-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kai4ou9XEoSfLCx4MDZGA5MFoy9b4hRhNrl6vnPNRYAair1/bw0ijstfOwmWRfBU RZgTJw2x8954kjCTWjkvuA== 0000950168-02-000532.txt : 20020415 0000950168-02-000532.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950168-02-000532 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13823 FILM NUMBER: 02588811 BUSINESS ADDRESS: STREET 1: 101 SUNSET AVE STREET 2: P O BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 BUSINESS PHONE: 3366268300 MAIL ADDRESS: STREET 1: P.O. BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 10-K405 1 d10k405.txt FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission File Number 0-13823 ----------------- FNB CORP. (Exact name of Registrant as specified in its charter) North Carolina 56-1456589 (State of incorporation) (I.R.S. Employer Identification No.) 101 Sunset Avenue, Asheboro, North Carolina 27203 (Address of principal executive offices) (336) 626-8300 (Registrant's telephone number, including area code) Securities pursuant to Section 12(g) of the Act: Common Stock, par value $2.50 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 2002, the Registrant had 4,758,147 shares of $2.50 par value common stock outstanding. The aggregate market value of voting stock held by nonaffiliates of the Registrant, assuming, without admission, that all directors and officers of the Registrant may be deemed affiliates, was $62,844,000. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 14, 2002 are incorporated by reference in Part III of this report. ================================================================================ CROSS REFERENCE INDEX
Page ----- Part I Item 1 Business...................................................................................... 3-7 Item 2 Properties.................................................................................... 7 Item 3 Legal Proceedings Not applicable. Item 4 Submission of Matters to a Vote of Security Holders Not applicable. Part II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters..................... 29 Item 6 Selected Financial Data....................................................................... 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9-29 Item 7a Quantitative and Qualitative Disclosures about Market Risk.................................... 17-18 Item 8 Financial Statements and Supplementary Data Independent Auditors' Report.................................................................. 30 Consolidated Balance Sheets at December 31, 2001 and 2000..................................... 31 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2001............................................................................. 32 Consolidated Statements of Shareholders' Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2001........................................ 33 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001............................................................................. 34 Notes to Consolidated Financial Statements.................................................... 35-58 Quarterly Financial Data for 2001 and 2000.................................................... 29 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Part III Item 10 Directors and Executive Officers of the Registrant............................................ * Item 11 Executive Compensation........................................................................ * Item 12 Security Ownership of Certain Beneficial Owners and Management................................ * Item 13 Certain Relationships and Related Transactions................................................ * Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements (See Item 8 for reference). (2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable. (3) Exhibits have been filed separately with the Commission and are available upon written request................................................................................... 60 (b) Reports on Form 8-K (None were filed during the last quarter of the period covered by this Form 10-K).
- -------- * Information called for by Part III is incorporated herein by reference to portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders, as follows: Item 10--See information that appears under the headings "Election of Directors" and "Executive Officers". Item 11--See information that appears under the heading "Executive Compensation". Item 12--See information that appears under the headings "Voting Securities Outstanding and Principal Shareholders" and "Security Ownership of Management". Item 13--See information that appears under the heading "Indebtedness of Officers and Directors". 2 BUSINESS General FNB Corp. is a bank holding company incorporated under the laws of the State of North Carolina in 1984. On July 2, 1985, through an exchange of stock, FNB Corp. acquired its wholly-owned bank subsidiary, First National Bank and Trust Company (the "Bank"), a national banking association founded in 1907. FNB Corp. and the Bank are collectively referred to as the "Corporation". The Bank, a full-service commercial bank, currently conducts all of its operations in Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties in North Carolina. Three offices, including the main office, are located in Asheboro. Additional community offices are located in Archdale (two offices), Biscoe, Ellerbe, Laurinburg, Ramseur, Randleman, Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity. Some of the major banking services offered include regular checking accounts, interest checking accounts (including package account versions that offer a variety of products and services), money market accounts, savings accounts, certificates of deposit, individual retirement accounts, debit cards, credit cards and loans, both secured and unsecured, for business, agricultural and personal use. Other services offered include internet banking, cash management, investment and trust services. The Bank also has automated teller machines and is a member of Plus, a national teller machine network, and Star, a regional network. On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. In connection with the merger of the Bank with Richmond Savings, the Bank acquired a financial subsidiary, Richmond Investment Services, Inc., which changed its name after the acquisition to First National Investor Services, Inc. On February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger will be accounted for as a purchase business combination and is subject to several conditions, including approval by the shareholders of Rowan Bancorp and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the third quarter of 2002. Rowan Bancorp shareholders will be permitted to elect FNB Corp. common stock or cash, or a combination of each. Subject to the Corporation's ability to limit the overall stock consideration to 45%, each share of Rowan Bancorp common stock, at the election of the shareholder, will be converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash. At December 31, 2001, Rowan Bancorp operated three offices through Rowan Bank and had approximately $116,033,000 in total assets, $96,494,000 in deposits and $10,043,000 in shareholders' equity. In the 2000 fourth quarter, management adopted a balance sheet restructuring project to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. In December 2000, single premium purchases of life insurance amounting to $10,000,000 were recorded as bank owned life insurance in other 3 assets on the consolidated balance sheet. Income relating to the bank owned life insurance is being recorded as noninterest income, while the loans sold had generated interest income. The effective reduction of interest income will tend to lower the net yield on earning assets and net interest spread in future periods. Management believes that the income resulting from the bank owned life insurance, which is not subject to income tax, will produce a greater contribution to net income than did the income from the loans sold. Prior to March 26, 1999, the Bank's data processing, item capture and statement rendering operations were outsourced under a service bureau arrangement. Commencing in the 1998 fourth quarter, the Bank began the process of converting these operations to an in-house basis. Conversion to the replacement systems occurred on March 26, 1999. Richmond Savings, however, was on a service bureau arrangement until its merger into the Bank on June 26, 2000. The total capital expenditure outlay for hardware and software amounted to approximately $1,700,000, of which approximately one-half was recorded in 1998 and the remainder in 1999. In the 1998 fourth quarter, the Bank received regulatory approval for establishment of a new branch office in Trinity, North Carolina. Construction of the permanent Trinity facility was completed in February 2002, resulting in a total capital outlay of approximately $1,400,000. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, was operated at this site. In March 2002, the Bank filed for regulatory approval for establishment of a new branch office in Pinehurst, North Carolina. The current intent is to lease a facility which had previously been used as a banking office by another financial institution. No significant capital outlay is expected. Competition The commercial banking industry within the Bank's marketing area is extremely competitive. The Bank faces direct competition in Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties from approximately 22 different financial institutions, including commercial banks, savings institutions and credit unions. Although none of these entities is dominant, the Bank considers itself one of the major financial institutions in the area in terms of total assets and deposits. Further competition is provided by banks located in adjoining counties, as well as other types of financial institutions such as insurance companies, finance companies, pension funds and brokerage houses and other money funds. The principal methods of competing in the commercial banking industry are improving customer service through the quality and range of services provided, improving cost efficiencies and pricing services competitively. Regulation and Supervision The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries. It also provides certain specific information relevant to FNB Corp. This regulatory framework is intended primarily for the protection of depositors and the deposit insurance funds that insure deposits of banks and savings institutions, and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to FNB Corp. or the Bank may have a material effect on the business of the Corporation. Additional information related to regulatory matters is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. General As a bank holding company, FNB Corp. is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Federal Reserve Board. Under the Bank Holding Company Act, bank holding companies, such as FNB Corp., that have not elected to become financial holding companies under the Gramm-Leach Bliley Financial Modernization Act of 1999 generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve Board's prior approval. As a national banking association, the Bank is subject to regulation and examination primarily by the Office of the Comptroller of the Currency (OCC). It is also regulated by the Federal Deposit Insurance Corporation (FDIC) and the 4 Federal Reserve Board. The Bank's deposits are insured by the FDIC through the Bank Insurance Fund and the Savings Association Insurance Fund. The OCC and the FDIC impose various requirements and restrictions on First National, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged on loans, limitations on the types of investments that may be made and the types of services that may be offered, and requirements governing capital adequacy, liquidity, earnings, dividends, management practices and branching. As a member of the Federal Reserve System, the Bank is subject to the applicable provisions of the Federal Reserve Act, which imposes restrictions on loans by subsidiary banks to a holding company and its other subsidiaries and on the use of stock or securities as collateral security for loans. Various consumer laws and regulations also affect the operations of the Corporation. In addition to the impact of regulation, financial institutions may be significantly affected by legislation, which can change the statutes affecting them in substantial and unpredictable ways, and by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability to influence the economy. The instruments of monetary policy used by the Federal Reserve Board include its open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits. The actions of the Federal Reserve Board influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid on deposits. Liability for Bank Subsidiaries Under current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary banks and to maintain resources adequate to support each subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, the cross-guaranty provisions of the Federal Deposit Insurance Act provide that if the FDIC suffers or anticipates a loss as a result of a default by a banking subsidiary or by providing assistance to a subsidiary in danger of default, then any other bank subsidiaries may be assessed for the FDIC's loss. Capital Requirements FNB Corp. and the Bank are required to comply with federal regulations on capital adequacy. There are two measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be considered in compliance. For additional information, see "Capital Adequacy" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. Dividend Restrictions FNB Corp. is a legal entity separate and distinct from its bank subsidiary. Because the principal source of FNB Corp. revenues is dividends from the Bank, the ability of FNB Corp. to pay dividends to its shareholders depends largely upon the amount of dividends the Bank may pay to its parent holding company. There are statutory and regulatory limitations on the payment of dividends by the Bank to FNB Corp., as well as by FNB Corp. to its shareholders. The Bank must obtain the prior approval of the OCC to pay dividends if the total of all dividends declared by the Bank in any calendar year will exceed the sum of its net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that in the aggregate would be greater than the Bank's undivided profits after deducting statutory bad debts in excess of the Bank's loan loss allowance. FNB Corp. and the Bank are also subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. Community Reinvestment Act The Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA). Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with their safe and sound operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does 5 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 appropriate federal bank regulatory agency, in connection with its examination of the bank, to assess the bank's record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Interstate Banking and Branching The Interstate Banking Act permits interstate acquisitions of banks by bank holding companies. FNB Corp. and any other bank holding company located in North Carolina may acquire a bank located in any other state, and any bank holding company located outside North Carolina may lawfully acquire any North Carolina-based bank, regardless of state law to the contrary, in either case subject to certain deposit-percentage limitations, aging requirements and other restrictions. The Interstate Banking Act also generally provides that national and state-chartered banks may branch interstate through acquisitions of banks in other states. It allowed, however, any state to elect prior to June 1, 1997 either to "opt in" and accelerate the date after which interstate branching was permissible or to "opt out" and prohibit interstate branching altogether. North Carolina enacted "opt in" legislation permitting interstate branching. The Interstate Banking Act may have the effect of increasing competition within the markets in which FNB Corp. operates. The extent and timing of any such increase cannot be predicted. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Financial Modernization Act of 1999 allows bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in the securities and insurance businesses. Under the Gramm-Leach Bliley Act, a bank holding company that elects to become a financial holding company may engage in any activity that is financial in nature, is incidental to financial activity or complements financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Activities cited by the law as being "financial in nature" include securities underwriting, dealing in securities and market making, insurance underwriting and agency, providing financial, investment or economic advisory services, and activities that the Federal Reserve Board has determined to be closely related to banking. Subject to certain limitations on investment, a national bank or its financial subsidiary may also engage in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, so long as the bank is well-capitalized, well-managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well-capitalized and well-managed to continue to engage in activities that are financial in nature. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has at least a satisfactory Community Reinvestment Act rating. The Gramm-Leach Bliley Act also contains a number of other provisions that will affect the Corporation's operations and the operations of all financial institutions. One of the new provisions relates to the financial privacy of consumers, authorizing federal banking regulators to adopt rules that will limit the ability of banks and other financial entities to disclose nonpublic information about consumers to nonaffiliated entities. These limitations likely will require more disclosure to the Corporation's customers, and in some circumstances, will require consent by the customer before information is allowed to be provided to a third party. International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 On October 26, 2001, the USA Patriot Act of 2001 was signed into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA"), which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial 6 institutions. As of the date of this filing, the Corporation has not determined the impact that the IMLAFA will have on its operations but the impact is not expected to be material. The Corporation will establish policies and procedures to ensure compliance with the IMLAFA. Employees As of December 31, 2001, FNB Corp. had three officers, all of whom were also officers of the Bank. On that same date, the Bank had 193 full-time employees and 22 part-time employees. The Bank considers its relationship with its employees to be excellent. The Bank provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings (401(k)) plan, group life, health and dental insurance, paid vacations, sick leave, and health care and life insurance benefits for retired employees. Properties The main offices of the Bank and the principal executive offices of FNB Corp. are located in an office building at 101 Sunset Avenue, Asheboro, North Carolina. The premises contain approximately 36,500 square feet of office space. The Bank also has other community offices in Asheboro (two offices), Archdale (two offices), Biscoe, Ellerbe, Laurinburg, Ramseur, Randleman, Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity, North Carolina. Except as noted below, all premises are owned by the Bank in fee. The Bush Hill office in Archdale is under a lease expiring January 31, 2003, with lease renewal options for up to an additional 19-year term. The Laurinburg office is under a lease expiring August 31, 2003. The land on which the Seagrove office is situated is under a lease expiring June 30, 2016. At that time, the land is subject to a purchase option at a fixed price or lease renewal options for up to an additional 30-year term. 7 FNB CORP. AND SUBSIDIARY FIVE YEAR FINANCIAL HISTORY /(1)/
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (dollars in thousands, except per share data) Summary of Operations Interest income...................................... $ 41,260 $ 41,936 $ 35,822 $ 35,111 $ 32,242 Interest expense..................................... 20,492 20,908 16,203 15,713 14,463 -------- -------- -------- -------- -------- Net interest income.................................. 20,768 21,028 19,619 19,398 17,779 Provision for loan losses............................ 1,200 1,802 511 482 670 -------- -------- -------- -------- -------- Net interest income after provision for loan losses.. 19,568 19,226 19,108 18,916 17,109 Noninterest income................................... 5,900 4,501 4,068 3,756 3,346 Noninterest expense.................................. 16,077 18,497 15,082 14,473 13,382 -------- -------- -------- -------- -------- Income before income taxes........................... 9,391 5,230 8,094 8,199 7,073 Income taxes......................................... 2,663 1,714 2,504 2,568 2,220 -------- -------- -------- -------- -------- Net income........................................... $ 6,728 $ 3,516 $ 5,590 $ 5,631 $ 4,853 ======== ======== ======== ======== ======== Per Share Data /(2)/ Net income: Basic............................................... $ 1.35 $ .70 $ 1.11 $ 1.12 $ 1.08 Diluted............................................. 1.32 .69 1.09 1.09 1.07 Cash dividends declared /(3)/........................ .53 .51 .51 .45 .38 Book value........................................... 11.74 10.89 10.13 9.76 11.24 Balance Sheet Information Total assets......................................... $593,742 $565,639 $517,468 $472,188 $437,743 Investment securities................................ 163,150 132,384 119,786 121,471 112,278 Loans................................................ 391,632 395,737 360,840 314,839 296,525 Deposits............................................. 480,230 472,448 427,010 400,218 365,349 Shareholders' equity................................. 55,907 55,122 52,068 50,390 57,349 Ratios (Averages) Return on assets..................................... 1.15% .65% 1.15% 1.23% 1.16% Return on shareholders' equity....................... 11.63 6.59 10.85 9.55 9.78 Shareholders' equity to assets....................... 9.93 9.86 10.57 12.88 11.86 Dividend payout ratio................................ 38.91 76.05 40.88 36.71 29.86 Loans to deposits.................................... 81.71 84.79 80.63 80.36 77.71 Net yield on earning assets, taxable equivalent basis 4.03 4.28 4.48 4.71 4.72
- -------- (1) Financial data for all prior periods has been restated to reflect the merger with Carolina Fincorp, Inc., which became effective on April 10, 2000 and was accounted for as a pooling of interests. (2) All per share data has been retroactively adjusted to reflect the FNB Corp. two-for-one stock split effected in the form of a 100% stock dividend paid in the first quarter of 1998. (3) Cash dividends declared represent FNB Corp. historical cash dividends declared. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of operations of FNB Corp. (the "Parent Company") and its wholly-owned subsidiary, First National Bank and Trust Company (the "Bank"), collectively referred to as the "Corporation". This discussion should be read in conjunction with the consolidated financial statements and supplemental financial information appearing elsewhere in this report. Overview On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. On February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger will be accounted for as a purchase business combination and is subject to several conditions, including approval by the shareholders of Rowan Bancorp and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the third quarter of 2002. Rowan Bancorp shareholders will be permitted to elect FNB Corp. common stock or cash, or a combination of each. Subject to the Corporation's ability to limit the overall stock consideration to 45%, each share of Rowan Bancorp common stock, at the election of the shareholder, will be converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash. At December 31, 2001, Rowan Bancorp operated three offices through Rowan Bank and had approximately $116,033,000 in total assets, $96,494,000 in deposits and $10,043,000 in shareholders' equity. In the 2000 fourth quarter, management adopted a balance sheet restructuring project to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. In December 2000, single premium purchases of life insurance amounting to $10,000,000 were recorded as bank owned life insurance in other assets on the consolidated balance sheet. Income relating to the bank owned life insurance is being recorded as noninterest income, while the loans sold had generated interest income. The effective reduction of interest income will tend to lower the net yield on earning assets and net interest spread in future periods. Management believes that the income resulting from the bank owned life insurance, which is not subject to income tax, will produce a greater contribution to net income than did the income from the loans sold. The Corporation earned $6,728,000 in 2001, a 91.4% increase in net income from 2000. Basic earnings per share increased from $.70 in 2000 to $1.35 in 2001 and diluted earnings per share increased from $.69 to $1.32. Total assets were $593,742,000 at December 31, 2001, up 5.0% from year-end 2000. Loans amounted to $391,632,000 at December 31, 2001, decreasing 1.0% from the prior year. Total deposits grew 1.6% to $480,230,000 in 2001. 