and other branch or business expansions,
since March 31, 1999, the business of FNB has been conducted only in the
ordinary course. Other than as identified on Schedule S, FNB is not in material
discussions to acquire any party that would be significant under Rule
11-01(b)(1) contained in Regulation S-X of the SEC.
F. Reports. FNB and FNB Southeast have filed all material
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with (i) the Federal Reserve
Board, (ii) the FDIC, (iii) the North Carolina Banking Commission, (iv) the SEC
and (v) any other governmental or regulatory authority or agency having
jurisdiction over its operations. Each of such reports and documents, including
the financial statements, exhibits and schedules thereto, filed with the SEC
pursuant to the 1934 Act was in form and substance in compliance in all material
respects with the 1934 Act. No such report or statement, or any amendments
thereto, contains any statement which, at the time and in light of the
circumstances under which it was made, was false or misleading with respect to
any material fact necessary in order to make the statements contained therein
not false or misleading. Except to the extent that information contained in any
such report or statement has been revised
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or superseded by a later filed report or statement, none of such reports or
statements (including any and all financial statements included therein)
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Neither FNB nor FNB Southeast has been notified by any such
governmental or regulatory authority that any such report or statement was
deficient in any material respect as to form or content. Following the date of
this Agreement, FNB shall deliver to Black Diamond, simultaneous with the filing
thereof, a copy of each report, registration, statement or other regulatory
filing made by it or FNB Southeast with the SEC, Federal Reserve Board, the
FDIC, the North Carolina Banking Commission, or any other such regulatory
authority. FNB has not offered or sold any securities in violation of the 1933
Act or the securities laws of any state.
G. Absence of Undisclosed Liabilities. At December 31, 1998
and March 31, 1999, neither FNB nor FNB Southeast had any material obligations
or liabilities (contingent or otherwise) of any nature which were not reflected
in FNB's reports filed with the SEC, except for those which are disclosed
(including an estimate of the amount of any such liability) in Schedules
specifically referred to herein. For purposes of this Section 3.2.G.,
obligations and liabilities shall be "material" if they exceed, or are
reasonably expected to exceed, individually or in the aggregate, $200,000.
H. Disclosure. Except to the extent of any subsequent
correction or supplement with respect thereto furnished prior to the date
hereof, no written statement, certificate, schedule, list or other written
information furnished by or on behalf of FNB at any time to Black Diamond, in
connection with this Agreement when considered as a whole, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading. Each
document delivered or to be delivered by FNB to Black Diamond is or will be a
true and complete copy of such document, unmodified except by another document
delivered by FNB.
I. Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, rights, commitments or
agreements of any character to which any of the FNB Companies is a party or by
which it any of them are bound, calling for the issuance of securities of any of
the FNB Companies or any security representing the right to purchase or
otherwise receive any such security, except as set forth on Schedule T.
J. Environmental Matters. For purposes of this subsection,
"Loan Portfolio Properties and Other Properties Owned" means those properties
owned or operated by FNB or any of its subsidiaries, including those properties
serving as collateral for any loans made and retained by FNB or any of its
subsidiaries or for which FNB or any of its subsidiaries serves in a trust
relationship for the loans retained in portfolio. To FNB's best knowledge,
except as disclosed in Schedule U, and except to the extent that there would be
no material adverse effect on FNB and its subsidiaries taken as a whole:
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i) Neither FNB nor FNB Southeast has been nor is in
violation of or liable under any Environmental Law;
ii) none of the Loan Portfolio Properties and Other
Properties Owned has been or is in violation of or liable under any
Environmental Law; and
iii) there are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to
the liability of the Loan Portfolio Properties and Other Properties
Owned under any Environmental Law, including without limitation any
notices, demand letters or requests for information from any federal or
state environmental agency relating to any such liabilities under or
violations of Environmental Law.
K. Accounting; Tax; Regulatory Matters. There exists no fact
or condition (including FNB's or FNB Southeast's record of compliance with the
Community Reinvestment Act) relating to FNB or FNB Southeast that may reasonably
be expected to (i) prevent or materially impede or delay FNB or Black Diamond
from obtaining the regulatory approvals required in order to consummate
transactions described herein, (ii) prevent the Merger from qualifying to be a
reorganization under Section 368(a) of the Code, or (iii) prevent the Merger
from being treated as a "pooling-of-interests" for accounting purposes; and, if
any such fact or condition becomes known to FNB, FNB shall promptly (and in any
event within three days after obtaining such knowledge) communicate such fact or
condition to Black Diamond in writing.
L. Regulatory Approvals. FNB knows of no reason why the
approvals, consents and waivers of governmental authorities referred to in
Sections 5.1F and 5.2E hereof should not be obtained on a timely basis without
the imposition of any condition of the type referred to in Section 5.1F hereof.
M. Year 2000 Readiness. To the best knowledge of management of
FNB, FNB and FNB Southeast are in compliance with the FDIC's guidelines on Year
2000 readiness.
3.3. Representations and Warranties of Acquisition Sub. Acquisition Sub
represents and warrants to Black Diamond as follows:
A. Organization Standing and Power. Upon the filing of its
charter with the OTS, Acquisition Sub will be a federal savings bank in
organization under the laws of the United States.
B. Authority. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby and by the Plan of
Merger have been, or will be prior to the Effective Time of the Merger, duly and
validly authorized by all necessary action on the part of Acquisition Sub, and
this Agreement is, or will be prior to the Effective Time of the Merger, a valid
and binding obligation of Acquisition Sub enforceable in accordance with its
terms except as enforceability may be limited by laws affecting the enforcement
of creditors' rights generally and subject to any equitable principles limiting
the right to obtain
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specific performance. The execution and delivery of this agreement, the
consummation of the transactions contemplated hereby and by the Plan of Merger
and compliance by Acquisition Sub with any of the provisions hereof or thereof
will not (i) conflict with or result in a breach of any provision of its Charter
or Bylaws or a default (or give rise to any right of termination, cancellation,
or acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement or other instrument or obligation
to which Acquisition Sub is a party, or by which it or any of its properties or
assets may be bound (except for such conflict, breach or default as to which
requisite waivers or consents either shall have been obtained by Acquisition Sub
by the Effective Time of the Merger or the obtaining of which shall have been
waiver by Black Diamond), or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Acquisition Sub or any of its property
or assets. No consent or approval by any government authority, other than
compliance with applicable federal and state securities and banking laws,
regulations of the Federal Reserve Board, the FDIC, the OTS and the North
Carolina Banking Commission, is required in connection with the execution and
delivery by Acquisition Sub of this Agreement or the consummation by Acquisition
Sub of the transactions contemplated hereby or by the Plan of Merger.
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger
4.1. Access to Records and Properties. Between the date of this
Agreement and the Effective Time of the Merger, each of Black Diamond and FNB
agrees to give to the other reasonable access to all the premises and books and
records (including tax returns filed and those in preparation) of it and its
subsidiaries and to cause its officers to furnish the other with such financial
and operating data and other information with respect to its business and
properties as either Black Diamond or FNB shall from time to time request for
the purposes of conducting its due diligence review of the other, verifying the
representations and warranties set forth herein, preparing the Registration
Statement (as defined in Section 4.2 hereof) and applicable regulatory filings
(as set forth in Section 4.6 hereof), and preparing unaudited financial
statements of Black Diamond as of a date prior to the Effective Time of the
Merger in order to facilitate FNB in performance of its post-Closing Date
financial reporting requirements. Each party shall maintain the confidentiality
of all confidential information furnished to it by the other concerning its
business, operations, and financial condition, and shall not use any such
information except in furtherance of the transactions contemplated hereby or by
the Plan of Merger. If this Agreement is terminated, each party shall promptly
return to the other all documents and copies of, and all workpapers containing,
confidential information received from the other party. The obligations of
confidentiality under this Section 4.1 shall survive any such termination of
this Agreement and shall remain in effect, except to the extent that (a) FNB
shall have directly or indirectly acquired the assets and business of Black
Diamond; (b) as to any particular confidential information, such information (i)
shall become generally available to the public other than as a result of an
unauthorized disclosure by the party receiving such information or (ii) was
available to the party receiving such information on a nonconfidential basis
prior to its disclosure by the party disclosing such information; (c) disclosure
is required by subpoena or order of a court of
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competent jurisdiction or by order of a regulatory authority of competent
jurisdiction; or (d) disclosure is required by law or by the SEC or bank or
thrift regulatory authorities in connection with the transactions contemplated
by this Agreement or otherwise, provided that the party making such a
disclosure, prior to such disclosure, advised the other party of the
circumstances necessitating such disclosure and the parties have reached
mutually agreeable arrangements relating to such disclosure.
4.2. Registration Statement, Proxy Statement, Shareholder Approval.
Black Diamond and FNB will duly call and will hold a meeting of their respective
shareholders as soon as practicable for the purpose of approving the Merger and
will comply fully with the applicable rules and regulations of bank and thrift
regulatory authorities, and the respective Charter and By-laws of Black Diamond
and FNB relating to the calling and holding of meetings of shareholders for such
purpose. The Boards of Directors of Black Diamond and FNB will recommend to and
actively encourage their respective shareholders that they vote in favor of the
Merger. FNB and Black Diamond will jointly prepare the joint proxy
statement-prospectus to be used in connection with such meetings (the "Joint
Proxy Statement-Prospectus"). FNB and Black Diamond shall cause the Joint Proxy
Statement-Prospectus to be filed with the OTS and the SEC for review; and each
party hereto will cooperate with the other in good faith and will use its
respective reasonable best efforts in good faith to respond to any comments of
the OTS or the SEC thereon. FNB will prepare and file with the SEC a
Registration Statement on Form S-4 (the "Registration Statement"), of which the
Joint Proxy Statement-Prospectus shall be a part, and use its best efforts to
have the Registration Statement declared effective. In connection with the
foregoing, FNB will comply with the requirements of the 1933 Act, the 1934 Act,
the NASD and the rules and regulations of the SEC under such acts with respect
to the offering and sale of FNB Common Stock in connection with the Merger and
with all applicable state Blue Sky and securities laws. The notices of such
meetings and the Joint Proxy Statement-Prospectus shall not be mailed to Black
Diamond or FNB shareholders until the Registration Statement shall have become
effective under the 1933 Act, but shall be mailed as soon as practicable
following such effectiveness. Black Diamond covenants that none of the
information supplied by Black Diamond and FNB covenants that none of the
information supplied by FNB in the Joint Proxy Statement-Prospectus will, at the
time of the mailing of the Joint Proxy Statement-Prospectus to Black Diamond and
FNB shareholders, contain any untrue statement of a material fact nor will any
such information omit any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading; and at all times subsequent to the time
of the mailing of the Joint Proxy Statement-Prospectus, up to and including the
dates of the meetings of Black Diamond and FNB shareholders to which the Joint
Proxy Statement-Prospectus relates, none of such information in the Joint Proxy
Statement-Prospectus, as amended or supplemented, will contain an untrue
statement of a material fact or omit any material fact required to be stated
therein in order to make the statements therein, in light of the circumstances
in which they were made, not misleading.
4.3. Operation of the Business of Black Diamond. Black Diamond agrees
that from March 31, 1999 to the Effective Time of the Merger, it has operated,
and it will operate, its business substantially as presently operated and only
in the ordinary course and in general
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conformity with applicable laws and regulations, and, consistent with such
operation, it will use its best efforts to preserve intact its present business
organizations and its relationships with persons having business dealings with
it. Without limiting the generality of the foregoing, Black Diamond agrees that
it will not, without the prior written consent of FNB, which shall not be
unreasonably withheld, (i) make any change in the salaries, bonuses or title of
Don M. Green, Ben Sergent or Esther W. Bolling or change the fees payable to any
director; (ii) make any change in the title, salaries, or bonuses of any other
employee, other than those permitted by current employment policies in the
ordinary course of business, any of which changes shall be reported promptly to
FNB; (iii) enter into any bonus, incentive compensation, deferred compensation,
profit sharing, thrift, retirement, pension, group insurance or other benefit
plan or any employment or consulting agreement or increase benefits under
existing plans; (iv) create or otherwise become liable with respect to any
indebtedness for money borrowed (excluding deposits, Federal Home Loan Bank
advances, secured or unsecured, and similar indebtedness) or purchase money
indebtedness, or mortgage, pledge, or subject any of its assets to, or permit
any of its assets to become or remain subject to, any lien or any other
encumbrance; (v) amend its Charter or By-laws; (vi) declare any dividend or make
any distribution, or effect any split or combination in respect of its capital
stock; (vii) issue or contract to issue any shares of Black Diamond capital
stock or securities exchangeable for or convertible into capital stock,
including without limitation pursuant to stock options, except up to 91,388
shares of Black Diamond Common Stock issuable pursuant to Black Diamond Options
outstanding as of March 31, 1999; (viii) purchase any shares of Black Diamond
capital stock; (ix) enter into, renew, extend or assume any material contract or
obligation; (x) other than as provided in subsection (A) below with respect to
the work-out of nonperforming assets, waive, release, compromise or assign any
right or claim involving $50,000 or more; (xi) propose or take any other action
which would make any representation or warranty in Section 3.1 hereof untrue;
(xii) introduce any new products or services or change the rate of interest on
any deposit instrument to above-market interest rates; (xiii) make any change in
policies respecting extensions of credit or loan charge-offs; (xiv) change
reserve requirement policies; (xv) change securities portfolio policies; (xvi)
acquire a policy or enter into any new agreement, amendment or endorsement or
make any changes relating to insurance coverage, including coverage for its
directors and officers, which would result in an additional payment obligation
of $50,000 or more; (xvii) propose or take any action with respect to the
opening, by merger, acquisition or otherwise, or closing of any branches;
(xviii) amend the terms of the Black Diamond Options; (xix) amend the terms of
the written severance or employment agreements identified in Schedule M,
including without limitation the employment agreements of Don M. Green, Ben
Sergent or Esther W. Bolling; or (xx) make any change in any tax election or
accounting method or system of internal accounting controls, except as may be
appropriate to conform to any change in regulatory accounting requirements or
generally accepted accounting principles. Black Diamond further agrees that,
between the date of this Agreement and the Effective Time of the Merger, it will
consult and cooperate with FNB regarding the following activities, provided that
such activities may be conducted by Black Diamond in the ordinary course of its
business, consistent with prior practices: (A) loan portfolio management,
including management and work-out of nonperforming assets, and credit review and
approval procedures, and (B) securities portfolio and funds management,
including management of interest rate risk.
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4.4. No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to its terms, neither Black Diamond nor any of its executive
officers, directors, representatives, agents or affiliates shall, directly or
indirectly, encourage, solicit or initiate discussions or negotiations (with any
person other than FNB) concerning any merger, sale of substantial assets, tender
offer, sale of shares of stock or similar transaction involving Black Diamond
(collectively, a "Significant Transaction") or disclose, directly or indirectly,
any information not customarily disclosed to the public concerning Black
Diamond, afford to any other person access to the properties, books or records
of Black Diamond or otherwise assist any person preparing to make or who has
made such an offer, or enter into any letter of intent or any agreement with any
third party providing for a Significant Transaction. Black Diamond agrees that,
as of the date hereof, it and any affiliate entities, and the respective
directors, officers, employees, agents, and representatives of the foregoing,
shall immediately cease and cause to be terminated any existing activities,
discussions, and negotiations with any person (other than FNB and its
representatives) conducted heretofore with respect to any Significant
Transaction. Black Diamond agrees to promptly advise FNB of any inquiries or
proposals received by, any such information requested from, and any requests for
negotiations or discussions sought to be initiated or continued with, Black
Diamond or any affiliate entities, or any of the respective directors, officers,
employees, agents, or representatives of the foregoing, in each case from a
person (other than FNB or its representatives) with respect to a Significant
Transaction. In addition, Black Diamond shall promptly advise FNB of the
substance and content of any such inquiry, proposal, information request,
negotiations, or discussions.
4.5. Dividends. Black Diamond agrees that subsequent to March 31, 1999,
and until the Effective Time of the Merger, it will not declare any dividends or
distributions in respect of any class of its securities.
4.6. Regulatory Filings; Best Efforts. FNB and Black Diamond shall
jointly prepare all regulatory filings required to consummate the transactions
contemplated by the Agreement and the Plan of Merger and submit the filings for
approval with the Federal Reserve Board, the OTS, the FDIC and the North
Carolina Banking Commission as soon as practicable after the date hereof.
FNB and Black Diamond shall use their best efforts to obtain approvals of such
filings.
4.7. Public Announcements. Each party will consult with the other
before issuing any press release or otherwise making any public statements with
respect to the Merger and shall not issue any press release or make any such
public statement prior to such consultations and approval of the other party,
which approval shall not be unreasonably withheld, except as may be required by
law or the policies of the NASD. FNB and Black Diamond agree that they shall
make a joint public announcement of this Agreement and the transactions
described herein after execution of this Agreement. The timing and content of
such announcement shall be approved by FNB and Black Diamond prior to such
announcement.
4.8. Operating Synergies; Conformance to Reserve Policies, Etc. Between
the date hereof and the Effective Time of the Merger, Black Diamond's management
will work with FNB to achieve appropriate operating efficiencies following the
Closing Date. At the request of FNB and upon receipt by Black Diamond of written
confirmation from FNB that there are no
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conditions to the obligations of FNB under this Agreement set forth in Article V
hereof which they believe will not be fulfilled so as to permit them to
consummate the Merger and the other transactions contemplated hereby, not more
than three days before the Effective Time of the Merger, Black Diamond shall
establish such additional accruals, reserves and charge-offs, through
appropriate entries in its accounting books and records (provided such
adjustments are in accordance with GAAP and applicable law and regulation) as
may be necessary to conform Black Diamond's accounting and credit loss reserve
practices and methods to those of FNB (as such practices and methods are to be
applied from and after the Effective Time of the Merger) and to FNB's plans with
respect to the conduct of the business of Black Diamond following the Merger, as
well as the costs and expenses relating to the consummation by Black Diamond of
the Merger and the other transactions contemplated hereby. Any such accruals,
reserves and charge-offs shall not be deemed to cause any representation and
warranty of Black Diamond to be untrue or inaccurate as of the Effective Time of
the Merger.
4.9. Agreement as to Efforts to Consummate. Subject only to the other
terms and conditions of this Agreement, each of FNB and Black Diamond agrees to
use all reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions contemplated by
this Agreement, including, without limitation, using reasonable effort to lift
or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions contemplated
herein. Each of FNB and Black Diamond shall use its best efforts to obtain
consents of all third parties and governmental bodies necessary or desirable for
the consummation of the transactions contemplated by this Agreement.
4.10. Adverse Changes in Condition. FNB and Black Diamond each agrees
to give written notice promptly to the other concerning any event or
circumstance which would cause or constitute a breach of any of the
representations, warranties or covenants of such party contained herein. Each of
FNB and Black Diamond shall use its best efforts to prevent or promptly to
remedy the same. No notification made pursuant to this Section 4.10 shall be
deemed to cure any breach of any representation or warranty made in this
Agreement or any Schedule unless FNB or Black Diamond, as the case may be,
specifically agrees thereto in writing, nor shall any such notification be
considered to constitute or give rise to a waiver by Black Diamond on the one
hand, or FNB on the other hand, of any condition set forth in this Agreement.
4.11. Nasdaq National Market Listing. FNB will use its reasonable best
efforts to file with Nasdaq a Supplemental Listing Application for the shares of
FNB Common Stock to be issued in the Merger and have such shares approved for
listing on The Nasdaq National Market prior to the Effective Time of the Merger.
4.12. Updating of Schedules. Black Diamond shall notify FNB in writing,
and FNB shall notify Black Diamond in writing, of any changes, additions or
events which may cause any Schedules delivered by it under this Agreement to
become incomplete or inaccurate, promptly after the occurrence of same and at
the Closing Date by delivery of updates, including future quarterly and annual
Black Diamond Financial Statements. No notification made pursuant to this
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Section 4.12 shall be deemed to cure any breach of any representation or
warranty made in this Agreement or any Schedule unless FNB or Black Diamond, as
the case may be, specifically agrees thereto in writing, nor shall any such
notification be considered to constitute or give rise to a waiver by Black
Diamond on the one hand, or FNB on the other hand of any condition set forth in
this Agreement.
4.13. Transactions in FNB Common Stock. Other than the issuance or
acquisition of FNB Common Stock pursuant to FNB employee benefit plans, or the
purchase or sale of FNB Common Stock by FNB in its capacity as trustee under FNB
employee benefit plans or in any other fiduciary capacity in which it is
directed to sell or purchase FNB Common Stock, none of FNB, Acquisition Sub or
Black Diamond will, nor will any such party permit any affiliate to directly or
indirectly, purchase, publicly sell or publicly acquire any shares of FNB Common
Stock during the period between the first mailing of the Joint Proxy
Statement-Prospectus and the Effective Time of the Merger.
4.14. Reorganization for Tax Purposes. FNB, Acquisition Sub and Black
Diamond each undertakes and agrees to use its reasonable best efforts to cause
the Merger to qualify as a "reorganization" within the meaning of Section 368(a)
of the Code, and that it will not intentionally take any action that would cause
the Merger to fail to so qualify.
4.15. Accounting Treatment. FNB, Acquisition Sub and Black Diamond each
undertakes and agrees to use its reasonable best efforts to cause the Merger to
qualify to be treated as a "pooling-of-interests" for accounting purposes and
that it will not intentionally take any action that would cause the Merger to
fail to so qualify.
4.16. Other Permissible Transactions. Black Diamond agrees that FNB and
its subsidiaries may offer to acquire, enter into agreements to acquire and
acquire financial institution holding companies and their subsidiaries,
financial institutions or financial services entities and their subsidiaries,
leasing companies and other entities which are permissible for financial
institutions to own, and/or the assets and liabilities of such entities prior to
the Effective Time of the Merger.
ARTICLE V
Conditions of Merger
5.1. Conditions to Obligations of FNB. The obligations of FNB to
perform this Agreement and to consummate the Merger are subject to the
satisfaction at or prior to the Effective Time of the Merger of the following
conditions unless waived by FNB.
A. Representations and Warranties; Performance of Obligations.
The representations and warranties of Black Diamond set forth in Section 3.l
hereof shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time of the Merger as though made on and as of
the Effective Time of the Merger (or on the date when made in the case of any
representation and warranty which specifically relates to an earlier date);
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Black Diamond shall have in all material respects performed all obligations
required to be performed by it and satisfied all conditions required to be
satisfied by it under this Agreement prior to the Effective Time of the Merger;
and FNB shall have received a certificate signed by the Chief Executive Officer
and by the Chief Financial Officer of Black Diamond to such effects.
B. Authorization of Transaction. All action necessary to
authorize the execution, delivery and performance of this Agreement by Black
Diamond and the consummation of the transactions contemplated herein (including
the shareholder action referred to in Section 4.2) shall have been duly and
validly taken, and not rescinded, by the Board of Directors and the shareholders
of Black Diamond, and the Board of Directors and shareholders of FNB, and Black
Diamond shall have full power and right to execute the Plan of Merger provided
in Exhibit A.
C. Opinion of Counsel. FNB shall have received an opinion of
Williams, Mullen, Christian & Dobbins, counsel to Black Diamond, dated the
Closing Date and satisfactory in form and substance to counsel to FNB, in
substantially the form attached hereto as Exhibit B.
D. The Registration Statement. The Registration Statement
shall be effective under the 1933 Act and FNB shall have received all state
securities laws or "blue sky" permits and other authorizations or there shall be
exemptions from registration requirements necessary to offer and issue the FNB
Common Stock in connection with the Merger, and neither the Registration
Statement nor any such permit, authorization or exemption shall be subject to a
stop order or threatened stop order by the SEC or any state securities
authority.
E. Tax Opinion. FNB shall have received, in form and substance
satisfactory to it, an opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. to the effect that, for federal income tax purposes, the Merger
will qualify as a "reorganization" under Section 368(a) of the Code.
F. Regulatory Approvals. All required approvals from federal
and state regulatory authorities having jurisdiction to permit FNB to consummate
the Merger and to issue FNB Common Stock to Black Diamond shareholders shall
have been received and shall have contained no conditions deemed in good faith
to be materially disadvantageous by FNB.
G. Affiliate Agreements. Within 60 days of the date hereof,
each shareholder of Black Diamond who is a Black Diamond Affiliate shall have
executed and delivered a commitment and undertaking in the form of Exhibit C
(the "Affiliates' Agreement") relating to restrictions on shares of FNB Common
Stock to be received by such Black Diamond Affiliate pursuant to this Agreement.
Certificates for the shares of FNB Common Stock issued to Black Diamond
Affiliates shall bear a restrictive legend (substantially in the form as shall
be set forth in the Affiliates' Agreement) with respect to the restrictions
applicable to such shares.
H. Nasdaq National Market Listing. If the shares of FNB Common
Stock to be issued in the Merger are not repurchased on the open market, such
shares to be issued in the
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Merger shall have been approved for listing, upon notice of issuance, on The
Nasdaq National Market.
I. Acceptance by FNB Counsel. The form and substance of all
legal matters contemplated hereby and of all papers delivered hereunder shall be
reasonably acceptable to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., counsel for FNB.
J. Exercise of Dissenters' Rights. The aggregate number of
shares of Black Diamond Common Stock as to which cash is required to be paid as
the result of the exercise of any dissenters' rights pursuant to 12 C.F.R. ss.
552.14, when coupled with any other shares of Black Diamond Common Stock deemed
tainted for "pooling-of-interest" purposes, shall not exceed 10% of the total
number of shares of Black Diamond Common Stock outstanding at the date of this
Agreement or at the Effective Time of the Merger.
K. Employment and Non-Compete Agreements. Don M. Green, Ben
Sergent and Esther W. Bolling shall each have entered into employment and
non-compete agreements with Black Diamond substantially in the form of Exhibits
D, E and F, respectively, and such employment and non-compete agreements shall
have replaced and superseded any prior employment agreements between such
individuals and Black Diamond. Each of such employment and non-compete
agreements shall be in full force effect and there shall not exist any breach
thereunder.
L. Accounting Treatment. (i) FNB shall have received
assurances from PricewaterhouseCoopers LLP, in form and substance satisfactory
to FNB, to the effect that the Merger will qualify to be treated as a
"pooling-of-interests" for accounting purposes; (ii) if requested by FNB, Black
Diamond's independent public accountants shall have delivered to FNB a letter in
form and content satisfactory to FNB to the effect that such accountants are not
aware of any fact or circumstance that might cause the Merger not to qualify for
such treatment; and (iii) it shall not have come to the attention of management
of FNB that any event has occurred or that any condition or circumstance exists
that makes it likely that the Merger may not so qualify.
M. Black Diamond Board of Directors. FNB shall have received
the written resignation, satisfactory in form and substance to FNB, from each
director of Black Diamond, other than Don M. Green and Jack Kennedy, effective
as of the Effective Time of the Merger, and Ernest J. Sewell, Robert F.
Albright, R. Michael Hendricks, Richard L. Powell, Michael W. Shelton and Ben
Sergent shall have been elected to the board of directors of Black Diamond as of
the Effective Time of the Merger.
N. Fairness Opinion. FNB shall have received a written opinion
in form and substance satisfactory to FNB from Equity Research Services, Inc.,
addressed to FNB and dated as of the date of the Joint Proxy
Statement-Prospectus which is mailed to shareholders of FNB, to the effect that
the terms of the Merger, including the Exchange Ratio, are fair, from a
financial point of view, to FNB and its shareholders.
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5.2. Conditions of Obligations of Black Diamond. The obligations of
Black Diamond to perform this Agreement and consummate the Merger are subject to
the satisfaction at or prior to the Effective Time of the Merger of the
following conditions unless waived by Black Diamond:
A. Representations and Warranties; Performance of Obligations.
The representations and warranties of FNB set forth in Section 3.2 hereof shall
be true and correct in all material respects as of the date of this Agreement
and as of the Effective Time of the Merger as though made on and as of the
Effective Time of the Merger (or on the date when made in the case of any
representation and warranty which specifically relates to an earlier date); FNB
shall have in all material respects performed all obligations required to be
performed by it and satisfied all conditions required to be satisfied by it
under this Agreement prior to the Effective Time of the Merger; and Black
Diamond shall have received a certificate signed by the Chief Executive Officer
and by the Chief Financial Officer of FNB, which may be to their best knowledge
after due inquiry, to such effects.
B. Authorization of Transaction. All action necessary to
authorize the execution, delivery and performance of this Agreement by FNB and
the consummation of the transactions contemplated hereby shall have been duly
and validly taken by the Board of Directors of FNB, the shareholders of FNB, and
the Board of Directors and shareholders of Black Diamond, and Acquisition Sub
shall have full power and right to merge with Black Diamond on the terms
provided herein.
C. Opinion of Counsel. Black Diamond shall have received an
opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
counsel to FNB, dated the Closing Date and satisfactory in form and substance to
counsel to Black Diamond, in the form attached hereto as Exhibit G.