9 Excluding $2,338,000 in after-tax charges associated with the merger, which includes the $450,000 provision for loan losses discussed above, net income for 2000 amounted to $5,854,000, resulting in a comparative 14.9% increase in 2001 net income, with basic and diluted earnings per share amounts of $1.16 and $1.15, respectively. Critical Accounting Policies The Corporation's significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements. Of these significant accounting policies, the Corporation considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management's most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation's allowance for loan losses and related matters, see "Asset Quality". Earnings Review After exclusion of after-tax, merger-related charges of $2,338,000 recorded in the second quarter of 2000 and associated with the merger with Carolina Fincorp as discussed in the "Overview", the Corporation's net income increased $874,000 in 2001, up 14.9% over 2000. Earnings were positively impacted in 2001 by a $1,399,000 increase in noninterest income and by a $152,000 decrease in the provision for loan losses, excluding merger-related charges. These gains were partially offset, however, by a $376,000 increase in noninterest expense, excluding merger-related charges, and by a $260,000 or 1.2% decrease in net interest income, which reflected the effects of interest rate declines in 2001 and the balance sheet restructuring project discussed in the "Overview". The interest rate declines, resulting from actions taken by the Federal Reserve, caused a greater reduction in the average yield on earning assets than in the average rate paid on interest-bearing liabilities. As noted in the discussion of the restructuring project, non-taxable income related to bank owned life insurance, which replaced a portion of certain loans sold, is recorded as noninterest income, while income on loans sold was recorded as interest income. Income on bank owned life insurance amounted to $638,000 in 2001 compared to $12,000 in 2000. The net gain on loans sold, which amounted to $831,000 in 2001 compared to $153,000 in 2000, included a net gain of $151,000 in the 2001 first quarter and $50,000 in the 2000 fourth quarter related to loans sold in connection with the restructuring project. The Corporation's net income, after exclusion of the merger-related charges, increased $264,000 in 2000, up 4.7% over 1999. Earnings were positively impacted in 2000 by increases of $1,409,000 or 7.2% in net interest income and $433,000 in noninterest income. These gains were significantly offset, however, by an increase of $619,000 in noninterest expense and by an increase of $841,000 in the provision for loan losses, excluding merger-related charges. Results for 2000 were negatively affected by a special group medical insurance assessment of $176,000 recorded in the second quarter, the effect of which was only partially offset by a $76,000 gain on the sale of an investment recorded in the same quarter. Excluding the merger-related charges, return on average assets declined from 1.15% in 1999 to 1.08% in 2000 and subsequently improved to 1.15% in 2001. Return on average shareholders' equity improved from 10.85% in 1999 to 10.97% in 2000 to 11.63% in 2001. Including the effect of the merger-related charges, return on average assets was .65% in 2000 and return on average shareholders' equity was 6.59%. Net Interest Income Net interest income is the difference between interest income, principally from loans and investments, and interest expense, principally on customer deposits. Changes in net interest income result from changes in interest rates and in the volume, or average dollar level, and mix of earning assets and interest-bearing liabilities. Net interest income was $20,768,000 in 2001 compared to $21,028,000 in 2000. The decrease of $260,000 or 1.2% resulted primarily from the effect of the balance sheet restructuring project as discussed in the "Overview" and from a decline in the net yield on earning assets, or net interest margin, from 4.28% in 2000 to 4.03% in 2001, the effect of which 10 more than offset the benefit of a 5.9% increase in the level of average earning assets. In 2000, there was a $1,409,000 or 7.2% increase in net interest income reflecting a 11.7% increase in average earning assets, the effect of which was partially offset by a decline in the net interest margin from 4.48% in 1999 to 4.28% in 2000. On a taxable equivalent basis, the decrease in net interest income in 2001 was $73,000 and the increase in 2000 was $1,377,000, reflecting changes in the relative mix of taxable and non-taxable earning assets in each year. Table 1 sets forth for the periods indicated information with respect to the Corporation's average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities. Table 1 Average Balances and Net Interest Income Analysis
2001 2000 1999 ---------------------------- ---------------------------- ----------------- Interest Average Interest Average Interest Average Income/ Rates Average Income/ Rates Average Income/ Balance Expense Earned/Paid Balance Expense Earned/Paid Balance Expense -------- -------- ----------- -------- -------- ----------- -------- -------- (taxable equivalent basis, dollars in thousands) EARNING ASSETS Loans (1) (2)............................ $391,127 $31,992 8.18% $385,299 $34,296 8.88% $328,450 $28,016 Investment securities (1): Taxable income......................... 128,610 8,738 6.79 103,636 6,772 6.53 104,438 6,893 Non-taxable income..................... 20,026 1,541 7.69 19,684 1,508 7.66 19,832 1,537 Other earning assets..................... 5,352 199 3.73 6,296 383 6.06 8,446 431 -------- ------- ---- -------- ------- ---- -------- ------- Total earning assets................. 545,115 42,470 7.79 514,915 42,959 8.33 461,166 36,877 -------- ------- ---- -------- ------- ---- -------- ------- Cash and due from banks.................. 12,327 13,955 14,371 Other assets, net........................ 25,083 11,968 11,895 -------- -------- -------- TOTAL ASSETS......................... $582,525 $540,838 $487,432 ======== ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing deposits: Demand deposits........................ $ 55,656 446 .80 $ 57,332 907 1.58 $ 55,129 826 Savings deposits....................... 34,351 499 1.45 35,844 827 2.30 37,571 849 Money market deposits.................. 42,886 1,339 3.12 34,798 1,463 4.19 31,839 1,154 Certificates and other time deposits... 299,787 16,469 5.49 279,586 16,304 5.82 239,289 12,354 Retail repurchase agreements............. 13,010 419 3.22 11,091 516 4.64 12,971 501 Federal Home Loan Bank advances.......... 24,770 1,273 5.14 15,178 819 5.38 8,567 433 Other borrowed funds..................... 940 47 5.04 1,112 72 6.47 1,616 86 -------- ------- ---- -------- ------- ---- -------- ------- Total interest-bearing liabilities... 471,400 20,492 4.35 434,941 20,908 4.79 386,982 16,203 -------- ------- ---- -------- ------- ---- -------- ------- Noninterest-bearing demand deposits...... 46,012 46,859 43,546 Other liabilities........................ 7,242 5,692 5,360 Shareholders' equity..................... 57,871 53,346 51,544 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $582,525 $540,838 $487,432 ======== ======== ======== NET INTEREST INCOME AND SPREAD............................. $21,978 3.44% $22,051 3.54% $20,674 ======= ==== ======= ==== ======= EARNING ASSETS......................... 4.03% 4.28% ==== ====
Average Rates Earned/Paid ----------- (taxable equivalent basis, dollars in thousands) EARNING ASSETS Loans (1) (2)............................ 8.53% Investment securities (1): Taxable income......................... 6.60 Non-taxable income..................... 7.75 Other earning assets..................... 5.10 ---- Total earning assets................. 8.00 ---- Cash and due from banks.................. Other assets, net........................ TOTAL ASSETS......................... INTEREST-BEARING LIABILITIES Interest-bearing deposits: Demand deposits........................ 1.50 Savings deposits....................... 2.26 Money market deposits.................. 3.62 Certificates and other time deposits... 5.16 Retail repurchase agreements............. 3.87 Federal Home Loan Bank advances.......... 5.05 Other borrowed funds..................... 5.30 ---- Total interest-bearing liabilities... 4.19 ---- Noninterest-bearing demand deposits...... Other liabilities........................ Shareholders' equity..................... TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... NET INTEREST INCOME AND SPREAD............................. 3.81% ==== EARNING ASSETS......................... 4.48% ====
- -------- (1) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (2) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. 11 Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities. Until the significant interest rate declines in 2001, there had been a much greater degree of stability for several years in the interest rates both earned and paid by the Bank. The prime rate, which fell to 4.75% by December 31, 2001, averaged 6.99% in 2001 compared to the average prime rates of 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998, respectively. In all of these periods, however, the actual level of the prime rate has changed with some frequency as the Federal Reserve has responded to various economic scenarios. Due to concern about inflationary pressures that appeared to be building in the economy, the Federal Reserve elected to raise the level of interest rates in the third and fourth quarters of 1999, resulting in three 25 basis point increases in the prime rate that increased it from 7.75% to 8.50%, thereby effectively reversing similar rate reductions that had occurred in 1998. Continued concerns about possible inflationary pressures caused the Federal Reserve to further raise the level of interest rates in the first six months of 2000, resulting in two additional 25 basis point increases and one 50 basis point increase in the prime rate that raised it to the 9.50% level. While the Corporation tended to see some improvement in the average total yield on earning assets due to the prime rate increases, the average rate paid on interest-bearing liabilities increased by a greater amount, negatively impacting the net interest margin and net interest spread. Due to a general slowdown in the economy that began to be perceived in the 2000 fourth quarter, the Federal Reserve acted to provide a stimulus through a series of interest rate reductions commencing in the 2001 first quarter, resulting in eight 50 basis point reductions and three 25 basis point reductions in the prime rate that lowered it to the 4.75% level at December 31, 2001. This decrease in the prime rate, through the reduction of the average yield on earning assets without a commensurate reduction in the average rate paid on interest bearing liabilities, has tended to negatively impact the net interest margin and net interest spread. In 2001, the net interest spread declined by 10 basis points from 3.54% in 2000 to 3.44% in 2001, reflecting the effect of a decrease in the average total yield on earning assets that was only partially offset by a decrease in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets decreased by 54 basis points from 8.33% in 2000 to 7.79% in 2001, while the cost of funds decreased by 44 basis points in moving from 4.79% to 4.35%. In 2000, the 27 basis points decrease in net interest spread resulted from a 33 basis points increase in the yield on earning assets that was more than offset by a 60 basis points increase in the cost of funds. Due to significant progress made in lowering the cost of deposits during the second half of 2001, the net interest margin and spread improved during the 2001 fourth quarter to 4.38% and 3.92%, respectively, compared to 4.12% and 3.33% in the 2000 fourth quarter and 4.03% and and 3.44% for the entire year of 2001. During these same periods, the cost of funds was 3.46%, 5.13% and 4.35%, respectively, while the yield on earning assets was 7.38%, 8.46% and 7.79%. 12 The 2001 and 2000 changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are analyzed in Table 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities. Table 2 Volume and Rate Variance Analysis
2001 Versus 2000 2000 Versus 1999 ---------------------------- ---------------------------- Variance due to(1) Variance due to(1) ----------------- ----------------- Volume Rate Net Change Volume Rate Net Change ------ ------- ---------- ------ ------ ---------- (taxable equivalent basis, in thousands) Interest Income Loans (2).............................. $ 498 $(2,802) $(2,304) $5,077 $1,203 $6,280 Investment securities (2): Taxable income....................... 1,687 279 1,966 (51) (70) (121) Non-taxable income................... 27 6 33 (11) (18) (29) Other earning assets................... (52) (132) (184) (121) 73 (48) ------ ------- ------- ------ ------ ------ Total interest income............ 2,160 (2,649) (489) 4,894 1,188 6,082 ------ ------- ------- ------ ------ ------ Interest Expense Interest-bearing deposits: Demand deposits...................... (26) (435) (461) 35 46 81 Savings deposits..................... (33) (295) (328) (38) 16 (22) Money market deposits................ 296 (420) (124) 115 194 309 Certificates and other time deposits. 1,126 (961) 165 2,245 1,705 3,950 Retail repurchase agreements........... 79 (176) (97) (78) 93 15 Federal Home Loan Bank advances........ 492 (38) 454 356 30 386 Other borrowed funds................... (10) (15) (25) (30) 16 (14) ------ ------- ------- ------ ------ ------ Total interest expense........... 1,924 (2,340) (416) 2,605 2,100 4,705 ------ ------- ------- ------ ------ ------ Net Interest Income............... $ 236 $ (309) $ (73) $2,289 $ (912) $1,377 ====== ======= ======= ====== ====== ======
- -------- (1) The mix variance, not separately stated, has been proportionally allocated to the volume and rate variances based on their absolute dollar amount. (2) Interest income related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone is stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. Provision for Loan Losses This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each year's charge is affected by several considerations including management's evaluation of various risk factors in determining the adequacy of the allowance (see "Asset Quality"), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in 2000 by a $1,802,000 provision for loan losses compared to provisions of $1,200,000 in 2001 and $511,000 in 1999. Of the total 2000 provision, $835,000 was recorded in the second quarter, which amount included approximately $450,000 that was merger related as discussed below, while the remainder resulted from increases in historical charge-off trends. The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.17% at December 31, 2001, 1.13% at December 31, 2000 and .91% at December 31, 1999. The increase in the allowance percentage from December 31, 1999 to December 31, 2000 resulted largely from the provision component of approximately $450,000 for the second quarter of 2000 to align the credit risk methodologies of FNB Corp. and Carolina Fincorp, while the increase from December 31, 2000 to December 31, 2001 related primarily to asset quality considerations and increases in historical charge-off trends. 13 Noninterest Income Noninterest income increased $1,399,000 or 31.1% in 2001 and $433,000 or 10.6% in 2000, reflecting in part the general increase in the volume of business. The 2001 increase was primarily due to a $678,000 increase in the net gain on sales of loans and to a $626,000 increase in income on bank owned life insurance. As discussed in the "Overview", a balance sheet restructuring project resulted in single premium purchases of life insurance amounting to $10,000,000 in December 2000. Income resulting from the bank owned life insurance is not subject to income tax. The net gain on loans sold included a net gain of $151,000 in the 2001 first quarter and $50,000 in the 2000 fourth quarter related to loans sold in connection with the restructuring project. The increase in service charges on deposit accounts in both 2001 and 2000 was primarily due to the improved fee collection efforts that became effective in 2000 subsequent to the first quarter. The decrease in annuity and brokerage commissions in both 2001 and 2000 was largely related to a general decrease in the volume of sales of annuity products. Other income was positively impacted in 2000 by a $76,000 gain on the sale of an investment and by a net gain on sales of other real estate that exceeded the net gain recorded in 1999 while a net loss was incurred on these sales in 2001. Noninterest Expense Excluding merger-related expenses of $2,796,000 recorded in the second quarter of 2000, noninterest expense was $376,000 or 2.4% higher in 2001. The nominal increase in the level of noninterest expense in 2001 reflects in part the successful implementation of synergies following the merger with Carolina Fincorp on April 10, 2000 as discussed in the "Overview". Personnel expense was impacted by increased staffing requirements and by normal salary adjustments. The decrease in furniture and equipment expense was due mainly to the reduction in depreciation expense related to computer networks that became fully depreciated in the third and fourth quarters of 2000. The cost of data processing services was higher in 2000 than in 2001 because of the outside data processing services employed by Richmond Savings until its merger into First National Bank and Trust Company on June 26, 2000. While benefiting from a reduction in advertising and marketing expense, other expense was negatively impacted in 2001 by increased expenses related to nonperforming assets. Noninterest expense, excluding merger-related expenses, was $619,000 or 4.1% higher in 2000 due largely to increased personnel expense and the continuing effects of inflation. The level of noninterest expense was further affected by the opening of a new branch office in August 1999 (see "Business Development Matters"). The components of noninterest expense were affected by the major data processing conversion completed in the first quarter of 1999, which conversion ultimately resulted in a major reduction in the cost of data processing services provided by outside processors. The cost of outside data processing services continued for Richmond Savings until its merger into First National Bank and Trust Company on June 26, 2000. Personnel expense was impacted by increased staffing requirements, especially as related to the data processing conversion and to the opening of the new branch office, and by normal salary adjustments. Personnel expense was further negatively affected in 2000 by a special group medical insurance assessment of $176,000 in the second quarter. Additionally, group medical insurance rates were increased approximately 39% in the 2000 second quarter. Furniture and equipment expense increased largely as a result of the data processing conversion, especially for depreciation and maintenance charges. The major data processing conversion from a service bureau arrangement to an in-house basis, completed on March 26, 1999 and discussed in "Business Development Matters", significantly affected operating results for the 1999 first quarter. The cost of data processing services in the 1999 first quarter was impacted by the higher rate charged by the service bureau on a month-to-month basis, subsequent to the termination of the prior long-term agreement in late 1998. Also, personnel expense was negatively affected by the staffing and training requirements that were preliminary to the implementation of the new system. Subsequent to the 1999 first quarter, the total cost related to data processing operations on an in-house basis compares favorably to the cost that was being experienced under the service bureau arrangement prior to the start of the conversion process in the 1998 fourth quarter. Noninterest expense components are being significantly affected, however, as there is a major decrease in the direct cost of data processing services, but increases in the levels of personnel expense and furniture and equipment expense. 14 Merger-Related Expenses and Charges In connection with the merger acquisition of Carolina Fincorp, merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested restricted stock plan shares became fully vested, resulting in certain expenses considered merger-related. Other primary components of merger-related expenses were professional fees, investment banking fees, contract termination costs, data processing conversion fees and severance payments. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. The primary components of merger-related expenses are summarized in Table 3. Table 3 Merger-Related Expenses
2000 -------------- (in thousands) Professional fees............................... $ 569 Investment banking fees......................... 558 Contract termination costs...................... 467 ESOP and restricted stock plan termination costs 385 Data processing conversion fees................. 209 Severance payments.............................. 161 Other merger expenses........................... 447 ------ Total........................................ $2,796 ======
Income Taxes The effective income tax rate declined from 32.8% in 2000 to 28.4% in 2001 due principally to the nondeductibility of certain merger-related expenses in 2000 and to a decrease in the ratio of taxable to tax-exempt income. The effective income tax rate increased from 30.9% in 1999 to 32.8% in 2000 due principally to the nondeductibility of certain merger-related expenses. Liquidity Liquidity refers to the continuing ability of the Bank to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the $71,200,000 line of credit established at the Federal Home Loan Bank, less existing advances against that line, and (e) the investment securities portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing. Consistent with its approach to liquidity, the Bank as a matter of policy does not solicit or accept brokered deposits for funding asset growth. Instead, loans and other assets are based primarily on a core of local deposits and the Bank's capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances, has been adequate to fund loan demand in the Bank's market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. 15 Contractual Obligations Under existing contractual obligations, the Bank will be required to make payments in future periods. The following table presents aggregated information about the payments due under such contractual obligations at December 31, 2001. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in one year or less. Table 4 Contractual Obligations
Payments due by Period at December 31, 2001 ------------------------------------------- One One to Three to Over Year or Three Five Five Less Years Years Years Total -------- ------- -------- ------- -------- (dollars in thousands) Deposits.............................. $426,720 $38,325 $15,185 $ -- $480,230 Retail repurchase agreements.......... 14,812 -- -- -- 14,812 Federal Home Loan Bank advances....... -- -- -- 30,000 30,000 Federal funds purchased............... 6,000 -- -- -- 6,000 Lease obligations..................... 48 33 16 50 147 -------- ------- ------- ------- -------- Total contractual cash obligations. $447,580 $38,358 $15,201 $30,050 $531,189 ======== ======= ======= ======= ========
Commitments, Contingencies and Off-Balance Sheet Risk In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 2001, a summary of significant commitments is as follows: Commitments to extend credit $103,135,000 Standby letters of credit... 351,000
In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. Commitments to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower. Standby letters of credit are commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that in extending loans to customers. There were no binding commitments for the origination of mortgage loans intended to be held for sale at December 31, 2001 and 2000. The Corporation does not have any special purpose entities or other similar forms of off-balance sheet financing. Asset/Liability Management and Interest Rate Sensitivity One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. 16 The Bank's balance sheet was liability-sensitive at December 31, 2001. A liability-sensitive position means that in gap measurement periods of one year or less there are more liabilities than assets subject to immediate repricing as market rates change. Because immediately rate sensitive interest-bearing liabilities exceed rate sensitive assets, the earnings position could improve in a declining rate environment and could deteriorate in a rising rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. Table 5 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2001 will either mature or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates. As a simplifying assumption concerning repricing behavior, 50% of the interest-bearing demand, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year. Table 5 Interest Rate Sensitivity Analysis
December 31, 2001 ------------------------------------------------ Rate Maturity In Days ---------------------------- Beyond 1-90 91-180 181-365 One Year Total -------- -------- -------- -------- -------- (dollars in thousands) Earning Assets Loans................................ $187,696 $ 17,354 $ 27,492 $159,090 $391,632 Investment securities................ 579 929 646 160,996 163,150 Federal funds sold................... 127 -- -- -- 127 -------- -------- -------- -------- -------- Total earning assets............... 188,402 18,283 28,138 320,086 554,909 -------- -------- -------- -------- -------- Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits.................... 29,603 -- -- 29,604 59,207 Savings deposits................... 17,209 -- -- 17,210 34,419 Money market deposits.............. 23,435 -- -- 23,435 46,870 Time deposits of $100,000 or more.. 50,048 29,335 18,621 11,183 109,187 Other time deposits................ 46,702 36,862 58,016 39,878 181,458 Retail repurchase agreements......... 14,812 -- -- -- 14,812 Federal Home Loan Bank advances...... -- -- -- 30,000 30,000 Federal funds purchased.............. 6,000 -- -- -- 6,000 -------- -------- -------- -------- -------- Total interest-bearing liabilities. 187,809 66,197 76,637 151,310 481,953 -------- -------- -------- -------- -------- Interest Sensitivity Gap.............. $ 593 $(47,914) $(48,499) $168,776 $ 72,956 ======== ======== ======== ======== ======== Cumulative gap........................ $ 593 $(47,321) $(95,820) $ 72,956 $ 72,956 Ratio of interest-sensitive assets to interest-sensitive liabilities....... 100% 28% 37% 212% 115%