D. The Registration Statement. The Registration Statement
shall be effective under the 1933 Act and FNB shall have received all state
securities laws or "blue sky" permits and other authorizations or there shall be
exemptions from registration requirements necessary to offer and issue the FNB
Common Stock in connection with the Merger, and neither the Registration
Statement nor any such permit, authorization or exemption shall be subject to a
stop order or threatened stop order by the SEC or any state securities
authority.
E. Regulatory Approvals. All required approvals from federal
and state regulatory authorities having jurisdiction to permit Black Diamond to
consummate the transactions contemplated hereby and to permit FNB to issue FNB
Common Stock to Black Diamond shareholders shall have been received.
F. Acceptance by Black Diamond's Counsel. The form and
substance of all legal matters contemplated hereby and of all papers delivered
hereunder shall be reasonably acceptable to counsel for Black Diamond.
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G. Nasdaq National Market Listing. If the shares of FNB Common
Stock to be issued in the Merger are not repurchased on the open market, such
shares to be issued in the Merger shall have been approved for listing, upon
notice of issuance, on The Nasdaq National Market.
H. Fairness Opinion. Black Diamond shall have received a
written opinion in form and substance satisfactory to Black Diamond from Austin
Financial Services, Incorporated, addressed to Black Diamond and dated as of the
date of the Joint Proxy Statement-Prospectus which is mailed to shareholders of
Black Diamond, to the effect that the terms of the Merger, including the
Exchange Ratio, are fair, from a financial point of view, to Black Diamond and
its shareholders.
I. Employment and Non-Compete Agreements. Don M. Green, Ben
Sergent and Esther W. Bolling shall each have executed on the date hereof
employment and non-compete agreements with Black Diamond substantially in the
form of Exhibits D, E and F, respectively.
ARTICLE VI
Closing Date; Effective Time
6.1. Closing Date. Unless another date or place is agreed to in writing
by the parties, the closing of the transactions contemplated in this Agreement
shall take place at the offices of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, Raleigh, North Carolina, at 10:00 A.M., local time, on such date as
FNB shall designate to Black Diamond at least 10 days prior to the designated
Closing Date and as reasonably acceptable to Black Diamond; provided, that the
date so designated shall not be earlier than 5 days after OTS approval, and
shall not be later than 60 days after such approval and, in no event, shall be
later than March 31, 2000 (the "Closing Date").
6.2. Filings at Closing. Subject to the provisions of Article V hereof,
at the Closing Date, FNB and Acquisition Sub shall cause Articles of Combination
relating to the Plan of Merger to be filed in accordance with the rules and
regulations of the OTS, and each of FNB, Acquisition Sub and Black Diamond shall
take any and all lawful actions to cause the Merger to become effective.
6.3. Effective Time. Subject to the terms and conditions set forth
herein, including receipt of all required regulatory approvals, the Merger shall
become effective at the time Articles of Combination filed with the OTS are made
effective (the "Effective Time of the Merger").
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ARTICLE VII
Termination; Waiver and Amendment
7.1. Termination. This Agreement shall be terminated, and the Merger
abandoned, if the shareholders of either Black Diamond or FNB shall not have
approved the Merger at the meetings required by Section 4.2. Notwithstanding
such approvals by such shareholders, this Agreement may be terminated at any
time prior to the Effective Time of the Merger, by:
A. The mutual consent of FNB and Black Diamond, as expressed
by their respective Boards of Directors;
B. FNB or Black Diamond, as expressed by their respective
Boards of Directors, if the Merger has not occurred by March 31, 2000, provided
that the failure of the Merger to so occur shall not be due to a willful breach
of any representation, warranty, covenant or agreement by the party seeking to
terminate this Agreement;
C. FNB in writing authorized by its Board of Directors if
Black Diamond has, or by Black Diamond in writing authorized by its Board of
Directors, if FNB has, in any material respect, breached (i) any covenant or
agreement contained herein, or (ii) any representation or warranty contained
herein, in any case if such breach has not been cured by the earlier of 30 days
after the date on which written notice of such breach is given to the party
committing such breach or the Closing Date; provided that it is understood and
agreed that either party may terminate this Agreement on the basis of any such
material breach of any representation or warranty by the other party which is
not cured within 30 days of written notice thereof contained herein
notwithstanding any qualification therein relating to the knowledge of the other
party;
D. FNB in writing authorized by its Board of Directors if any
Purchase Event described in Section 3(b)(i), Section 3(b)(iii) or Section
3(b)(iv) of the Stock Option Agreement shall have occurred or if a Purchase
Event described in Section 3(b)(ii) of the Stock Option Agreement shall have
occurred and the Board of Directors of Black Diamond does not, within three (3)
days after such Purchase Event described in Section 3(b)(ii), confirm in writing
to FNB and publicly that a majority of the Board of Directors of Black Diamond
supports the Merger and will recommend to the shareholders of Black Diamond that
they approve the Merger;
E. FNB or Black Diamond, as expressed by their respective
Boards of Directors, in the event that any of the conditions precedent to the
obligations of such parties to consummate the Merger have not been satisfied or
fulfilled or waived by the party entitled to so waive on or before the Closing
Date, provided that no party shall be entitled to terminate this Agreement
pursuant to this subparagraph D if the condition precedent or conditions
precedent which provide the basis for termination can reasonably be and are
satisfied within a reasonable period of time, in which case, the Closing Date
shall be appropriately postponed;
F. FNB, if the Board of Directors of FNB shall have determined
in its sole discretion, exercised in good faith, that the Merger, has become
inadvisable or impracticable by reason of (1) the issuance of any order, decree
or ruling of any regulatory authority containing
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conditions or requirements reasonably deemed objectionable to FNB or (2) the
institution of any litigation or proceeding (including under federal antitrust
laws) to restrain or prohibit the consummation of the Merger or to obtain other
relief in connection with this Agreement;
G. Black Diamond, if the Board of Directors of Black Diamond
shall have determined in its sole discretion, exercised in good faith, that the
Merger, has become inadvisable or impracticable by reason of (1) the issuance of
any order, decree or ruling of any regulatory authority containing conditions or
requirements reasonably deemed objectionable to Black Diamond or (2) the
institution of any litigation or proceeding (including under federal antitrust
laws) to restrain or prohibit the consummation of the Merger or to obtain other
relief in connection with this Agreement;
H. FNB or Black Diamond, if the Federal Reserve Board, the
OTS, the North Carolina Banking Commission, or the VSCC deny approval of the
transactions contemplated hereby and the time period for all appeals or requests
for reconsideration has run; or
I. FNB if, prior to the Effective Time of the Merger, the
Board of Directors of Black Diamond shall have withdrawn or modified in a manner
adverse to FNB its approval or recommendation of the Merger, or shall have
recommended another offer or shall have resolved to do any of the foregoing.
7.2. Effect of Termination. In the event of the termination and
abandonment of this Agreement and the Merger pursuant to Section 7.1, including
as a result of breach or violation of the provisions hereof, this Agreement,
other than the provisions of Sections 4.1 (last three sentences), 7.4 and 9.2,
shall become void and have no effect, without any liability on the part of any
party or its directors, officers or shareholders, provided that nothing
contained in this Section 7.2 shall relieve any party from liability for any
willful breach of this Agreement.
7.3. Waiver and Amendment. Any term or provision of this Agreement may
be waived in writing at any time by the party which is, or whose shareholders
are, entitled to the benefits thereof and this Agreement may be amended or
supplemented by written instructions duly executed by all parties hereto at any
time, whether before or after the meetings of Black Diamond or FNB shareholders
referred to in Section 4.2 hereof, excepting statutory requirements and
requisite approvals of shareholders and regulatory authorities, provided that
any such amendment or waiver executed after shareholders of Black Diamond or FNB
have approved this Agreement and the Plan of Merger shall not modify either the
amount or form of the consideration to be given hereunder for shares of Black
Diamond Common Stock or otherwise materially adversely affect such shareholders
without their approval.
7.4 Termination Expenses and Fees.
A. In the event FNB terminates this Agreement pursuant to
Section 7.1C or 7.1I, Black Diamond shall pay FNB's expenses incurred in
connection with the proposed Merger, including without limitation reasonable
attorney fees, in an amount not to exceed
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$300,000, such payment to be made by wire transfer of immediately available
funds to an account designated by FNB.
B. In the event Black Diamond terminates this Agreement
pursuant to Section 7.1C, FNB shall pay Black Diamond's expenses incurred in
connection with this Agreement, including without limitation reasonable attorney
fees, in an amount not to exceed $200,000, such payment to be made by wire
transfer of immediately available funds to an account designated by Black
Diamond.
C. Notwithstanding any other provisions of this Agreement, and
in addition to the provisions of Paragraph 7.4A if applicable, if FNB terminates
this Agreement because prior to the termination of this Agreement, a Purchase
Event (as defined in the Stock Option Agreement) has occurred, or after the date
of this Agreement and prior to termination of this Agreement Black Diamond or
any Black Diamond subsidiary engages in negotiations (including without
limitation negotiations occurring after the date of this Agreement which arise
from or are a continuation of negotiations that may have been commenced prior to
the date of this Agreement) relating to any such transaction and a letter of
intent or other written or verbal agreement is entered into within one year
following the termination of this Agreement, then Black Diamond shall be
obligated to pay to FNB a termination fee of $200,000, such payment to be made
by wire transfer of immediately available funds to an account designated by FNB.
ARTICLE VIII
Additional Covenants
8.1. Indemnification of Black Diamond Officers and Directors; Liability
Insurance. After the Effective Time of the Merger, FNB agrees to provide
indemnification to the directors and officers of Black Diamond and the
subsidiaries thereof for events occurring prior to or subsequent to the
Effective Time of the Merger as if they had been directors or officers of FNB
prior to the Effective Time of the Merger, to the extent permitted under the
North Carolina Business Corporation Act and the Articles of Incorporation and
Bylaws of FNB as in effect as of the date of this Agreement. Such
indemnification shall continue for three years after the Effective Time of the
Merger, provided that any right to indemnification in respect of any claim
asserted or made within such three year period shall continue until final
disposition of such claim. FNB will use its reasonable efforts to provide
officers and directors liability insurance coverage to all Black Diamond
directors and officers, whether or not they become part of the FNB organization
after the Effective Time of the Merger, to the same extent it is provided to
FNB's officers and directors, provided that coverage will not extend to acts as
to which notice has been given prior to the Effective Time of the Merger. The
right to indemnification and insurance provided in this Section 8.1 is intended
to be for the benefit of directors, employees and officers of Black Diamond and
as such may be personally enforced by them at law or in equity.
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8.2. Employee Benefit Matters.
A. Plan Participation. All employees of Black Diamond
immediately prior to the Effective Time of the Merger who are employed by Black
Diamond immediately following the Effective Time of the Merger will be entitled
to participate in FNB's 401(k) plan and to the extent they are eligible based on
their length of service, compensation, job classification, and position, and the
existing Black Diamond 401(k) plan shall be terminated prior to the Effective
Time of the Merger. Except as specifically provided in this Section 8.2 and as
otherwise prohibited by law, an employee's service with Black Diamond which is
recognized by the applicable benefit plan of Black Diamond at the Effective Time
of the Merger shall be recognized as service with FNB for purposes of
eligibility to participate and vesting if applicable, (but not for purposes of
benefit accrual) under the corresponding FNB benefit plan, if any, subject to
applicable break-in-service rules.
B. Cooperation. Black Diamond agrees to cooperate with FNB in
implementing any decision made by FNB under this Section 8.2 with respect to
employee benefit plans and to provide to FNB on or before the Effective Time of
the Merger a schedule of service credit for its employees.
8.3 Board of Directors. Subject to any necessary regulatory and
shareholder approval, as soon as practicable following the Effective Time of the
Merger (or earlier, in FNB's sole discretion), FNB shall take such steps as
necessary of appropriate to appoint Don M. Green and Gary G. Blosser, or cause
them to be elected, as members of FNB's Board of Directors, and, for such
service, Mr. Green and Mr. Blosser shall be compensated in accordance with FNB's
standard arrangements for the compensation of directors.
8.4. Actions of Acquisition Sub. Subject to the terms and conditions of
this Agreement, FNB agrees to cause Acquisition Sub to take all actions
reasonably necessary to consummate the Merger.
ARTICLE IX
Miscellaneous
9.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time of the Merger and
all such representations and warranties will be extinguished on consummation of
the Merger and neither Black Diamond, FNB, Acquisition Sub, nor any officer,
director or employee or stockholder of any of them shall be under any liability
whatsoever with respect to any such representation or warranty after such time.
This Section 9.1 shall not limit any covenant or agreement of the parties which
by its terms contemplates performance after the Effective Time of the Merger,
including without limitation the covenants set forth in Article II and Article
VIII of this Agreement.
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9.2. Expenses. Except as set forth in Section 7.4, each party hereto
shall bear and pay the costs and expenses incurred by it relating to the
transactions contemplated hereby. All costs incurred in connection with the
printing and mailing of the Joint Proxy Statement-Prospectus shall be deemed to
be incurred and shall be paid sixty-nine percent (69%) by FNB and thirty-one
percent (31%) by Black Diamond.
9.3. Entire Agreement. This Agreement contains the entire agreement
among FNB, Acquisition Sub and Black Diamond with respect to the transactions
contemplated hereby and the related transactions and supersedes all prior
agreements, arrangements or understandings with respect thereto.
9.4. Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provisions of this Agreement.
9.5. Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
If to FNB or Acquisition Sub:
Ernest J. Sewell
President and Chief Executive Officer
FNB Financial Services Corporation
2025 S. Main Street
Reidsville, North Carolina 27320
Copy to:
Gerald F. Roach, Esq.
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
2500 First Union Capitol Center
Raleigh, North Carolina 27601
If to Black Diamond Savings Bank, FSB:
Don M. Green
President and Chief Executive Officer
Black Diamond Savings Bank, FSB
600 Trent Street
Norton, Virginia 24273
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Copy to:
Howard W. Dobbins, Esq.
Williams, Mullen, Christian & Dobbins
Two James Center
1021 East Cary Street
Richmond, Virginia 23210-1320
9.6. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
9.7. Governing Law. Except as may otherwise be required by the laws of
the United States, this Agreement shall be governed by and construed in
accordance with the laws of North Carolina.
9.8. Severability. The invalidity or unenforceability of any term,
phrase, clause, paragraph, restriction, covenant, agreement, or other provision
hereof shall in no way affect the validity or enforceability of any other
provision or part hereof.
9.9 Assignment. This Agreement may not be assigned by any party hereto
except with the prior written consent of the other parties hereto.