Market Risk Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Bank's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Bank's loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Bank does not maintain a trading account nor is the Bank subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Bank's asset/liability management function, which is discussed in "Asset/Liability Management and Interest Rate Sensitivity" above. 17 Table 6 presents information about the contractual maturities, average interest rates and estimated fair values of financial instruments considered market risk sensitive at December 31, 2001. Table 6 Market Risk Analysis of Financial Instruments
Contractual Maturities at December 31, 2001 ----------------------------------------------------------- Beyond Average Estimated Five Interest Fair 2002 2003 2004 2005 2006 Years Total Rate (1) Value -------- ------- ------- ------- ------- -------- --------- -------- --------- (dollars in thousands) Financial Assets Debt securities (2).... $ 2,121 $ 2,818 $ 1,724 $ 2,355 $ 959 $148,727 $158,704 6.95% $160,144 Loans (3): Fixed rate........... 51,493 19,885 21,996 13,854 13,753 47,804 168,785 8.40 181,970 Variable rate........ 70,359 32,334 35,743 15,891 13,741 54,779 222,847 6.13 223,061 Federal funds sold..... -- -- -- -- -- -- 127 1.65 127 -------- ------- ------- ------- ------- -------- --------- -------- Total.............. $123,973 $55,037 $59,463 $32,100 $28,453 $251,310 $550,463 7.06 $565,302 ======== ======= ======= ======= ======= ======== ========= ======== Financial Liabilities Interest-bearing demand deposits............. $ -- $ -- $ -- $ -- $ -- $ -- $ 59,207 .61 $ 59,207 Savings deposits....... -- -- -- -- -- -- 34,419 .99 34,419 Money market deposits............. -- -- -- -- -- -- 46,870 1.93 46,870 Time deposits: Fixed rate........... 233,167 15,294 14,596 2,149 12,890 -- 278,096 4.06 284,383 Variable rate........ 3,968 7,885 550 146 -- -- 12,549 4.65 12,918 Retail repurchase agreements........... -- -- -- -- -- -- 14,812 1.92 14,812 Federal Home Loan Bank advances........ -- -- -- -- -- 30,000 30,000 4.82 33,168 Federal funds purchased............ -- -- -- -- -- -- 6,000 1.71 6,000 -------- ------- ------- ------- ------- -------- --------- -------- Total.............. $237,135 $23,179 $15,146 $ 2,295 $12,890 $ 30,000 $481,953 3.18 $491,777 ======== ======= ======= ======= ======= ======== ========= ========
- -------- (1) The average interest rate related to debt securities is stated on a fully taxable equivalent basis, assuming a 34% federal income tax rate and applicable state income tax rate, reduced by the nondeductible portion of interest expense. (2) Debt securities are reported on the basis of amortized cost. Mortgage-backed securities which have monthly curtailments of principal are categorized by final maturity. (3) Nonaccrual loans are included in the balance of loans. The allowance for loan losses is excluded. Capital Adequacy Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution's ongoing trading activities. 18 At December 31, 2001, FNB Corp. and the Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At December 31, 2001, FNB Corp. and the Bank had total capital ratios of 14.29% and 13.56%, respectively, and Tier 1 capital ratios of 13.22% and 12.50%. The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At December 31, 2001, FNB Corp. and the Bank had leverage capital ratios of 9.39% and 8.87%, respectively. The Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, the Bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, the Bank met all of those ratio requirements at December 31, 2001 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Balance Sheet Review Asset growth, affected by the general slowdown in the economy, was at a much lower rate in 2001 than in 2000. Total assets increased $28,103,000 or 5.0% in 2001 compared to $48,171,000 or 9.3% in 2000. Deposits grew $7,782,000 or 1.6% and $45,438,000 or 10.6%, respectively, in the same periods. A significant portion of the 2001 asset growth was funded by advances totaling $15,000,000 from the Federal Home Loan Bank, which added to the initial $15,000,000 level of advances obtained from the FHLB in 1999. Retail repurchase agreements increased $3,611,000 in 2001 following a $534,000 increase in 2000. The average asset growth rates were 7.7% in 2001 and 11.0% in 2000. The corresponding average deposit growth rates were 5.3% and 11.5%. Certain balance sheet restructuring matters are discussed in the "Overview". Investment Securities Investments are carried on the consolidated balance sheet at estimated fair value for available-for-sale securities and at amortized cost for held-to-maturity securities. Table 7 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years. As discussed in "Accounting Pronouncement Matters", on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio in connection with the adoption of Statement of Financial Accounting Standards No. 133. 19 Table 7 Investment Securities Portfolio Analysis
December 31 ------------------------------------------------ 2001 2000 1999 ----------------------------- -------- -------- Estimated Taxable Amortized Fair Equivalent Carrying Carrying Cost Value Yield (1) Value Value --------- --------- ---------- -------- -------- (dollars in thousands) Available for Sale U.S. Treasury: Within one year.......................... $ -- $ -- --% $ 753 $ 758 One to five years........................ -- -- -- -- 250 -------- -------- ------- ------- Total.................................. -- -- -- 753 1,008 -------- -------- ------- ------- U.S. Government agencies and corporations: Within one year.......................... 1,000 1,021 6.23 3,240 1,492 One to five years........................ 2,749 2,909 6.56 25,975 13,131 Five to ten years........................ 79,844 81,072 6.84 38,563 43,214 Over ten years........................... 46,138 45,782 6.69 1,494 -- -------- -------- ------- ------- Total.................................. 129,731 130,784 6.78 69,272 57,837 -------- -------- ------- ------- Mortgage-backed securities................ 330 341 7.04 -- -- -------- -------- ------- ------- State, county and municipal: Within one year.......................... 1,118 1,130 9.06 -- -- One to five years........................ 4,321 4,471 7.93 -- -- Five to ten years........................ 10,231 10,556 7.93 -- -- Over ten years........................... 9,372 9,067 6.99 -- -- -------- -------- ------- ------- Total.................................. 25,042 25,224 7.63 -- -- -------- -------- ------- ------- Other debt securities: Within one year.......................... -- -- -- -- -- One to five years........................ 500 521 6.48 -- -- Five to ten years........................ 493 504 6.66 -- -- Over ten years........................... 2,608 2,770 9.29 -- -- -------- -------- ------- ------- Total.................................. 3,601 3,795 8.61 -- -- -------- -------- ------- ------- Total debt securities..................... 158,704 160,144 6.95 70,025 58,845 Equity securities......................... 2,981 3,006 2,998 2,220 -------- -------- ------- ------- Total available-for-sale securities.... $161,685 $163,150 $73,023 $61,065 ======== ======== ======= ======= Held to Maturity U.S. Government agencies and corporations: Within one year.......................... $ -- $ -- -- $ 3,499 $ 1,001 One to five years........................ -- -- -- 28,190 7,796 Five to ten years........................ -- -- -- 4,400 28,292 -------- -------- ------- ------- Total.................................. -- -- -- 36,089 37,089 -------- -------- ------- ------- Mortgage-backed securities................ -- -- -- 483 594 -------- -------- ------- ------- State, county and municipal: Within one year.......................... -- -- -- 1,092 1,330 One to five years........................ -- -- -- 4,483 4,495 Five to ten years........................ -- -- -- 7,637 6,645 Over ten years........................... -- -- -- 6,523 7,578 -------- -------- ------- ------- Total.................................. -- -- -- 19,735 20,048 -------- -------- ------- ------- Other debt securities: Within one year.......................... -- -- -- -- -- One to five years........................ -- -- -- 499 499 Five to ten years........................ -- -- -- 492 491 Over ten years........................... -- -- -- 2,063 -- -------- -------- ------- ------- Total.................................. -- -- -- 3,054 990 -------- -------- ------- ------- Total held-to-maturity securities......... $ -- $ -- -- $59,361 $58,721 ======== ======== ======= =======
- -------- (1) Yields are stated on a fully taxable equivalent basis, assuming a 34% federal income tax rate and applicable state income tax rate, reduced by the nondeductible portion of interest expense. 20 Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. In general, since there was growth in total assets in 2001 but a decrease in loans outstanding, the level of investment securities was increased $30,766,000 or 23.2%. This growth in investment securities also related to certain balance sheet strategies, including a restructuring project that commenced in the 2000 fourth quarter (see "Overview") whereby certain loans were sold with the reinvestment of such funds planned for other asset categories including investment securities. Additionally, the funds obtained from advances totaling $15,000,000 from the Federal Home Loan Bank in 2001 were primarily utilized for the purchase of investment securities. In 2000, because the growth in total assets exceeded that for loans and as investments were further impacted by the balance sheet restructuring project, the level of investment securities was increased $12,598,000 or 10.5%. Investable funds not otherwise utilized are temporarily invested on an overnight basis as federal funds sold, the level of which is affected by such considerations as near-term loan demand and liquidity needs. Based on funds requirements, the Bank was a net purchaser of funds at December 31, 2001. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Reflecting the general slowdown in the economy and as further impacted by the balance sheet restructuring project discussed below, loans decreased $4,105,000 or 1.0% in 2001 after experiencing growth of $34,897,000 or 9.7% in 2000. Average loans increased $5,828,000 or 1.5% and $56,849,000 or 17.3%, respectively. The ratio of average loans to average deposits decreased from 84.8% in 2000 to 81.7% in 2001. The ratio of loans to deposits at December 31, 2001 was 81.6%. Table 8 sets forth the major categories of loans for each of the last five years. The maturity distribution and interest sensitivity of selected loan categories at December 31, 2001 are presented in Table 9. Table 8 Loan Portfolio Composition
December 31 -------------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------------- -------------- -------------- -------------- -------------- Amount % Amount % Amount % Amount % Amount % -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Commercial and agricultural.. $177,577 46.9 $160,057 41.5 $125,331 34.7 $ 99,055 32.0 $ 84,221 28.6 Real estate -- construction.. 11,249 3.0 5,734 1.5 5,472 1.5 8,056 2.6 7,801 2.6 Real estate -- mortgage: 1-4 family residential... 146,347 38.6 165,057 42.8 170,577 47.3 151,552 49.0 146,588 49.7 Commercial and other..... 15,269 4.0 16,050 4.2 22,214 6.2 21,423 6.9 24,535 8.3 Consumer..................... 20,978 5.5 25,290 6.5 30,340 8.4 29,477 9.5 31,772 10.8 Leases....................... 7,376 2.0 13,679 3.5 6,832 1.9 -- -- -- -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Loans held for investment.... 378,796 100.0 385,867 100.0 360,766 100.0 309,563 100.0 294,917 100.0 ===== ===== ===== ===== ===== Loans held for sale.......... 12,836 9,870 74 5,276 1,608 -------- -------- -------- -------- -------- Gross loans.................. $391,632 $395,737 $360,840 $314,839 $296,525 ======== ======== ======== ======== ========
Table 9 Selected Loan Maturities
December 31, 2001 --------------------------------------- One Year One to Over or Less Five Years Five Years Total -------- ---------- ---------- -------- (in thousands) Commercial and agricultural. $63,534 $81,569 $32,474 $177,577 Real estate -- construction. 6,410 3,428 1,411 11,249 ------- ------- ------- -------- Total selected loans.... $69,944 $84,997 $33,885 $188,826 ======= ======= ======= ======== Sensitivity to rate changes: Fixed interest rates...... $18,592 $33,644 $12,817 $ 65,053 Variable interest rates... 51,352 51,353 21,068 123,773 ------- ------- ------- -------- Total................... $69,944 $84,997 $33,885 $188,826 ======= ======= ======= ========
21 While the level of the entire loan portfolio was adversely impacted in 2001 by the general slowdown of the economy, the commercial and agricultural loan portfolio did experience a gain. The level of the 1-4 family residential mortgage loan portfolio has been specifically affected by the balance sheet restructuring project adopted in the 2000 fourth quarter and discussed in the "Overview". The specific aim of the restructuring project was to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. Funds obtained from these sales were primarily redeployed to single premium purchases of life insurance amounting to $10,000,000 in December 2000 and to purchases of investment securities. Asset Quality Management considers the Bank's asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. As part of the loan review function, a third party assessment group is employed to review the underwriting documentation and risk grading analysis. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. 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. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. At December 31, 2001, the Bank had impaired loans which totaled $512,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $155,000. At December 31, 2000, the Bank had impaired loans which totaled $321,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $73,000. A model that considers both allocated and unallocated components of the allowance for loan losses is used on a quarterly basis to analyze the adequacy of the allowance to absorb probable losses inherent in the loan portfolio. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades derived from regulatory guidelines. Allocations of estimated reserves are assigned to the most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. The reserve is allocated to each pool, and remaining classifications within pools, based upon a two-year historical loss ratio, concentrations within industries, economic and industry-specific trends, portfolio trends, and other subjective factors. An additional portion of the reserve is unallocated to any specific portion of the loan portfolio, and is based upon the mix and weight of the several homogeneous pools. The determination within the allowance model of allocated and unallocated components is not necessarily indicative of future losses or allocations. The entire balance of the allowance for loan losses is available to absorb losses in the loan portfolio. The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.17% at December 31, 2001, 1.13% at December 31, 2000 and .91% at December 31, 1999. The increase in the allowance percentage from December 31, 1999 to December 31, 2000 resulted largely from the merger-related component of the provision for loan losses of approximately $450,000 in 2000 to align the credit risk methodologies of FNB Corp. and Carolina Fincorp, Inc., while the increase from December 31, 2000 to December 31, 2001 related primarily to asset quality considerations and increases in historical charge-off trends. Management believes the allowance for loan losses of $4,417,000 at December 31, 2001 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable 22 judgment. Management's judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no asssurance that loan losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management's ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Corporation. Table 10 presents an analysis of the changes in the allowance for loan losses and of the level of nonperforming assets for each of the last five years. Information about management's allocation of the allowance for loan losses by loan category is presented in Table 11. Table 10 Allowance for Loan Losses and Nonperforming Assets
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (dollars in thousands) Allowance for Loan Losses Balance at beginning of year..................... $4,352 $3,289 $2,954 $2,694 $2,375 Charge-offs: Commercial and agricultural.................... 152 603 49 9 66 Real estate -- construction.................... -- -- -- -- -- Real estate -- mortgage........................ 10 21 2 -- 2 Consumer....................................... 395 277 306 387 449 Leases......................................... 702 12 -- -- -- ------ ------ ------ ------ ------ Total charge-offs............................ 1,259 913 357 396 517 ------ ------ ------ ------ ------ Recoveries: Commercial and agricultural.................... 63 117 16 16 14 Real estate -- construction.................... -- -- -- -- -- Real estate -- mortgage........................ 8 6 -- -- 11 Consumer....................................... 96 130 138 158 141 Leases......................................... -- -- -- -- -- ------ ------ ------ ------ ------ Total recoveries............................. 167 253 154 174 166 ------ ------ ------ ------ ------ Net loan charge-offs............................. 1,092 660 203 222 351 Provision for loan losses (1).................... 1,200 1,802 511 482 670 Allowance adjustment for loans sold.............. (43) (79) -- -- -- Adjustment to conform fiscal periods............. -- -- 27 -- -- ------ ------ ------ ------ ------ Balance at end of year........................... $4,417 $4,352 $3,289 $2,954 $2,694 ====== ====== ====== ====== ====== Nonperforming Assets, at end of year Nonaccrual loans................................. $4,144 $1,478 $1,602 $ 855 $ 257 Accruing loans past due 90 days or more.......... 609 367 298 263 167 ------ ------ ------ ------ ------ Total nonperforming loans.................... 4,753 1,845 1,900 1,118 424 Foreclosed assets................................ 123 33 3 -- 23 Other real estate owned.......................... 758 163 423 20 27 ------ ------ ------ ------ ------ Total nonperforming assets................... $5,634 $2,041 $2,326 $1,138 $ 474 ====== ====== ====== ====== ====== Ratios Net loan charge-offs to average loans............ .28% .17% .06% .07% .13% Net loan charge-offs to allowance for loan losses 24.72 15.17 6.17 7.52 13.03 Allowance for loan losses to loans held for investment..................................... 1.17 1.13 .91 .95 .91 Total nonperforming loans to loans held for investment..................................... 1.25 .48 .53 .36 .14
- -------- (1) Approximately $450,000 of the total provision for loan losses in 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp, Inc. 23 Table 11 Allocation of Allowance For Loan Losses
December 31 ---------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (in thousands) Commercial and agricultural............ $1,590 $1,714 $1,070 $ 821 $ 719 Real estate -- construction............ 15 21 14 31 23 Real estate -- mortgage................ 776 982 735 643 633 Consumer............................... 934 1,076 1,023 1,027 971 Leases................................. 734 201 58 -- -- Unallocated............................ 368 358 389 432 348 ------ ------ ------ ------ ------ Total allowance for loan losses... $4,417 $4,352 $3,289 $2,954 $2,694 ====== ====== ====== ====== ======
Deposits The level and mix of deposits is affected by various factors, including general economic conditions, the particular circumstances of local markets and the specific deposit strategies employed. In general, broad interest rate declines tend to encourage customers to consider alternative investments such as mutual funds and tax-deferred annuity products, while interest rate increases tend to have the opposite effect. The Bank's level and mix of deposits has been specifically affected by the following factors. Money market deposits, which increased $10,969,000 in 2001, were the most significant factor resulting in the 2001 gain in deposits. Time deposits, reflecting the effect of promotions for premium-rate certificates of deposits, grew $43,867,000 in 2000, accounting for the majority of total deposit growth in that year. In 2001, time deposits decreased by $9,079,000. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $53,573,000, $46,800,000, and $39,179,000 at December 31, 2001, 2000 and 1999, respectively. 24 Table 12 shows the year-end and average deposit balances for the years 2001, 2000 and 1999 and the changes in 2001 and 2000. Table 12 Analysis of Deposits
2001 2000 1999 ---------------------- ---------------------- -------- Change from Change from Prior Year Prior Year ------------- ------------- Balance Amount % Balance Amount % Balance -------- ------- ---- -------- ------- ---- -------- (dollars in thousands) Year-End Balances Interest-bearing deposits: Demand deposits......................... $ 59,207 $ 2,726 4.8 $ 56,481 $(1,532) (2.6) $ 58,013 Savings deposits........................ 34,419 (22) (.1) 34,441 (1,438) (4.0) 35,879 Money market deposits................... 46,870 10,969 30.6 35,901 1,974 5.8 33,927 -------- ------- -------- ------- -------- Total............................... 140,496 13,673 10.8 126,823 (996) (.8) 127,819 Certificates and other time deposits.... 290,645 (9,079) (3.0) 299,724 43,867 17.1 255,857 -------- ------- -------- ------- -------- Total interest-bearing deposits..... 431,141 4,594 1.1 426,547 42,871 11.2 383,676 Noninterest-bearing demand deposits..... 49,089 3,188 6.9 45,901 2,567 5.9 43,334 -------- ------- -------- ------- -------- Total deposits...................... $480,230 $ 7,782 1.6 $472,448 $45,438 10.6 $427,010 ======== ======= ======== ======= ======== Average Balances Interest-bearing deposits: Demand deposits......................... $ 55,656 $(1,676) (2.9) $ 57,332 $ 2,203 4.0 $ 55,129 Savings deposits........................ 34,351 (1,493) (4.2) 35,844 (1,727) (4.6) 37,571 Money market deposits................... 42,886 8,088 23.2 34,798 2,959 9.3 31,839 -------- ------- -------- ------- -------- Total............................... 132,893 4,919 3.8 127,974 3,435 2.8 124,539 Certificates and other time deposits.... 299,787 20,201 7.2 279,586 40,297 16.8 239,289 -------- ------- -------- ------- -------- Total interest-bearing deposits..... 432,680 25,120 6.2 407,560 43,732 12.0 363,828 Noninterest-bearing demand deposits..... 46,012 (847) (1.8) 46,859 3,313 7.6 43,546 -------- ------- -------- ------- -------- Total deposits...................... $478,692 $24,273 5.3 $454,419 $47,045 11.5 $407,374 ======== ======= ======== ======= ========
Business Development Matters As discussed in the "Overview" and in Note 2 to Consolidated Financial Statements, the Corporation completed a merger on April 10, 2000 for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. As further discussed in the "Overview" and in Note 2 to Consolidated Financial Statements, on February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger is anticipated to close early in the third quarter of 2002. As discussed in the "Overview", management adopted a balance sheet restructuring project in the 2000 fourth quarter that has affected loans and other balance sheet categories in both the 2000 fourth quarter and the 2001 first quarter. Prior to March 26, 1999, the Bank's data processing, item capture and statement rendering operations were outsourced under a service bureau arrangement. Commencing in the 1998 fourth quarter, the Bank began the process of converting these 25 operations to an in-house basis. Conversion to the replacement systems occurred on March 26, 1999. Richmond Savings, however, was on a service bureau arrangement until its merger into the Bank on June 26, 2000. The total capital expenditure outlay for hardware and software amounted to approximately $1,700,000, of which approximately one-half was recorded in 1998 and the remainder in 1999. In the 1998 fourth quarter, the Bank received regulatory approval for establishment of a new branch office in Trinity, North Carolina. Construction of the permanent Trinity facility was completed in February 2002, resulting in a total capital outlay of approximately $1,400,000. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, was operated at this site. In March 2002, the Bank filed for regulatory approval for establishment of a new branch office in Pinehurst, North Carolina. The current intent is to lease a facility which had previously been used as a banking office by another financial institution. No significant capital outlay is expected. Accounting Pronouncement Matters On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as further amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" (collectively referred to as "SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. As permitted by SFAS No. 133, on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio as follows:
Securities Transferred ----------------------------- Estimated Unrealized Amortized Fair Gain Cost Value (Loss) --------- --------- ---------- (in thousands) U.S. Government agencies and corporations.............. $36,089 $35,759 $(330) Mortgage-backed securities.. 483 488 5 State, county and municipal. 19,735 20,352 617 Other debt securities....... 3,054 3,128 74 ------- ------- ----- Total.................. $59,361 $59,727 $ 366 ======= ======= =====