9.10 Inspections. Any right of FNB or Black Diamond hereunder to
investigate or inspect the assets, books, records, files, and other information
of FNB or Black Diamond, or their respective subsidiaries, in no way shall
establish any presumption that FNB or Black Diamond should have conducted any
investigation or that such right has been exercised by FNB or Black Diamond or
their respective agents, representatives, or others. Any investigations or
inspections that have been made by FNB or Black Diamond or their respective
agents, representatives, or others prior to the Closing Date shall not be deemed
in any way in derogation or limitation of the covenants, representations, and
warranties made by or on behalf of FNB or Black Diamond in this Agreement.
[remainder of page intentionally left blank; signatures begin on next page]
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf and its corporate seal (if any) to be
hereunto affixed and attested by its officers thereunto duly authorized, all as
of the day and year first above written.
FNB FINANCIAL SERVICES CORPORATION
By: /s/ Ernest J. Sewell
--------------------------------------
Name: Ernest J. Sewell
Title: President & Chief Executive Officer
FNB ACQUISITION SUB, F.S.B.
(In Organization)
By: /s/ Ernest J. Sewell
--------------------------------------
Name: Ernest J. Sewell
Title: Proposed President & Chief Executive Officer
BLACK DIAMOND SAVINGS BANK, F.S.B.
By: /s/ Don M. Green
--------------------------------------
Name: Don M. Green
Title: President and Chief Executive Officer
[signatures continued on next page]
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/s/ Harold E. Armsey
---------------------------------------
/s/ Ben F. Sergent, III
---------------------------------------
/s/ Jack Kennedy
---------------------------------------
/s/ Louis Hunter
---------------------------------------
/s/ Jerry W. Wharton
---------------------------------------
/s/ Don M. Green
---------------------------------------
/s/ Gary G. Blosser
---------------------------------------
/s/ Orden L. Harman
---------------------------------------
/s/ Gerald E. Myers
---------------------------------------
All of the Directors of Black Diamond have signed above to agree to vote all
their shares of Black Diamond Common Stock beneficially owned by them and with
respect to which they have power to vote (other than shares held by them in a
fiduciary capacity) in favor of the Merger and the transactions contemplated by
this Agreement and to cause the Merger and the Plan of Merger to be recommended
by the Board of Directors of Black Diamond to the shareholders of Black Diamond
in the proxy statement sent to shareholders in connection with such
shareholders' meeting.
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EXHIBIT A
PLAN OF MERGER
OF
FNB ACQUISITION SUB, F.S.B.
INTO
BLACK DIAMOND SAVINGS BANK, F.S.B.
Section 1. FNB Acquisition Sub, F.S.B. ("Acquisition Sub") shall, upon
the issuance of a certificate of merger by the Office of Thrift Supervision (the
"Effective Time of the Merger"), be merged (the "Merger") into Black Diamond
Savings Bank, F.S.B. ("Black Diamond"), which shall be the surviving bank (the
"Surviving Bank").
Section 2. Conversion of Stock. At the Effective Time of the Merger:
(i) Each share of Black Diamond Common Stock outstanding immediately
prior to the Effective Time of the Merger shall be converted into 1.3333 (the
"Exchange Ratio") shares of Common Stock of FNB Financial Services Corporation
("FNB"), rounded to the nearest whole share.
(ii) At the Effective Time of the Merger, each option or other right to
purchase shares of Black Diamond Common Stock pursuant to stock options ("Black
Diamond Options") granted by Black Diamond under its 1989 Incentive Stock Option
Plan (as amended, referred to herein as the "Black Diamond Stock Plan"), which
are outstanding at the Effective Time of the Merger, whether or not exercisable,
shall be converted into and become rights with respect to FNB Common Stock, and
FNB shall assume each Black Diamond Option, in accordance with the terms of the
Black Diamond Stock Plan and stock option agreement by which it is evidenced,
except that from and after the Effective Time (A) FNB and its Compensation
Committee shall be substituted for Black Diamond and the Committee of Black
Diamond's Board of Directors (including, if applicable, the entire Board of
Directors of Black Diamond) administering the Black Diamond Stock Plan, (B) each
Black Diamond Option assumed by FNB may be exercised solely for shares of FNB
Common Stock, (C) the number of shares of FNB Common Stock subject to such Black
Diamond Option shall be equal to the number of shares of Black Diamond Stock
subject to such Black Diamond Option immediately prior to the Effective Time of
the Merger multiplied by the Exchange Ratio and rounding to the nearest whole
share, and (D) the per share exercise price under each such Black Diamond Option
shall be adjusted by dividing the
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per share exercise price under each such Black Diamond Option by the Exchange
Ratio and rounding to the nearest cent.
(iii) Each share of Acquisition Sub Common Stock outstanding
immediately prior to the Effective Time of the Merger shall be converted into
one share of Black Diamond Common Stock (after giving effect to the conversion
contemplated above).
Section 3. Articles of Incorporation, Bylaws and Directors of the
Surviving Bank. At the Effective Time of the Merger, there shall be no change
caused by the Merger in the Charter (except any change caused by the filing of
Articles of Combination relating to the Merger), Bylaws, or Board of Directors
of the Surviving Bank.
Section 4. Conditions to Bank Merger. Consummation of the Merger is
subject to the following conditions:
(i) The approving vote of the holders of two-thirds of the outstanding
shares of Black Diamond Common Stock entitled to vote.
(ii) The approving vote of the holders of a majority of the outstanding
shares of FNB Common Stock present, in person or by proxy, at the meeting of
FNB's shareholders.
(iii) The approval of the Merger, to the extent required, by the North
Carolina Banking Commission, the Board of Governors of the Federal Reserve
System and the Office of Thrift Supervision.
(iv) The satisfaction of the conditions contained in the Agreement and
Plan of Reorganization and Merger, dated May 28, 1999, by and among FNB,
Acquisition Sub and Black Diamond, or the waiver of such conditions by the party
for whose benefit they were imposed.
Section 5. Manner of Exchange.
(i) After the Effective Time of the Merger, each holder of a
certificate for theretofore outstanding shares of Black Diamond Common Stock,
upon surrender of such certificate to the agent appointed by FNB to administer
the exchange of certificates (the "Exchange Agent"), accompanied by a letter of
transmittal in the form furnished by FNB and the Exchange Agent (the "Letter of
Transmittal"), shall be entitled to receive in exchange therefor the number of
full shares of FNB Common Stock into which shares of Black Diamond Common Stock
shall be converted pursuant to Section 2 hereof. Until so surrendered, each
outstanding certificate which, prior to the Effective Time of the Merger,
represented Black Diamond Common Stock will be deemed to evidence the right to
receive the number of full shares of FNB Common Stock into which the shares of
Black Diamond Common Stock represented thereby may be converted in accordance
with Section 2 hereof, and, after the Effective Time of the Merger, will be
deemed for all corporate purposes of FNB to evidence ownership of the number of
full shares of FNB
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Common Stock into which the shares of Black Diamond Common Stock represented
thereby were converted.
(ii) Until outstanding certificates formerly representing Black Diamond
Common Stock are surrendered in exchange for FNB Common Stock, no dividend
payable to holders of record of FNB Common Stock for any period as of any date
subsequent to the Effective Time of the Merger shall be paid to the holder of
such outstanding certificates in respect thereof. After the Effective Time of
the Merger, there shall be no further registry of transfer on the records of
Black Diamond of shares of Black Diamond Common Stock. If a certificate
representing such shares is presented to Black Diamond or FNB, it shall be
canceled and exchanged for a certificate representing shares of FNB Common Stock
as herein provided. Upon surrender of certificates of Black Diamond Common Stock
in exchange for FNB Common Stock, there shall be paid to the recordholder of the
certificates of FNB Common Stock issued in exchange therefor (i) the amount of
dividends theretofore paid for such full shares of FNB Common Stock as of any
date subsequent to the Effective Time of the Merger which have not yet been paid
to a public official pursuant to abandoned property laws and (ii) at the
appropriate payment date, the amount of dividends with a record date prior to
surrender and a payment date subsequent to surrender. No interest shall be
payable on such dividends upon surrender of outstanding certificates.
(iii) At the Effective Time of the Merger, each outstanding Black
Diamond Option shall be assumed in the manner provided in Section 2(ii) hereof .
Section 6. Effect of the Merger. The Merger, upon the Effective Time of
the Merger, shall have the effect provided by 12 C.F.R. 552.13.
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APPENDIX B
STOCK OPTION AGREEMENT
<PAGE> 219
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT ("Option Agreement"), dated as of May 28, 1999,
by and between FNB Financial Services Corporation, a North Carolina corporation
("FNB"), and Black Diamond Savings Bank, FSB, a federal savings bank ("Black
Diamond").
BACKGROUND
A. The Boards of Directors of FNB and Black Diamond have approved an
Agreement and Plan of Reorganization and Merger dated of even date herewith (the
"Merger Agreement") providing for certain transactions whereby Black Diamond
would become a wholly-owned subsidiary of FNB, and Black Diamond shareholders
would become shareholders of FNB.
B. To induce FNB to enter into the Merger Agreement, Black Diamond has
agreed to grant to FNB an option to purchase 166,179 shares of the common stock
of Black Diamond.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Definitions.
(a) "Subsidiary" means, with respect to any person (the
"Owner"), any corporation or other person of which securities or other interests
having the power to elect a majority of that corporation's or other person's
board of directors or similar governing body, or otherwise having the power to
direct the business and policies of that corporation or other person (other than
securities or other interests having such power only in the event of a
contingency that has not occurred) are held by the Owner or one or more of its
Subsidiaries.
(b) Capitalized terms defined in the Merger Agreement and used
in this Option Agreement shall have the same meanings as in the Merger
Agreement.
2. Grant of Option.
(a) Subject to the terms and conditions set forth in this
Option Agreement, Black Diamond hereby grants to FNB an option ("Option") to
purchase up to 166,179 shares (the "Shares") of Black Diamond Common Stock, at a
price of $17.25 share (the "Purchase Price") payable in cash as provided in
Section 4 hereof.
(b) In the event of any change in Black Diamond Common Stock
by reason of a stock dividend, split-up, recapitalization, combination, exchange
of shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase
<PAGE> 220
Price therefor, shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction, so that FNB shall receive
upon exercise of the Option the number and class of shares or other securities
or property that FNB would have received in respect of Black Diamond Common
Stock if the Option had been exercised immediately prior to such event or the
record date therefor, as applicable. If any additional shares of Black Diamond
Common Stock are issued after the date of this Agreement, the number of shares
of Black Diamond Common Stock subject to the Option shall be adjusted so that,
after such issuance, it equals 19.9% of the number of shares of Black Diamond
Common Stock then issued and outstanding, without giving effect to any shares
subject to or issued pursuant to the Option.
(c) In the event that, prior to the termination of the Option
in accordance with Section 3(a) hereof, Black Diamond shall enter into an
agreement (i) to consolidate with or merge into any person, other than FNB or
one of its subsidiaries, and shall not be the continuing or surviving
corporation of such consolidation or merger, (ii) to permit any person, other
than FNB or one of its subsidiaries, to merge into Black Diamond and Black
Diamond shall be the continuing or surviving corporation, but, in connection
with such merger, the shares of Black Diamond Common Stock outstanding
immediately prior to the consummation of such merger shall be changed into or
exchanged for stock or other securities of Black Diamond or any other person or
cash or any other property, or the shares of Black Diamond Common Stock
outstanding immediately prior to the consummation of such merger shall after
such merger represent less than 50% of the outstanding voting securities of the
merged company, or (iii) to sell or otherwise transfer all or substantially all
of its assets to any person, other than FNB or one of its subsidiaries, then,
and in each such case, the agreement governing such transaction shall make
proper provisions so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option (the "Substitute Option"), at the election of
FNB, of either (I) the Acquiring Corporation (as defined below) or (II) any
person that controls the Acquiring Corporation (any such person specified in
clause (I) or (II) being referred to as "Substitute Option Issuer").
(d) The Substitute Option shall have the same terms as the
Option; provided that the exercise price therefor and number of shares subject
thereto shall be as set forth in Section 2(e); provided, further, that the
Substitute Option shall be exercisable immediately upon issuance without the
occurrence of a Purchase Event with respect to the Substitute Option; and
provided, further, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option (subject to the variations described in the
foregoing provisos), such terms shall be as similar as possible and in no event
less advantageous to FNB. Substitute Option Issuer shall also enter into an
agreement with FNB in substantially the same form as this Agreement (subject to
the variations described in the foregoing provisos), which shall be applicable
to the Substitute Option.
(e) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock (as defined below) as is equal to the
Assigned Value (as defined below) multiplied by the number of shares of Black
Diamond Common Stock for which the Option was theretofore exercisable, divided
by the Average Price (as defined below), rounded
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up to the nearest whole share. The exercise price per share of Substitute
Common Stock of the Substitute Option (the "Substitute Option Price") shall then
be equal to the Purchase Price multiplied by a fraction in which the numerator
is the number of shares of Black Diamond Common Stock for which the Option was
theretofore exercisable and the denominator is the number of shares of
Substitute Common Stock for which the Substitute Option is exercisable.
(f) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the aggregate
of the shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the aggregate of the shares of outstanding Substitute
Common Stock but for the limitation in the first sentence of this Section 2(f),
Substitute Option Issuer shall make a cash payment to FNB equal to the excess of
(i) the value of the Substitute Option without giving effect to the limitation
in the first sentence of this Section 2(f) over (ii) the value of the Substitute
Option after giving effect to the limitation in the first sentence of this
Section 2(f). This difference in value shall be determined by a nationally
recognized investment banking firm selected by FNB.
(g) Black Diamond shall not enter into any transaction
described in Section 2(c) unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Black Diamond hereunder and take all other actions that may be necessary so that
the provisions of this Agreement are given full force and effect (including,
without limitation, any action that may be necessary so that the holders of the
other shares of common stock issued by Substitute Option Issuer are not entitled
to exercise any rights comparable to the rights described herein by reason of
the issuance or exercise of the Substitute Option and the shares of Substitute
Common Stock are otherwise in no way distinguishable from or have lesser
economic value than other shares of common stock issued by Substitute Option
Issuer (other than any diminution in value resulting from the fact, if
applicable, that the shares of Substitute Common Stock are restricted
securities, as defined in Rule 144 under the Securities Act or any successor
provision)).
(h) For purposes of this Agreement, the following terms have
the following meanings:
(1) "Acquiring Corporation" means (i) the continuing
or surviving corporation of a consolidation or merger with Black Diamond (if
other than Black Diamond), (ii) Black Diamond in a merger in which Black Diamond
is the continuing or surviving corporation and (iii) the transferee of all or
substantially all of Black Diamond's assets.