As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. On January 1, 2001, the Corporation had no embedded derivative instruments requiring separate accounting treatment. The Corporation does not engage in hedging activities and has identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation's consolidated financial statements. The fair value of these commitments at December 31, 2001 was not material to the Corporation's consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at December 31, 2001. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of SFAS No. 125" ("SFAS No. 140"), which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosure. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures related to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Corporation adopted the provisions of SFAS No. 140 effective April 1, 2001 with no material impact. 26 In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Also, SFAS No. 142 will require that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Corporation was required to adopt the provisions of SFAS No. 141 as of June 30, 2001 and will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature issued prior to SFAS No. 142. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized in 2001 prior to the adoption of SFAS No. 142 on January 1, 2002. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Corporation evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, The Corporation will be required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, any intangible asset classified as goodwill under SFAS No. 142 will be subjected to a transitional impairment test during the first six months of 2002 based on the level of goodwill as of January 1, 2002. Any impairment losses identified as a result of this transitional impairment test will be recognized in the 2002 statement of income as the effect of a change in accounting principle. As of December 31, 2001, the Corporation had no goodwill and had intangible assets, totaling $1,000, related to deposit and branch purchase acquisitions that are being accounted for in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions". SFAS No. 72, which was not amended by SFAS No. 142, requires that identified intangible assets and unidentified intangible assets associated with deposit and branch purchase acquisitions be amortized into expense. Accordingly, these intangible assets will continue to be amortized over their useful lives (generally ten years). Management periodically reviews the useful lives of these assets and adjusts them downward where appropriate. The amortization expense associated with these intangible assets was $9,000, $14,000, and $19,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS No. 143 requires the Corporation to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Corporation also is to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. This statement is effective for fiscal years beginning after June 15, 2002. At this time, the Corporation is assessing the impact of SFAS No. 143 on its financial condition and results of operations. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance on differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Statement 144 also supersedes APB Opinion No. 30, "Reporting the Results of Operations-Reporting 27 the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Corporation does not expect adoption of SFAS No. 144 to have a material effect on its consolidated financial statements. Effects of Inflation The operations of the Bank and therefore of the Corporation are subject to the effects of inflation through interest rate fluctuations and changes in the general price level of noninterest operating expenses. Such costs as salaries, fringe benefits and utilities have tended to increase at a rate comparable to or even greater than the general rate of inflation. Broadly speaking, all operating expenses have risen to higher levels as inflationary pressures have increased. Management has responded to this situation by evaluating and adjusting fees charged for specific services and by emphasizing operating efficiencies. The level of interest rates is also considered to be influenced by inflation, rising whenever inflationary expectations and the actual level of inflation increase and declining whenever the inflationary outlook appears to be improving. Management constantly monitors this situation, attempting to adjust both rates received on earning assets and rates paid on interest-bearing liabilities in order to maintain the desired net yield on earning assets. Cautionary Statement for Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes", "expects", "plans", "projects", "goals", "estimates", "may", "could", "should", or "anticipates" or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management's current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation's actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) competitive pressure in the banking industry or in the Corporation's markets may increase significantly, (ii) changes in the interest rate environment may reduce margins, (iii) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (iv) changes may occur in banking legislation and in the environment, (v) changes may occur in general business conditions and inflation and (vi) changes may occur in the securities markets. 28 Table 13 Quarterly Financial Data
First Second Third Fourth ------- ------- ------- ------- (in thousands, except per share data) 2001 Interest income.................................... $10,677 $10,519 $10,269 $ 9,795 Interest expense................................... 5,769 5,565 5,015 4,143 ------- ------- ------- ------- Net interest income................................ 4,908 4,954 5,254 5,652 Provision for loan losses.......................... 120 165 205 710 ------- ------- ------- ------- Net interest income after provision for loan losses 4,788 4,789 5,049 4,942 Noninterest income................................. 1,426 1,488 1,453 1,533 Noninterest expense................................ 3,839 4,071 4,097 4,070 ------- ------- ------- ------- Income before income taxes......................... 2,375 2,206 2,405 2,405 Income taxes....................................... 693 608 685 677 ------- ------- ------- ------- Net income......................................... $ 1,682 $ 1,598 $ 1,720 $ 1,728 ======= ======= ======= ======= Per share data: Net income: Basic........................................... $ .33 $ .32 $ .34 $ .36 Diluted......................................... .33 .31 .34 .35 Cash dividends declared........................... .12 .12 .12 .17 Common stock price (1): High............................................ 15.00 14.90 15.75 15.99 Low............................................. 11.88 12.00 13.65 13.85 2000 Interest income.................................... $ 9,814 $10,330 $10,734 $11,058 Interest expense................................... 4,632 5,013 5,445 5,818 ------- ------- ------- ------- Net interest income................................ 5,182 5,317 5,289 5,240 Provision for loan losses.......................... 157 835 160 650 ------- ------- ------- ------- Net interest income after provision for loan losses 5,025 4,482 5,129 4,590 Noninterest income................................. 1,093 1,147 1,070 1,191 Merger related expense............................. -- 2,796 -- -- Noninterest expense................................ 3,948 4,086 3,957 3,710 ------- ------- ------- ------- Income (loss) before income taxes.................. 2,170 (1,253) 2,242 2,071 Income taxes (benefit)............................. 689 (278) 698 605 ------- ------- ------- ------- Net income (loss).................................. $ 1,481 $ (975) $ 1,544 $ 1,466 ======= ======= ======= ======= Per share data: Net income (loss): Basic........................................... $ .30 $ (.19) $ .31 $ .29 Diluted......................................... .29 (.19) .30 .29 Cash dividends declared........................... .12 .12 .12 .15 Common stock price (1): High............................................ 17.00 12.50 12.00 12.13 Low............................................. 10.50 6.00 9.50 11.19
- -------- (1) FNB Corp. common stock is traded on the NASDAQ National Market System under the symbol FNBN. At December 31, 2001, there were 1,653 shareholders of record. 29 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS FNB Corp. We have audited the accompanying consolidated balance sheets of FNB Corp. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Corporation'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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Corp. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Greenville, South Carolina March 7, 2002 30 FNB CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31 -------------------- 2001 2000 -------- -------- (in thousands, excep share data) Assets Cash and due from banks........................................................................ $ 13,490 $ 14,108 Federal funds sold............................................................................. 127 94 Investment securities: Available for sale, at estimated fair value (amortized cost of $161,685 in 2001 and $73,572 in 2000)....................................................................................... 163,150 73,023 Held to maturity (estimated fair value of $59,727 in 2000).................................... -- 59,361 Loans: Loans held for sale........................................................................... 12,836 9,870 Loans held for investment..................................................................... 378,796 385,867 Less allowance for loan losses................................................................ (4,417) (4,352) -------- -------- Net loans................................................................................. 387,215 391,385 -------- -------- Premises and equipment, net.................................................................... 10,268 9,596 Other assets................................................................................... 19,492 18,072 -------- -------- Total Assets.............................................................................. $593,742 $565,639 ======== ======== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand deposits........................................................... $ 49,089 $ 45,901 Interest-bearing deposits: Demand, savings and money market deposits................................................... 140,496 126,823 Time deposits of $100,000 or more........................................................... 109,187 101,584 Other time deposits......................................................................... 181,458 198,140 -------- -------- Total deposits............................................................................ 480,230 472,448 Retail repurchase agreements................................................................... 14,812 11,201 Federal Home Loan Bank advances................................................................ 30,000 15,000 Federal funds purchased........................................................................ 6,000 4,750 Other liabilities.............................................................................. 6,793 7,118 -------- -------- Total Liabilities......................................................................... 537,835 510,517 -------- -------- Shareholders' equity: Preferred stock, $10.00 par value; authorized 200,000 shares, none issued..................... -- -- Common stock, $2.50 par value; authorized 10,000,000 shares, issued 4,763,261 shares in 2001 and 5,059,641 shares in 2000................................................................ 11,908 12,649 Surplus....................................................................................... -- 2,836 Retained earnings............................................................................. 43,032 40,000 Accumulated other comprehensive income (loss)................................................. 967 (363) -------- -------- Total Shareholders' Equity................................................................ 55,907 55,122 -------- -------- Total Liabilities and Shareholders' Equity................................................ $593,742 $565,639 ======== ========