(2) "Assigned Value" means the highest of (w) the
price per share of Black Diamond Common Stock at which a tender offer or
exchange offer for Black Diamond Common Stock has been made after the date
hereof and prior to the consummation of the consolidation, merger or sale
referred to in Section 2(c), (x) the price per share to be paid by any third
party or the consideration per share to received by holders of Black Diamond
Common Stock, in each case pursuant to the agreement with Black Diamond with
respect to the consolidation, merger or sale referred to in Section 2(c), (y)
the highest bid price per share for
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Black Diamond Common Stock quoted on the Nasdaq National Market (or if such
Black Diamond Common Stock is not quoted thereon, the highest bid price per
share as quoted on the principal trading market on which such shares are traded
as reported by a recognized source) during the 12-month period immediately
preceding the consolidation, merger or sale referred to in Section 2(c) and (z)
in the event the transaction referred to in Section 2(c) is a sale of all or
substantially all of Black Diamond's assets, an amount equal to (i) the sum of
the price paid in such sale for such assets (including assumed liabilities) and
the current market value of the remaining assets of Black Diamond, as determined
by a nationally recognized investment banking firm selected by FNB divided by
(ii) the number of shares of Black Diamond Common Stock outstanding at such
time. In the event that a tender offer or exchange offer is made for Black
Diamond Common Stock or an agreement is entered into for a merger or
consolidation involving consideration other than cash, the value of the
securities or other property issuable or deliverable in exchange for Black
Diamond Common Stock shall be determined by a nationally recognized investment
banking firm selected by FNB.
(3) "Average Price" means the average closing sales
price per share of a share of Substitute Common Stock quoted on the New York
Stock Exchange ("NYSE") (or if such Substitute Common Stock is not quoted on the
NYSE, the highest bid price per share as quoted on the Nasdaq National Market
or, if the shares of Substitute Common Stock are not quoted thereon, on the
principal trading market on which such shares are traded as reported by a
recognized source) for the twenty trading days immediately preceding the fifth
business day prior to the consolidation, merger or sale in question, but in no
event higher than the closing price of the shares of Substitute Common Stock on
the day preceding such consolidation, merger or sale; provided that if
Substitute Option Issuer is Black Diamond, the Average Price shall be computed
with respect to a share of common stock issued by Black Diamond, the person
merging into Black Diamond or by any company which controls such person, as FNB
may elect.
(4) "Substitute Common Stock" means the shares of
capital stock (or similar equity interest) with the greatest voting power in
respect of the election of directors (or persons similarly responsible for the
direction of the business and affairs) of the Substitute Option Issuer.
3. Exercise of Option.
(a) FNB may exercise the Option, in whole or in part, at any
time or from time to time if a Purchase Event (as defined below) shall have
occurred and be continuing; provided that to the extent the Option shall not
have been exercised, it shall terminate and be of no further force or effect
upon the earliest to occur of (i) the Effective Time of the Merger or (ii)
termination of the Merger Agreement in accordance with the provisions thereof
prior to the occurrence of a Purchase Event (other than a termination resulting
from a breach by Black Diamond of any covenant contained therein) or (iii) six
months after termination of the Merger Agreement if such termination follows the
occurrence of a Purchase Event or is due to a breach by Black Diamond of any
covenant contained therein. Any such exercise shall be subject to compliance
with applicable provisions of law.
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(b) As used herein, a "Purchase Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Black Diamond or any Black Diamond Subsidiary,
without having received FNB's prior written consent, shall have entered into an
agreement with any person, whereby such person would (x) merge or consolidate,
or enter into any similar transaction, with Black Diamond or any Black Diamond
Subsidiary, (y) purchase, lease or otherwise acquire all or substantially all of
the assets of Black Diamond or any Black Diamond Subsidiary or (z) purchase or
otherwise acquire (including by way of merger, consolidation, share exchange or
any similar transaction) securities representing 20% or more of the voting power
of Black Diamond or any Black Diamond Subsidiary;
(ii) any person shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 20% or more of the
outstanding shares of the Common Stock of Black Diamond (the term "beneficial
ownership" for purposes of this Option Agreement having the meaning assigned
thereto in Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the regulations promulgated thereunder);
(iii) Black Diamond, acting through its Board of
Directors or duly authorized officers, deliberately breaches any of its
obligations under the Merger Agreement after any person (x) shall have made a
bona fide proposal to Black Diamond by public announcement or written
communication that is or becomes the subject of public disclosure to acquire
Black Diamond or any Black Diamond Subsidiary by merger, consolidation, purchase
of all or substantially all of its assets or any other similar transaction, (y)
shall have commenced a bona fide tender or exchange offer to purchase shares of
Black Diamond Common Stock such that upon consummation of such offer such person
would own or control 20% or more of the outstanding shares of Black Diamond
Common Stock, or (z) shall have filed an application or notice with any federal
or state regulatory agency for clearance or approval to engage in any
transaction described in clause (i) or (ii) above; or
(iv) any federally insured depository or registered
holding company thereof (not affiliated with FNB) or any person, corporation or
other legal entity with a net worth exceeding $20 million (x) shall have made a
bona fide proposal to Black Diamond by public announcement or written
communication that is or becomes the subject of public disclosure to acquire
Black Diamond or any Black Diamond Subsidiary by merger, consolidation, purchase
of all or substantially all of its assets or any other similar transaction, (y)
shall have commenced a bona fide tender or exchange offer to purchase shares of
Black Diamond Common Stock such that upon consummation of such offer such person
would own or control 20% or more of the outstanding shares of Black Diamond
Common Stock, or (z) shall have filed an application or notice with any federal
or state regulatory agency for clearance or approval to engage in any
transaction described in clause (i) or (ii) above, and thereafter the Board of
Directors of Black Diamond shall have failed to recommend, or shall have revoked
its recommendation of, the Merger Agreement and the transactions contemplated
thereby or the holders of Black Diamond Common Stock shall have not approved the
Merger Agreement and
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the transactions contemplated thereby at the meeting of such stockholders held
for such purpose or such meeting shall have not been held or shall have been
canceled prior to termination of the Merger Agreement.
If more than one of the transactions giving rise to a Purchase Event
under this Section 3(b) is undertaken or effected, then all such transactions
shall give rise only to one Purchase Event, which Purchase Event shall be deemed
continuing for all purposes under this Option Agreement until all such
transactions are abandoned. As used in this Option Agreement, "person" shall
have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange
Act.
(c) In the event FNB wishes to exercise this Option, it shall
send to Black Diamond a written notice (the date of which shall be the "Notice
Date") specifying (i) the total number of shares it will purchase pursuant to
such exercise, and (ii) a place and date not earlier than three business days
nor later than 60 business days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if prior notification to or
approval of any federal or state regulatory agency is required in connection
with such purchase, FNB shall promptly file the required notice or application
for approval and shall expeditiously process the same and the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which any required notification period has expired or been terminated or
such approval has been obtained and any requisite waiting period shall have
passed.
4. Payment and Delivery of Certificates.
(a) At the closing referred to in Section 3 hereof, FNB shall
pay to Black Diamond the aggregate purchase price for the Shares purchased
pursuant to the exercise of the Option in immediately available funds by a wire
transfer to a bank account designated by Black Diamond.
(b) At such closing, simultaneously with the delivery of cash
as provided in Section 4(a), Black Diamond shall deliver FNB a certificate
representing the number of shares of Black Diamond Common Stock purchased by
FNB.
5. Regulatory Filings. Black Diamond and FNB agree to file with state
and federal governmental bodies and authorities (including without limitation
the Office of Thrift Supervision and the Federal Reserve Board) all required
applications, notifications and report forms and other documents required to be
filed under any applicable law, rule or regulation, to permit the purchase
contemplated by this Agreement (collectively, "Regulatory Filings"). Black
Diamond agrees to cooperate fully with FNB in connection with the preparation of
any Regulatory Filing. Upon the happening of a Purchase Event, all additional
fees, expenses and charges of any kind or nature whatsoever incurred in
connection with any Regulatory Filing up to but not exceeding $25,000 shall be
borne and paid by Black Diamond. Without limitation, Black Diamond shall
indemnify and hold harmless FNB, its affiliates and its officers and directors
from and against any and all losses, claims, damages, liabilities and expenses
(including, without limitation, all out-of-pocket expenses, investigation
expenses, expenses
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incurred with respect to any judgment and fees and disbursements of counsel and
accountants) arising out of or based upon any statements contained in, omissions
or alleged omissions from, each Regulatory Filing, other than statements or
omissions made in reliance on and in conformity with information provided in
writing by FNB included in such Regulatory Filing.
6. Representations and Warranties.
Black Diamond represents, warrants and covenants to FNB as follows:
(a) Shares. The Shares, when delivered to FNB upon exercise of
the Option, will be duly authorized, validly issued, fully paid, nonassessable,
free of preemptive rights, and free and clear of all claims, liens, charges,
encumbrances and security interests of any nature whatsoever.
(b) Authority. Black Diamond has full right, power and
authority to execute and deliver this Option Agreement, to grant the Option and
to sell, assign, transfer and deliver the Shares to FNB upon exercise of the
Option.
(c) Binding Obligation. The execution and delivery of this
Option Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of Black
Diamond. This Option Agreement has been duly executed and delivered by Black
Diamond and constitutes the legal, valid and binding obligation of Black
Diamond, enforceable against Black Diamond in accordance with its terms.
(d) Absence of Conflicting Agreements. The execution, delivery
and performance of this Option Agreement will not (i) conflict with, result in a
breach of, or constitute a default under, any applicable law, judgment,
ordinance, regulation or ruling of any court or governmental authority, or under
any contract or agreement to which Black Diamond is a party or by which Black
Diamond may be bound, or (ii) create any lien, charge, claim or encumbrance upon
the Shares.
(e) Consents. No consent, approval, permit or authorization
of, or filing with any governmental authority or any third party is required to
consummate this Option Agreement and the transactions contemplated hereby.
(f) Claims and Legal Actions. There is no claim, liability,
legal action, governmental investigation or other legal, administrative or tax
proceeding, nor any order, decree or judgment, in progress or pending, or to the
knowledge of Black Diamond, threatened against Black Diamond which could
adversely affect the Shares, nor does Black Diamond know or have reason to be
aware of any basis for the same.
(g) Reservation of Shares. Black Diamond has taken all
necessary corporate action to reserve from the authorized and unissued shares of
Black Diamond Common Stock to issue, upon exercise of the Option, all of the
Shares. At all times from the date hereof until
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such time as the Option is no longer exercisable, Black Diamond will reserve for
issuance, upon exercise of the Option, the number of shares of Black Diamond
Common Stock equal to the number of Shares for which the Option is then
exercisable.
7. Severability. If any term, provision, covenant or restriction
contained in this Option Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Option Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated. If for any
reason such court or regulatory agency determines that the Option will not
permit the holder to acquire the full number of shares of Black Diamond Common
Stock as provided in Section 2 hereof, it is the express intention of Black
Diamond to allow the holder to acquire such lesser number as may be permissible,
without any amendment or modification hereof.
8. Additional Documents. Black Diamond will, upon request of FNB,
promptly execute and deliver all additional documents reasonably deemed by FNB
to be necessary, appropriate or desirable to complete and evidence any sale,
assignment or transfer of the Shares pursuant to this Option Agreement and to
vest in FNB good, valid and marketable title to the Shares so transferred.
9. Limitation of Profit.
(a) Notwithstanding any other provision herein, in no event
shall FNB's Total Profit (as defined below) exceed $3,000,000, and, if it
otherwise would exceed such amount, FNB, at its sole discretion, shall either
(i) reduce the number of shares subject to the Option, (ii) deliver to Black
Diamond for cancellation shares of Black Diamond Common Stock (or other
securities into which such Option Shares are converted or exchanged), (iii) pay
cash to Black Diamond, or (iv) any combination of the foregoing, so that FNB's
actually realized Total Profit shall not exceed $3,000,000 after taking into
account the foregoing actions.
(b) For purposes of this Agreement, "Total Profit" shall mean:
(i) the aggregate amount of (A) Net Proceeds, plus (B) all amounts received by
FNB on the transfer of the Option, plus (C) all equivalent amounts with respect
to the Substitute Option, plus (D) all amounts received by FNB pursuant to
Section 7.4C of the Merger Agreement, minus (ii) the aggregate of (A) all
amounts of cash previously paid to Black Diamond pursuant to this Section 9 and
(B) the value of the Option Shares (or other securities) previously delivered to
Black Diamond for cancellation pursuant to this Section 9. "Net Proceeds" shall
mean the aggregate proceeds of such sale or disposition in excess of the product
of the Purchase Price multiplied by the number of such Option Shares (or
securities into which such shares are converted or exchanged) included in such
sale or disposition.
(c) Notwithstanding any other provision of this Agreement,
nothing in this Agreement shall affect the ability of FNB to receive, nor
relieve Black Diamond's obligation to pay, any payment provided for in Section
7.4C of the Merger Agreement; provided that if and to the extent the Total
Profit received by FNB would exceed $3,000,000, following receipt of
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<PAGE> 227
such payment, FNB shall be obligated to comply with the terms of Section 9(a)
within 30 days of the latest of (i) the date of receipt of such payment, (ii)
the date of receipt of the Net Proceeds, (iii) the date of receipt of net cash
from disposition of the Option and (iv) the date of receipt of equivalent
amounts pursuant to the sale of the Substitute Option or shares of Substitute
Common Stock (or other securities into which such Substitute Common Stock is
converted or exchanged).
(d) For purposes of Section 9(a) and clause (ii) of Section
9(b), the value of any Option Shares delivered to Black Diamond shall be the
Assigned Value of such Option Shares and the value of any Substitute Common
Stock delivered to Black Diamond shall be the Highest Closing Price of such
Substitute Common Stock. "Highest Closing Price" means the highest closing sales
price for shares of Substitute Common Stock quoted on the NYSE (or if the
Substitute Common Stock is not quoted on the NYSE, the highest bid price per
share as quoted on the National Association of Securities Dealers Automated
Quotations System or, if the shares of Substitute Common Stock are not quoted
thereon, on the principal trading market on which such shares are traded as
reported by a recognized) during the six-month period preceding the issuance of
the Substitute Option.
(e) Notwithstanding anything in this Agreement or the Merger
Agreement to the contrary, if a court shall finally adjudicate that FNB's Total
Profit is unenforceable, then Net Proceeds shall be limited to the largest
amount enforceable, whether such amount is $3,000,000, $2,500,000, $2,000,000,
$1,750,000, $1,500,000, $1,250,000, $1,000,000, $900,000, $800,000, $700,000,
$600,000, $500,000 or some lesser amount. All Net Proceeds in excess of such
limitation shall be remitted to Black Diamond upon receipt.
10. Loss, Theft, Etc. of Agreement. This Agreement (and the Option
granted hereby) are exchangeable, without expense, at the option of FNB, upon
presentation and surrender of this Agreement at the principal office of Black
Diamond for other Agreements providing for Options of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Black Diamond Common Stock purchasable hereunder. The terms
"Agreement" and "Option" as used herein include any other Agreements and related
Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Black Diamond of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Agreement, if mutilated, Black
Diamond will execute and deliver a new Agreement of like tenor and date. Any
such new Agreement executed and delivered shall constitute an additional
contractual obligation on the part of Black Diamond, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
11. Miscellaneous.
(a) Expenses. Except as otherwise provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection
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with the transactions contemplated hereunder, including fees and expenses of its
own financial consultants, investment bankers, accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly provided
herein, this Option Agreement contains the entire agreement among the parties
with respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral. The terms
and conditions of this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their responsible heirs, successors and
assigns. Nothing in this Option Agreement, expressed or implied, is intended to
confer upon any party, other than the parties hereto, and their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Option Agreement, except as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any
of its rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of the other
party.
(d) Notices. All notices under this Agreement shall be deemed
to have been duly given when delivered in person, by recognized overnight
courier, or by confirmed facsimile to the parties as set forth below.
If to FNB:
Mr. Ernest J. Sewell
President and Chief Executive Officer
FNB Financial Services Corporation
202 S. Main Street
Reidsville, North Carolina 27320
Facsimile No. (336) 634-4776
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with a copy to:
Gerald F. Roach, Esq.
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
2500 First Union Capitol Center
Raleigh, NC 27601
Facsimile No. (919) 821-6800
If to Black Diamond:
Mr. Don M. Green
President and Chief Executive Officer
Black Diamond Savings Bank, FSB
600 Trent Street
Norton, Virginia 24273
Facsimile No. (540) 679-5818
with a copy to:
Howard W. Dobbins, Esq.
Williams, Mullen, Christian & Dobbins
Two James Center
1021 East Cary Street
Richmond, Virginia 23210-1320
Facsimile No. (804) 783-6507
(e) Counterparts. This Option Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would
be an inadequate remedy for breach of the provisions of this Option Agreement by
either party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by
and construed in accordance with the laws of the State of North Carolina
applicable to agreements made and entirely to be performed within such state and
such federal laws as may be applicable.
[remainder of page intentionally left blank; signatures appear on next page]
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IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
FNB FINANCIAL SERVICES CORPORATION
By: /s/ Ernest J. Sewell
-------------------------------------
Ernest J. Sewell
President and Chief Executive Officer
BLACK DIAMOND SAVINGS BANK, FSB
By: /s/ Don M. Green
-------------------------------------
Mr. Don M. Green
President and Chief Executive Officer
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APPENDIX C
DISSENTERS' RIGHTS
CODE OF FEDERAL REGULATIONS
TITLE 12--BANKS AND BANKING
CHAPTER V--OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY
PART 552--INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL STOCK
ASSOCIATIONS
Sec. 552.14 Dissenter and appraisal rights.
(a) Right to demand payment of fair or appraised value. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with Sec. 552.13 of this part shall have the
right to demand payment of the fair or appraised value of his stock: Provided,
That such stockholder has not voted in favor of the combination and complies
with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to Sec. 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) Procedure--(1) Notice. Each constituent Federal stock
association shall notify all stockholders entitled to rights under this section,
not less than twenty days prior to the meeting at which the combination
agreement is to be submitted for stockholder approval, of the right to demand
payment of appraised value of shares, and shall include in such notice a copy of
this section. Such written notice shall be mailed to stockholders of record and
may be part of management's proxy solicitation for such meeting.
(2) Demand for appraisal and payment. Each stockholder
electing to make a demand under this section shall deliver to the
Federal stock association, before voting on the combination, a
writing identifying himself or herself and stating his or her
intention thereby to demand appraisal of and payment for his or her
shares. Such demand must be in addition to and separate from any
proxy or vote against the combination by the stockholder.
(3) Notification of effective date and written offer.
Within ten days after the effective date of the combination, the
resulting association shall:
(i) Give written notice by mail to
stockholders of constituent Federal stock associations
who have complied with the provisions of paragraph
(c)(2) of this section and have not voted in favor of
the combination, of the effective date of the
combination;
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(ii) Make a written offer to each
stockholder to pay for dissenting shares at a specified
price deemed by the resulting association to be the fair
value thereof; and
(iii) Inform them that, within sixty days of
such date, the respective requirements of paragraphs
(c)(5) and (c)(6) of this section (set out in the
notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
(4) Acceptance of offer. If within sixty days of the
effective date of the combination the fair value is agreed upon
between the resulting association and any stockholder who has
complied with the provisions of paragraph (c)(2) of this section,
payment therefor shall be made within ninety days of the effective
date of the combination.
(5) Petition to be filed if offer not accepted. If
within sixty days of the effective date of the combination the
resulting association and any stockholder who has complied with the
provisions of paragraph (c)(2) of this section do not agree as to
the fair value, then any such stockholder may file a petition with
the Office, with a copy by registered or certified mail to the
resulting association, demanding a determination of the fair market
value of the stock of all such stockholders. A stockholder entitled
to file a petition under this section who fails to file such
petition within sixty days of the effective date of the combination
shall be deemed to have accepted the terms offered under the
combination.
(6) Stock certificates to be noted. Within sixty days of
the effective date of the combination, each stockholder demanding
appraisal and payment under this section shall submit to the
transfer agent his certificates of stock for notation thereon that
an appraisal and payment have been demanded with respect to such
stock and that appraisal proceedings are pending. Any stockholder
who fails to submit his or her stock certificates for such notation
shall no longer be entitled to appraisal rights under this section
and shall be deemed to have accepted the terms offered under the
combination.
(7) Withdrawal of demand. Notwithstanding the foregoing,
at any time within sixty days after the effective date of the
combination, any stockholder shall have the right to withdraw his or
her demand for appraisal and to accept the terms offered upon the
combination.
(8) Valuation and payment. The Director shall, as he or
she may elect, either appoint one or more independent persons or
direct appropriate staff of the Office to appraise the shares to
determine their fair market value, as of the effective date of the
combination, exclusive of any element of value arising from the
accomplishment or expectation of the combination. Appropriate staff
of the Office shall review and provide an opinion on appraisals
prepared by independent persons as to the suitability of the
appraisal methodology and the adequacy of the analysis and
supportive data. The Director after consideration of the appraisal
report and the advice of the appropriate staff shall, if he or she
concurs in the valuation of the shares, direct payment by the
resulting association of the appraised fair market value of the
shares, upon surrender of the certificates representing such stock.
Payment shall be made, together with interest from the effective
date of the combination, at a rate deemed equitable by the Director.
<PAGE> 233
(9) Costs and expenses. The costs and expenses of any
proceeding under this section may be apportioned and assessed by the
Director as he or she may deem equitable against all or some of the
parties. In making this determination the Director shall consider
whether any party has acted arbitrarily, vexatiously, or not in good
faith in respect to the rights provided by this section.
(10) Voting and distribution. Any stockholder who has
demanded appraisal rights as provided in paragraph (c)(2) of this
section shall thereafter neither be entitled to vote such stock for
any purpose nor be entitled to the payment of dividends or other
distributions on the stock (except dividends or other distribution
payable to, or a vote to be taken by stockholders of record at a
date which is on or prior to, the effective date of the
combination): Provided, That if any stockholder becomes unentitled
to appraisal and payment of appraised value with respect to such
stock and accepts or is deemed to have accepted the terms offered
upon the combination, such stockholder shall thereupon be entitled
to vote and receive the distributions described above.
(11) Status. Shares of the resulting association into
which shares of the stockholders demanding appraisal rights would
have been converted or exchanged, had they assented to the
combination, shall have the status of authorized and unissued shares
of the resulting association.
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APPENDIX D
OPINION OF AUSTIN FINANCIAL SERVICES
May 19, 1999
Board of Directors
Black Diamond Savings Bank, F.S.B.
600 Trent Street
Norton, Virginia 24273
Members of the Board:
You have requested our opinion, from a financial point of view, as to the
fairness to Black Diamond Savings Bank F.S.B., ("Bank") Norton, Virginia and its
shareholders of the terms of the Agreement and Plan of Reorganization and Merger
("Reorganization Agreement"), dated May 19, 1999, among the Bank, FNB
Acquisition Sub, F.S.B. ("Interim Bank"), and FNB Financial Services Corporation
of North Carolina ("FNB"). The terms of the Reorganization Agreement provide for
an affiliation and merger of Bank and Interim Bank, a wholly-owned subsidiary of
FNB. The merger will result in the merger of Interim Bank with and into Bank and
Bank becoming a wholly-owned subsidiary of FNB. FNB will continue to carry on
its banking business in substantially the same manner as before the
reorganization.
Austin Financial Services, Inc., ("Austin") is a nationally recognized
investment banking firm specializing in the banking and financial services
industry. Austin is continually engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, private placements and
valuations for estate, corporate and other purposes. In the past, Austin has not
provided professional services and/or products to Bank or FNB in the ordinary
course of business. Furthermore, Austin does not contemplate any future business
with Bank or FNB arising from this engagement, nor has its opinion concerning
the fairness, from a financial point of view, of the terms of the Reorganization
Agreement been subject to indications of future business with either Bank or
FNB.
In connection with its opinion, Austin reviewed material bearing upon the
financial operating condition of Bank including, but not limited to: (1) the
Annual Report for the fiscal year 1998; (2) financial statements for year-end
(1993-1998); (3) Statement of Condition, April 30, 1999; (4) Uniform Thrift
Performance Report, September 30, 1998; (5) Corporate Income Tax Return,
December 31, 1998; (6) projected depreciation schedule for 1998; (7) Business
Plan (1998-2000); (8) various financial information prepared by management; (9)
publicly available information concerning the nature and terms of certain other
merger and acquisition transactions believed relevant to its inquiry; (10)
discussed the foregoing as well as other matters relevant to its inquiry,
including the past and current business operations and acquisitions, results of
regulatory examinations, financial condition, current loan quality and trends,
and future prospects of Bank with certain officers and representatives of Bank;
and (11) the Reorganization Agreement.
Also, in connection with its opinion, Austin reviewed material bearing upon the
financial operating condition of FNB including, but not limited to: (1) the
Annual Report for the fiscal years (1993-1998); (2) Notice of Annual Meeting and
Proxy Statement, April 13, 1999; (3) Form 10-KSB for the fiscal years
(1995-1997); (4) Annual Report of Bank Holding Company FR Y-6 for the fiscal
years (1995-1997); (5) Consolidated Reports of Condition and Income year-end
(1995-1997); and (6) Form 10-K for the fiscal year ended December 31, 1998.
<PAGE> 235
Furthermore, Austin also took into account its assessment of general economic,
market and financial conditions and its experience in other transactions, as
well as, its experience in securities valuation and general knowledge of the
banking industry. Austin's opinion was necessarily based upon conditions as they
existed and could be evaluated on the date of the opinion and the information
made available to Austin through that date.
Austin relied upon and assumed without independent verification the accuracy and
completeness of all of the financial and other information provided to it by
Bank, its agents, or from public sources. Austin has not made an independent
evaluation of the assets of Bank, but has relied upon the books and records of
Bank, and the audited financial statements as presented to Austin as the
valuators of the fair market value of Bank. In addition, Austin did not
independently verify and relied on and assumed the aggregate allowances for loan
losses set forth in the balance sheet of Bank at April 30, 1999, were adequate
to cover such losses and complied fully with applicable law, regulatory policy,
and sound banking practice as of the date of such financial statements.
Furthermore, Austin did not independently verify the carrying values of other
real estate owned and loans classified as in-substance foreclosures of Bank in
its respective April 30, 1999, balance sheet, and Austin assumed that such
carrying values complied fully with applicable law, regulatory policy and sound
banking practice as of such date. Austin did conduct a physical inspection of
some of the properties and facilities of Bank, but Austin did not make any
independent evaluation or appraisal of the assets, liabilities or prospects of
Bank, nor was Austin furnished with any such evaluation or appraisal. Austin
also assumed that the Reorganization Agreement is, and will be, in compliance
with all laws and regulations that are applicable to Bank and FNB.
In its analyses, Austin made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of Bank and FNB. Any estimates contained in Austin's
analyses are not necessarily indicative of future results or value, which may be
significantly more or less favorable than such estimates. Austin's estimates of
values of companies do not purport to be appraisals or necessarily reflect the
price at which companies or their securities actually may be sold. No company or
transaction utilized in Austin's analyses was identical to Bank or the
Reorganization Agreement. Accordingly, such analyses are not based solely on
arithmetic calculations; rather, they involve complex considerations and
judgments by Austin concerning differences in financial and operating
characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interest, as well as other factors that could
affect the public trading markets of the company or companies to which they are
being compared. None of the analyses performed by Austin was assigned a greater
significance by Austin than any other.
The following is a brief description of the analyses performed by Austin in
connection with its opinion as described to Bank's board of directors by Austin:
Under the terms of the Reorganization Agreement, each share of common stock of
Bank outstanding immediately prior to consummation of the merger will be
exchanged for 1.3333 shares of FNB. The merger will result in the merger of
Interim Bank with and into Bank and Bank becoming a wholly-owned subsidiary of
FNB. FNB will continue to carry on its banking business in substantially the
same manner as before the reorganization.
Using a discounted cash flow analysis, Austin projected Bank's cash flow from
April 30, 2000, through April 30, 2004. The steps involved in determining the
discounted cash flow value of Bank included the following: (1) annual net income
projections were determined from the principal drivers of net income (loans,
investments, noninterest income, deposits, loan loss provision and operating
expenses) over the five year period; (2) the amount of excess earnings over the
amount necessary to maintain a reasonable capital to asset ratio was calculated
(assumed a minimum equity capital to asset ratio of 6.00%); (3) excess earnings
<PAGE> 236
plus the noncash expenses less capital expenditures which are referred to as
"cash flows" were converted to a present value equivalent using a process known
as "discounting." This involved the use of a discount rate of 16.31%, which is a
rate that reflects the yield a prudent investor would require on a similar
investment. The discount rate was determined utilizing the Capital Asset Pricing
Model ("CAPM"). The CAPM hypothesizes that the expected return on an individual
security is equal to the risk-free return plus beta (measure of risk) times a
benchmark risk premium; (4) the residual value of the cash flows at the end of
the five year period was calculated. The residual value represents the estimated
sale or liquidation value of the company. This value was based on the projected
cash flow for the year following the projected periods (i.e., 6th year). In
order to calculate a residual value, a capitalization rate must be determined.
The capitalization rate equals the discount rate minus the estimated annual
growth in Bank's earnings after the fifth year of the projected period plus any
specific company risk premium. The capitalization rate was then divided into the
cash flow of the 6th year to determine the projected residual value; (5) the
present value equivalent of the projected residual value was determined by using
the discounting approach noted above; and (6) the present value of the projected
cash flows was added to the present value of the residual value to determine the
fair market value. The present value per share currently outstanding of Bank's
common stock (835,069 shares) resulting from this analysis was $20.50.
Austin also determined the adjusted book value of Bank as an alternative
valuation method. The adjusted book value approach required a three-step
process: (1) Bank's book value was determined. This figure was derived from
Bank's April 30, 1999, balance sheet, and it represents the summary measure of
stockholders' claims against the assets, on a historical cost basis; (2) assets
and liabilities were restated to their fair market values. The adjusted book
value calculation considers each major asset and liability account
classification; (3) additional "off-balance sheet" adjustments were calculated,
if necessary. The fair market value per current share of Bank's common stock
resulting from this analysis was $15.93.
Austin applied a 50% weighting to the discounted cash flow value and a 50%
weighting to the adjusted book value. The weightings were based on Austin's
review of the financial position, history and recent performance of Bank. The
sum of the weighted values or $18.22 per current share outstanding equates to
the fair market value of Bank. Based on the $18.22 per share value of Bank
common stock as determined by Austin and the stock offering of 1.3333 shares of
FNB stock for each share of Bank in comparison to FNB's last stock trade of
$15.75 on May 18, 1998, the terms of the Reorganization Agreement provide an
additional $2.78 per current share outstanding to Bank shareholders over and
above the fair market value.
Austin analyzed certain other mergers and acquisitions that were announced
during the first quarter of 1999 in the Southeast involving financial
institutions with assets of approximately $300 million or less. Austin compared
the multiple produced by this reorganization based on the current number of
shares outstanding to the mean multiples for the transactions analyzed. Set
forth below are the mean transaction multiples:
<TABLE>
<CAPTION>
Selected
Acquisitions Bank
------------ ----
<S> <C> <C>
Price/Earnings Multiple 23.14 16.02*
Price/Book Value Multiple 234.60 186.22
</TABLE>
- --------------------
* Based on LTM earnings
The results produced in this analysis do not purport to be indicative of actual
values or expected values of Bank or shares of Bank common stock. The financial
institution acquisition transactions announced in the southeastern portion of
the U.S. during the first quarter of 1999 included in the above multiples are:
<PAGE> 237
<TABLE>
<CAPTION>
Buyer ST Seller ST
------------------------------------------------------------------------
<S> <C> <C> <C>
NBC Capital Corp MS FFBS Bancorp, Inc. MS
FLAG Financial Corp. GA Thomaston Fed. Savings Bank GA
Synovus Financial Corp. GA Ready Bank of Ft. Walton Beach FL
FLAG Financial Corp. GA Abbbeville Capital Corporation SC
Premier Bancshares, Inc. GA North Fulton Bancshares, Inc. GA
Simmons First National AR NBC Bank Corp. AR
Synovus Financial Corp. GA Merit Holding Corp. GA
Carolina First Corp. SC Citrus Bank FL
Southern Financial Bancorp VA Horizon Bank of Virginia VA
First National Corp. SC First Bancorporation, Inc. SC
FLAG Financial Corp. GA First Hogansville Bankshares, Inc. GA
First Citizens Bancorp SC SC Exchange Bank of South Carolina SC
James River Bancshares, VA State Bank of Remington VA
Inc.
Capital City Bank Group FL Grady Holding Co. GA
</TABLE>
Austin's analysis showed that the implied valuations of Bank, applying the mean
transaction multiples described above to Bank's earnings per share and book
value per share was $32.33 per share and $26.45 per share, respectively. The
results produced in this analysis do not purport to be indicative of actual
values or expected values of Bank or shares of Bank's common stock.
Bank and Austin have entered into an arrangement relating to the services to be
provided by Austin in connection with the Reorganization Agreement. In regards
to Austin's services in determining an opinion as to the fairness, from a
financial point of view, of the terms of the Reorganization Agreement, the fee
is inclusive with the commission to be received upon consummation of the
reorganization. In addition, Bank also has agreed to indemnify Austin and its
officers, directors, shareholders, employees and agents for all of its time,
expenses, and any liability incurred as a result of Austin's proposed engagement
by means of legal action, administrative proceedings or threat thereof, unless
such action, pending or threat thereof is caused by Austin's own unlawful
conduct, breach of duty or negligence during the course of performing Austin's
services.
Austin, in rendering its opinion, has assumed that the transaction will be a
tax-free reorganization with no material adverse tax consequences to any of the
parties involved, In addition, Austin has assumed that in the course of
obtaining the necessary regulatory approvals for the transaction, no condition
will be imposed upon Bank or FNB that will have a materially adverse impact on
the contemplated benefits of the proposed transaction to Bank and FNB and their
shareholders.
<PAGE> 238
Based upon Austin's analysis and subject to the qualifications described herein,
considering all circumstances known to us and based upon other matters
considered relevant, Austin believes that as of the date of this letter, the
terms of the Reorganization Agreement from a financial point of view are fair to
Bank and its shareholders.
Austin hereby consents to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
On behalf of Austin Financial Services, Inc.
Dr. Douglas V. Austin
President and CEO
/s/ Dr. Douglas V. Austin
<PAGE> 239
APPENDIX E
OPINION OF EQUITY RESEARCH SERVICES
May 28, 1999
Board of Directors
FNB Financial Services Corporation
202 South Main Street
Reidsville, NC 27323-2037
Gentlemen:
We were retained by you to provide an opinion as to the fairness, from a
financial point of view, of the Exchange Ratio (as defined below) in the pending
acquisition of Black Diamond Savings Bank, F.S.B. ("Black Diamond") by FNB
Financial Services Corporation ("FNB"). The terms of the proposed transaction
are set forth in the Agreement and Plan of Reorganization and Merger By and
Among FNB, FNB Acquisition Sub, F.S.B. ("Acquisition Sub") and Black Diamond,
which is dated as of May 28, 1999, and the Stock Option Agreement between FNB
and Black Diamond, which is dated as of that same date (collectively,
"Agreements"). Under the terms of the Agreements, Acquisition Sub, a wholly
owned subsidiary of FNB, will be merged into Black Diamond, which will be the
surviving bank. Each share of Black Diamond common stock outstanding immediately
prior to the effective time of the merger shall be converted into FNB common
stock based on an exchange rate of 1.3333 ("Exchange Ratio"). Each Black Diamond
shareholder will receive a number of shares of FNB common stock equal to the
number of shares of Black Diamond common stock owned by such shareholder
immediately prior to the effective time of the merger multiplied by the Exchange
Ratio. No fractional shares will be issued; instead, FNB shares to be issued to
each Black Diamond shareholder will be rounded to the nearest whole share. The
foregoing summary is qualified in its entirety by reference to the Agreements.
Equity Research Services, Inc. ("Equity Research") is a North Carolina-based
corporation primarily engaged in: (i) performing valuations of, and valuations
related to, closely held and publicly traded companies and (ii) conducting
research on the performance and investment characteristics of publicly traded
companies and publishing such analyses in the form of reports which are made
available to the respective companies and the investment community. All reports
generated by Equity Research for the purpose of investor relations are
designated "Investor Relations Report" and Equity Research receives a fee (from
the company whose securities are described) for producing such reports. The
reports do not contain a purchase or investment rating but do consider certain
investment characteristics of the respective company's securities. In addition,
Equity Research regularly responds to inquiries from brokers, shareholders and
others who have questions about the respective company.
In connection with the services including and related to the "Investor Relations
Reports," the majority of Equity Research's clients are banks which are located
in North Carolina. One of Equity Research's such clients is FNB. Equity
Research's engagement by FNB involves the production of the above mentioned
"Investor Relations Reports," responding to questions about FNB and providing
various financial advisory services. Equity Research is compensated by FNB for
such services on an annual retainer basis which does not exceed $9,000. In
addition, Equity Research has provided limited financial advisory services to
FNB with respect to the proposed acquisition of Black Diamond on an hourly rate
basis and such charges are approximately $10,000.
<PAGE> 240
Equity Research was selected by FNB as its financial advisor because of its
knowledge of and experience in valuations and capital markets and expertise in
the commercial banking and thrift industries. Equity Research does not trade in
the securities of either Black Diamond or FNB.
In connection with rendering its opinion to FNB's Board of Directors, Equity
Research, among other things, (i) reviewed the terms of the Agreements; (ii)
reviewed and analyzed the financial position and performance of Black Diamond
and FNB as reflected in certain information provided for this purpose by the
respective management; (iii) reviewed financial forecasts of FNB and Black
Diamond prepared by their respective management; (iv) reviewed and analyzed
certain exhibits produced by FNB analyzing the merger; (v) reviewed information
including, but not limited to, Annual Reports for both companies, Annual Reports
on Form 10-K for FNB, Quarterly Reports to shareholders and Quarterly Reports on
Form 10-Q for FNB, Uniform Bank Performance Reports and Call Report data for
FNB, Office Of Thrift Supervision Thrift Financial Report data for Black Diamond
and conducted a general and financial comparison of the two companies to one
another, as well as to other comparable institutions; and (vi) analyzed the
terms of certain other control transactions involving mergers of thrift
institutions in the southeast which we deemed most relevant. Equity Research
also analyzed overall market, economic, financial and other considerations as
well.
In providing its opinion, Equity Research, without independent verification,
relied on the accuracy and completeness of all financial and other information
provided to or discussed with us or publicly available, and we have not
independently verified such information. With respect to financial forecasts and
other forward-looking information furnished to or discussed with us, we have
been advised by management of FNB and Black Diamond, as to their respective
information, that such forecasts and information were prepared on the basis of
reasonable estimates and judgments and we have assumed such to be accurate. We
also have assumed, with your consent, that the Merger will be treated as a
pooling of interests transaction. We have not performed or considered any
independent appraisal or evaluation of the assets of Black Diamond or FNB.
Additionally, Equity Research made numerous assumptions with respect to business
conditions, economic conditions, projections of Black Diamond's and FNB's
performance, as well as other matters, many of which are beyond Black Diamond's
and FNB's control. Any earnings or other estimates considered in Equity
Research's analysis are not necessarily indicative of future results.
Based on and subject to the foregoing, and based upon such other matters as we
consider relevant, it is our opinion that the Exchange Ratio is fair, from a
financial point of view and as of the date hereof, to FNB.
It is understood that this letter is for the information of the Board of
Directors of FNB and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by FNB in respect of the transaction with the Securities and
Exchange Commission. In addition, this opinion does not in any manner address
the prices at which FNB common stock will trade following the consummation of
the merger and Equity Research expresses no opinion or recommendation as to how
the stockholders of FNB or Black Diamond should vote at the stockholders'
meeting held in connection with the merger.
Sincerely,
Equity Research Services, Inc.
<PAGE> 241
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Sections 55-8-50 through 55-8-58 of the North Carolina Business
Corporation Act 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 (1) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (2) 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 Business Corporation Act 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 any of the foregoing capacities; provided,
however, that a corporation may not indemnify or agree to indemnify a person
against liability or expenses such person may incur 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. FNB's bylaws provide for
indemnification to the fullest extent permitted under the North Carolina
Business Corporation Act, provided, however, that FNB will indemnify any person
seeking indemnification in connection with a proceeding initiated by such person
only if such proceeding was authorized by the board of directors of FNB.
Accordingly, FNB may indemnify its directors, officers and employees in
accordance with either the statutory or the non-statutory standard.
Sections 55-8-52 and 55-8-56 of the North Carolina Business Corporation
Act 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.
II-1
<PAGE> 242
Finally, Section 55-8-57 of the North Carolina Business Corporation Act
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. FNB's directors and officers are
currently covered under directors' and officers' insurance policies maintained
by FNB.
As permitted by North Carolina law, Article II of FNB's articles of
incorporation limits the personal liability of directors for monetary damages
for breaches of duty as a director provided that such limitation will not apply
to (i) acts or omissions that the director at the time of the breach knew or
believed were clearly in conflict with the best interests of FNB, (ii) any
liability for unlawful distributions under N.C. Gen. Stat. Section 55-8-33 of
the North Carolina law, (iii) any transaction from which the director derived an
improper personal benefit, or (iv) acts or omissions occurring prior to June 13,
1988.
ITEM 21. Exhibits and Financial Statement Schedules
The following documents (unless indicated) are filed herewith and made
a part of this Registration Statement.
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.01 Agreement and Plan of Reorganization and Merger dated as of
May 28, 1999 by and among FNB, FNB Acquisition Sub and Black
Diamond (included as Appendix A of the Joint Proxy
Statement/Prospectus)
2.02 Agreement to furnish omitted schedules
4.01(1) Specimen Common Stock Certificate
4.02(2) Amended and Restated Articles of Incorporation
4.03(2) Amended and Restated Bylaws
5.01 Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. as to the legality of the securities being
registered
8.01 Form of opinion of Smith, Anderson, Blount, Dorsett, Mitchell
& Jernigan, L.L.P. as to the United States federal income tax
consequences of the merger
23.01 Consent of PricewaterhouseCoopers LLP
23.02 Consent of Cherry Bekaert & Holland, L.L.P.
23.03 Consent of McGladrey & Pullen, LLP
23.04 Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
II-2
<PAGE> 243
23.05 Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 8.01 hereto)
24.01 Powers of Attorney (see Page II-5)
99.01 Stock Option Agreement dated as of May 28, 1999 between of
Black Diamond and FNB (included as Appendix B of the Joint
Proxy Statement/Prospectus)
99.02 Form of proxy card to be sent to Black Diamond shareholders
99.03 Form of proxy card to be sent to FNB shareholders
- --------------------
(1) Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission.
(2) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1998, filed with
the Securities and Exchange Commission.
ITEM 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers and sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
II-3
<PAGE> 244
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
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 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.
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 foregoing provisions, 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.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 245
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant 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 July 14, 1999.
FNB FINANCIAL SERVICES CORPORATION
By: /s/ Ernest J. Sewell
---------------------------------------
Ernest J. Sewell
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ernest J. Sewell and Robert F. Albright
and each of them, each with full power to act without the other, his true and
lawful attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement on Form
S-4 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of July 14, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Ernest J. Sewell President and Chief Executive Officer
- --------------------------------------------
Ernest J. Sewell
/s/ Robert F. Albright Executive Vice President and Chief Financial Officer
- -------------------------------------------- (principal financial officer)
Robert F. Albright
/s/ Michael W. Shelton Senior Vice President and Controller (principal accounting
- -------------------------------------------- officer)
Michael W. Shelton
/s/ Willard B. Apple Chairman of the Board
- --------------------------------------------
Willard B. Apple
/s/ Charles A. Britt Director
- ---------------------------------------------
Charles A. Britt
/s/ Barry Z. Dodson Director
- --------------------------------------------
Barry Z. Dodson
/s/ O. Eddie Green Director
- --------------------------------------------
O. Eddie Green
/s/ Joseph H. Kinnarney Director
- --------------------------------------------
Joseph H. Kinnarney
/s/ Clifton G. Payne Director
- --------------------------------------------
Clifton G. Payne
/s/ Elton H. Trent, Jr. Director
- --------------------------------------------
Elton H. Trent, Jr.
- -------------------------------------------- Director
Kenan C. Wright
</TABLE>
II-5
<PAGE> 246
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.01 Agreement and Plan of Reorganization and Merger dated as of
May 28, 1999 by and among FNB, FNB Acquisition Sub and Black
Diamond (included as Appendix A of the Joint Proxy
Statement/Prospectus)
2.02 Agreement to furnish omitted schedules
4.01(1) Specimen Common Stock Certificate
4.02(2) Amended and Restated Articles of Incorporation
4.03(2) Amended and Restated Bylaws
5.01 Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. as to the legality of the securities being
registered
8.01 Form of opinion of Smith, Anderson, Blount, Dorsett, Mitchell
& Jernigan, L.L.P. as to the United States federal income tax
consequences of the merger
23.01 Consent of PricewaterhouseCoopers LLP
23.02 Consent of Cherry Bekaert & Holland, L.L.P.
23.03 Consent of McGladrey & Pullen, LLP
23.04 Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
23.05 Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 8.01 hereto)
24.01 Powers of Attorney (see Page II-5)
99.01 Stock Option Agreement dated as of May 28, 1999 between of
Black Diamond and FNB (included as Appendix B of the Joint
Proxy Statement/Prospectus)
99.02 Form of proxy card to be sent to Black Diamond shareholders
99.03 Form of proxy card to be sent to FNB shareholders
- --------------------
(1) Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission.
(2) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1998, filed with
the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 2.02
LIST OF OMITTED SCHEDULES AND EXHIBITS TO AGREEMENT AND PLAN OF REORGANIZATION
AND MERGER AND AGREEMENT TO FURNISH FNB SCHEDULES
EXHIBIT DESCRIPTION
Exhibit B Form of legal opinion of Williams, Mullen, Christian & Dobbins
Exhibit C Form of Affiliates' Agreement
Exhibit D Form of Don M. Green Employment Agreement
Exhibit E Form of Ben Sergent Employment Agreement
Exhibit F Form of Esther W. Bolling Employment Agreement
Exhibit G Form of legal opinion of Smith,
Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
SCHEDULE DESCRIPTION
Schedule A Beneficial Owners of 5% or More of Black Diamond's Common Stock
Schedule B Conflicts or Breaches of Black Diamond's Charter or By-laws
Schedule C Investments
Schedule D Financial Statements
Schedule E Tax Matters
Schedule F Options, Warrants and Related Matters
Schedule G Employees
Schedule H Certain Contracts
Schedule I Employment Contracts and Related Matters
Schedule J Real Estate
Schedule K Affiliates
Schedule L Legal Proceedings; Compliance with Laws
Schedule M Employee Benefits Plans
Schedule N Insurance
Schedule O Loan Portfolio
Schedule P Absence of Changes
Schedule Q Brokers and Finders
Schedule R Environmental Matters
Schedule S Absence of Changes
Schedule T Options, Warrants and Related Matters
Schedule U Environmental Matters
The Company hereby agrees to furnish supplementally a copy of any omitted
schedules and Exhibits to the Commission upon request.
<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
July 14, 1999
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
Re: Registration Statement of Form S-4
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-4 (the "Registration Statement") to be filed by the Company with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), relating to the registration of 1,250,000 shares (the "Shares") of
the Company's common stock, no par value per share ("Common Stock"). This
opinion is furnished pursuant to the requirement of Item 601(b)(5) of the
Regulation S-K under the Act.
We have examined the Articles of Incorporation filed by the Company
with the North Carolina Secretary of State, the Bylaws of the Company, 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 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.
<PAGE> 2
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,
SMITH, ANDERSON, BLOUNT, DORSETT,
MITCHELL & JERNIGAN, L.L.P.
/s/ Smith, Anderson, Blount, Dorsett, Mitchell
& Jernigan, L.L.P.
<PAGE> 1
EXHIBIT 8.01
SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, LLP
Lawyers
2500 First Union Capitol Center
Raleigh, North Carolina 27601
Phone: 919-821-1220
Fax: 919-821-6800
_______________, 1999
FNB Financial Services Corporation
202 South Main Street
Reidsville, North Carolina 27320
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER DATED AS OF
MAY 28, 1999 BY AND AMONG FNB FINANCIAL SERVICES CORPORATION,
FNB ACQUISITION SUB, F.S.B. (IN ORGANIZATION) AND BLACK
DIAMOND SAVINGS BANK, F.S.B.
Gentlemen:
We have acted as counsel to FNB Financial Services Corporation ("FNB"),
a North Carolina corporation, in connection with the proposed merger (the
"Merger") of FNB Acquisition Sub, F.S.B. (in organization) ("Sub"), a federal
savings bank wholly owned by FNB, with and into Black Diamond Savings Bank,
F.S.B., a federal savings bank ("Black Diamond") pursuant to the terms of the
Agreement and Plan of Reorganization and Merger dated as of May 28, 1999 (the
"Merger Agreement") by and among FNB, Black Diamond and Sub. This opinion is
being rendered pursuant to Section 5.1(E) of the Merger Agreement. All
capitalized terms, unless otherwise specified, have the meaning assigned to them
in the Merger Agreement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the Merger Agreement,
the Registration Statement and such other documents as we have deemed necessary
or appropriate in order to enable us to render the opinion expressed below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies.
In rendering the opinion set forth below, we have relied, with your
permission, upon certain written factual representations of FNB, Sub and Black
Diamond dated as of the date of this letter. We have assumed that any
representation or statement made in connection with such representations that is
made "to the best of knowledge" or similarly qualified is correct without such
qualification. We have also assumed that when a person or entity making a
representation has represented that such person or entity either is not a party
to or does not have, or is not aware of, any plan or intention, understanding or
agreement as to a particular matter, there is in fact no such plan, intention,
understanding or agreement. We also have assumed that all such written
representations will be true as of the Effective Time.
<PAGE> 2
In rendering our opinion, we have considered the applicable provisions
of the Code, the Treasury Regulations, pertinent judicial authorities,
interpretive rulings of the Internal Revenue Service and such other authorities
as we have considered relevant.
Based upon and subject to the foregoing, we are of the opinion that (i)
the Merger will constitute a tax-free reorganization under Section 368(a) of the
Code; (ii) FNB, Sub and Black Diamond will each be a party to the reorganization
within the meaning of Section 368(b) of the Code; and (iii) the summary of
"Material Federal Income Tax Considerations" set forth in the Registration
Statement filed by FNB with the Securities and Exchange Commission is accurate,
subject to the assumptions, conditions and limitations set forth therein.
Our opinion expressed in this letter is based on current law and upon
facts and assumptions as of the date of this letter. Our opinion is subject to
change in the event of a change in the applicable law, a change in the
interpretation of the applicable law by the courts or by the Internal Revenue
Service or a change in any of the facts or assumptions upon which the opinion is
based. There is no assurance that legislative, regulatory, administrative or
judicial developments may not be forthcoming which would significantly modify
the statements or opinion expressed in this letter. Any such developments may or
may not be retroactive. This opinion represents our best legal judgment but has
no binding effect or official status of any kind. As a result, no assurance can
be given that the opinion expressed in this letter will be sustained by a court
if contested. No ruling will be obtained from the Internal Revenue Service with
respect to the Merger.
Except as set forth above, we express no opinion as to the tax
consequences to any party, whether Federal, state, local or foreign, of the
Merger or of any transactions related to the Merger or contemplated by the
Merger Agreement. This opinion is being furnished only to you in connection with
the Merger and solely for your benefit in connection therewith and may not be
used or relied upon for any other purpose and may not be circulated, quoted or
otherwise referred to for any other purpose without our express written consent.
We hereby acknowledge and consent to FNB's filing of this opinion as an exhibit
to the Registration Statement with the Securities and Exchange Commission. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement on Form S-4 of
FNB Financial Services Corporation of our report dated February 5, 1999 relating
to the financial statements of FNB Financial Services Corporation, which appears
in such Registration Statement. We also consent to the references to us under
the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 13, 1999
<PAGE> 1
EXHIBIT 23.02
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
FNB Financial Services Corporation
and Subsidiary
We consent to the use in the Registration Statement of FNB Financial
Services Corporation on Form S-4 of our report dated February 10, 1998 on the
consolidated balance sheet of FNB Financial Services Corporation and subsidiary
as of December 31, 1997 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 1997, and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
Greensboro, North Carolina
July 9, 1999
<PAGE> 1
EXHIBIT 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report, dated January 22, 1999, except
for Note 16 as to which the date is May 28, 1999, relating to the financial
statements of Black Diamond Savings Bank, F.S.B. for the years ended December
31, 1998 and 1997, in the FNB Financial Services Corporation Registration
Statement on Form S-4 and in the related Prospectus. We also consent to the
reference to our Firm under the caption "Experts" in the Prospectus.
/s/ McGladrey & Pullen, LLP
Charlotte, NC
July 13, 1999
<PAGE> 1
EXHIBIT 99.02
FNB FINANCIAL SERVICES CORPORATION
202 SOUTH MAIN STREET
REIDSVILLE, NORTH CAROLINA 27320
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS - __________, 1999
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Ernest J. Sewell and Robert F.
Albright, and either of them, as attorney and proxy of the undersigned, with the
full power of substitution, to represent the undersigned and to vote all of the
shares of stock in Capital Bank which the undersigned is entitled to vote at the
Special Meeting of Shareholders to be held at Pennrose Park Country Club, 1622
Country Club Road, Reidsville, North Carolina, on ________, ___________, 1999 at
9:30 a.m., local time, and any adjournments or postponements thereof (1) as
specified below and as more particularly described in the accompanying Joint
Proxy Statement-Prospectus, receipt of which is hereby acknowledged; and (2) in
their discretion upon such other matters as may properly come before the meeting
and any adjournment or postponement thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL
LISTED BELOW.
1. Approval of the issuance by FNB Financial Services Corporation of up
to 1,113,397 shares of common stock, par value $1.00 per share, of FNB Financial
Services Corporation to the shareholders of Black Diamond Savings Bank, F.S.B.,
in connection with the Merger Agreement described in the accompanying Joint
Proxy Statement-Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on the reverse)
<PAGE> 2
(Continued from other side)
By signing the proxy, a shareholder will be authorizing the proxy
holder to vote in his discretion regarding any procedural motions which may come
before the FNB Special Meeting. For example, this authority could be used to
adjourn the meeting if FNB believes it is desirable to do so. Adjournment or
other procedural matters could be used to obtain more time before a vote is
taken in order to solicit additional proxies or to provide additional
information to shareholders. However, proxies voted against the proposals will
not be used to adjourn the FNB Special Meeting. FNB has no current plans to
adjourn the meeting, but would attempt to do so if it believes adjournment would
promote shareholder interests.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and Joint Proxy Statement/Prospectus.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK. WHEN SHARES ARE
HELD BY JOINT TENANTS, BOTH SHOULD SIGN.
Date____________________________, 1999
(Be sure to date Proxy)
_____________________________________
Signature and title, if applicable
_____________________________________
Signature if held jointly
WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE
GIVE FULL TITLE AS SUCH. IF A CORPORATION,
PLEASE SIGN THE FULL CORPORATE NAME BY THE
PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN THE PARTNERSHIP
NAME BY AN AUTHORIZED PERSON.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE> 1
EXHIBIT 99.03
BLACK DIAMOND SAVINGS BANK, F.S.B.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints and , and
either of them, as attorney and proxy of the undersigned, with the full power of
substitution, to represent the undersigned and to vote all of the shares of
stock in Black Diamond Savings Bank, F.S.B., which the undersigned is entitled
to vote at the Special Meeting of Shareholders to be held at , on , ,
1999 at p.m., local time, and any adjournments or postponements thereof (1)
as specified below and as more particularly described in the accompanying Joint
Proxy Statement-Prospectus, receipt of which is hereby acknowledged; and (2) in
their discretion upon such other matters as may properly come before the meeting
and any adjournment or postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL LISTED BELOW.
1. Approval of the Agreement and Plan of Reorganization and Merger
Exchange, dated as of May 28, 1999, among FNB Financial Services Corporation,
FNB Acquisition Sub, F.S.B. and Black Diamond Savings Bank, F.S.B., by which FNB
Financial Services Corporation will acquire Black Diamond Savings Bank, F.S.B.
by merging FNB Acquisition Sub, F.S.B. with and into Black Diamond Savings Bank,
F.S.B. with Black Diamond Savings Bank, F.S.B. surviving the merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on the reverse)
<PAGE> 2
(Continued from other side)
By signing the proxy, a shareholder will be authorizing the proxy
holder to vote in his discretion regarding any procedural motions which may come
before the Special Meeting. For example, this authority could be used to adjourn
the meeting if Black Diamond believes it is desirable to do so. Adjournment or
other procedural matters could be used to obtain more time before a vote is
taken in order to solicit additional proxies or to provide additional
information to shareholders. However, proxies voted against the proposal will
not be used to adjourn the Black Diamond Special Meeting. Black Diamond has no
current plans to adjourn the meeting, but would attempt to do so if the Bank
believes adjournment would promote shareholder interests.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN.
Date____________________________, 1999
(Be sure to date Proxy)
______________________________________
Signature and title, if applicable
______________________________________
Signature if held jointly
WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE
GIVE FULL TITLE AS SUCH. IF A CORPORATION,
PLEASE SIGN THE FULL CORPORATE NAME BY THE
PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN THE PARTNERSHIP
NAME BY AN AUTHORIZED PERSON.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