Commitments (Note 17) See accompanying notes to consolidated financial statements. 31 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 ------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (in thousands, except per share data) Interest Income Interest and fees on loans........................ $ 31,872 $ 34,241 $ 27,970 Interest and dividends on investment securities: Taxable income.................................. 8,203 6,331 6,430 Non-taxable income.............................. 986 981 991 Other interest income............................. 199 383 431 ---------- ---------- ---------- Total interest income......................... 41,260 41,936 35,822 ---------- ---------- ---------- Interest Expense Deposits.......................................... 18,753 19,501 15,183 Retail repurchase agreements...................... 419 516 501 Federal Home Loan Bank advances................... 1,273 819 433 Other borrowed funds.............................. 47 72 86 ---------- ---------- ---------- Total interest expense........................ 20,492 20,908 16,203 ---------- ---------- ---------- Net Interest Income................................ 20,768 21,028 19,619 Provision for loan losses......................... 1,200 1,802 511 ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 19,568 19,226 19,108 ---------- ---------- ---------- Noninterest Income Service charges on deposit accounts............... 2,537 2,236 2,058 Annuity and brokerage commissions................. 271 414 482 Cardholder and merchant services income........... 609 524 450 Other service charges, commissions and fees....... 720 674 583 Bank owned life insurance......................... 638 12 -- Net gain on sales of loans........................ 831 153 238 Other income...................................... 294 488 257 ---------- ---------- ---------- Total noninterest income...................... 5,900 4,501 4,068 ---------- ---------- ---------- Noninterest Expense Personnel expense................................. 9,137 8,534 7,792 Occupancy expense................................. 824 835 788 Furniture and equipment expense................... 1,423 1,709 1,472 Data processing services.......................... 703 831 1,188 Merger related expenses........................... -- 2,796 -- Other expense..................................... 3,990 3,792 3,842 ---------- ---------- ---------- Total noninterest expense..................... 16,077 18,497 15,082 ---------- ---------- ---------- Income Before Income Taxes......................... 9,391 5,230 8,094 Income taxes....................................... 2,663 1,714 2,504 ---------- ---------- ---------- Net Income......................................... $ 6,728 $ 3,516 $ 5,590 ========== ========== ========== Net income per common share: Basic............................................. $ 1.35 $ .70 $ 1.11 Diluted........................................... $ 1.32 $ .69 $ 1.09 Weighted average number of shares outstanding: Basic............................................. 4,988,084 5,035,529 5,022,403 Diluted........................................... 5,080,767 5,077,937 5,138,365
See accompanying notes to consolidated financial statements. 32 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Common Stock ESOP and Other ------------------ Retained Restricted Comprehensive Shares Amount Surplus Earnings Stock Plans Income (Loss) Total --------- ------- ------- -------- ----------- ------------- ------- (in thousands, except share data) Balance, December 31, 1998........................ 5,160,756 $12,902 $ 4,205 $35,763 $(2,531) $ 51 $50,390 Comprehensive income:............................. Net income...................................... -- -- -- 5,590 -- -- 5,590 Other comprehensive income: Unrealized securities losses, net of income tax benefit of $1,037........................ -- -- -- -- -- (2,009) (2,009) ------- Total comprehensive income...................... 3,581 ------- Cash dividends declared, $.51 per share........... -- -- -- (2,285) -- -- (2,285) ESOP and restricted stock plan transactions....... -- -- (64) -- 295 -- 231 Common stock issued through: Dividend reinvestment plan...................... -- -- -- -- -- -- -- Stock option plan............................... 7,224 19 77 -- -- -- 96 Common stock repurchased.......................... (28,460) (72) (71) (184) -- -- (327) Equity adjustment to conform fiscal periods....... -- -- (16) 274 144 (20) 382 --------- ------- ------- ------- ------- ------- ------- Balance, December 31, 1999........................ 5,139,520 12,849 4,131 39,158 (2,092) (1,978) 52,068 Comprehensive income: Net income...................................... -- -- -- 3,516 -- -- 3,516 Other comprehensive income: Unrealized securities gains, net of income taxes of $834................................ -- -- -- -- -- 1,615 1,615 ------- Total comprehensive income...................... 5,131 ------- Cash dividends declared, $.51 per share........... -- -- -- (2,674) -- -- (2,674) Cash paid for fractional shares in merger......... (122) -- (1) -- -- -- (1) ESOP and restricted stock plan transactions: Termination of plans............................ (93,113) (233) (1,342) -- 1,960 -- 385 Other transactions.............................. -- -- (17) -- 132 -- 115 Common stock issued through: Dividend reinvestment plan...................... 4,701 12 39 -- -- -- 51 Stock option plan............................... 15,355 38 114 -- -- -- 152 Common stock repurchased.......................... (6,700) (17) (88) -- -- -- (105) --------- ------- ------- ------- ------- ------- ------- Balance, December 31, 2000........................ 5,059,641 12,649 2,836 40,000 -- (363) 55,122 Comprehensive income: Net income...................................... -- -- -- 6,728 -- -- 6,728 Other comprehensive income: Unrealized securities gains, net of income taxes of $684................................ -- -- -- -- -- 1,330 1,330 ------- Total comprehensive income........................ 8,058 ------- Cash dividends declared, $.53 per share........... -- -- -- (2,618) -- -- (2,618) Common stock issued through: Stock option plan............................... 24,461 61 189 -- -- -- 250 Common stock repurchased.......................... (320,841) (802) (3,025) (1,078) -- -- (4,905) --------- ------- ------- ------- ------- ------- ------- Balance, December 31, 2001........................ 4,763,261 $11,908 $ -- $43,032 $ -- $ 967 $55,907 ========= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 33 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 ----------------------------- 2001 2000 1999 --------- -------- -------- (in thousands) Operating Activities Net income........................................................................ $ 6,728 $ 3,516 $ 5,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment......................... 1,144 1,465 1,359 Provision for loan losses....................................................... 1,200 1,802 511 Deferred income taxes........................................................... 20 (398) (191) Deferred loan fees and costs, net............................................... 110 (22) 115 Premium amortization and discount accretion of investment securities, net....... (20) 47 (1) ESOP and restricted stock plan expenses......................................... -- 500 231 Amortization of intangibles..................................................... 9 14 19 Net decrease (increase) in loans held for sale.................................. (2,966) 11,142 5,096 Decrease (increase) in other assets............................................. (931) 631 436 Increase (decrease) in other liabilities........................................ (452) 2,057 (354) --------- -------- -------- Net Cash Provided by Operating Activities...................................... 4,842 20,754 12,811 --------- -------- -------- Investing Activities Available-for-sale securities: Proceeds from sales............................................................. -- 77 500 Proceeds from maturities and calls.............................................. 131,739 2,250 17,965 Purchases....................................................................... (160,460) (11,761) (30,039) Held-to-maturity securities: Proceeds from maturities and calls.............................................. -- 2,434 13,039 Purchases....................................................................... -- (3,117) (6,941) Net decrease (increase) in loans held for investment.............................. 5,063 (47,948) (46,246) Purchases of premises and equipment............................................... (1,818) (922) (2,341) Purchases of life insurance contracts............................................. -- (10,000) -- Other, net........................................................................ (373) (108) 340 --------- -------- -------- Net Cash Used in Investing Activities.......................................... (25,849) (69,095) (53,723) --------- -------- -------- Financing Activities Net increase in deposits.......................................................... 7,782 45,438 26,645 Increase (decrease) in retail repurchase agreements............................... 3,611 534 (817) Increase in Federal Home Loan Bank advances....................................... 15,000 -- 15,000 Increase (decrease) in other borrowed funds....................................... 1,250 (2,985) 2,990 Common stock issued............................................................... 250 203 96 Common stock repurchased.......................................................... (4,905) (105) (327) Cash dividends and fractional shares paid......................................... (2,566) (2,465) (2,284) --------- -------- -------- Net Cash Provided by Financing Activities...................................... 20,422 40,620 41,303 --------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents................................ (585) (7,721) 391 Cash and cash equivalents at beginning of year...................................... 14,202 21,923 23,253 Adjustment to conform fiscal periods................................................ -- -- (1,721) --------- -------- -------- Cash and Cash Equivalents at End of Year............................................ $ 13,617 $ 14,202 $ 21,923 ========= ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest........................................................................ $ 21,502 $ 19,333 $ 16,128 Income taxes.................................................................... 2,994 1,879 3,025 Noncash transactions: Transfer of held-to-maturity securities to available-for-sale securities........ 59,361 -- -- Loans held for investment transferred to loans held for sale.................... -- 20,938 -- Foreclosed loans transferred to other real estate............................... 673 1,173 549 Unrealized securities gains (losses), net of income taxes....................... 1,330 1,615 (2,009)
See accompanying notes to consolidated financial statements. 34 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations/Consolidation FNB Corp. is a one-bank holding company whose wholly-owned subsidiary is the First National Bank and Trust Company (the "Bank"). The Bank, which has one wholly-owned subsidiary, First National Investor Services, Inc., offers a complete line of financial services, including loan, deposit, cash management, investment and trust services, to individual and business customers primarily in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The consolidated financial statements include the accounts of FNB Corp. and the Bank (collectively the "Corporation"). All significant intercompany balances and transactions have been eliminated. The chief operating decision maker reviews the results of operations of the Corporation and its subsidiary as a single enterprise. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As discussed in Note 2 below, the Corporation in 2000 completed a merger for the acquisition of Carolina Fincorp, Inc. in a transaction accounted for as a pooling of interests. Historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp, Inc. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Investment Securities Investment securities are categorized and accounted for as follows: . Held-to-maturity securities--Debt securities that the Corporation has the positive intent and ability to hold to maturity are reported at amortized cost. . Trading securities--Debt and equity securities bought and held principally for the purpose of being sold in the near future are reported at fair value, with unrealized gains and losses included in earnings. . Available-for-sale securities--Debt and equity securities not classified as either held-to-maturity securities or trading securities are reported at fair value, with unrealized gains and losses, net of related tax effect, included as an item of other comprehensive income and reported as a separate component of shareholders' equity. The Corporation intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Corporation has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities. As permitted in connection with the adoption of SFAS No. 133 on January 1, 2001, as discussed under "Derivatives" below, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio. As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion of discounts. The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities. 35 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) Loans Interest income on loans is generally calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectibility cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. A loan is considered impaired when, based on current information or events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. When the ultimate collectibility of the impaired loan's principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are first recorded as recoveries of any amounts previously charged-off and are then applied to interest income, to the extent that any interest has been foregone. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis. Allowance for Loan Losses The allowance for loan losses represents an amount considered adequate to absorb loan losses inherent in the portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Losses are charged and recoveries are credited to the allowance for loan losses. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. 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, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu thereof and is carried at the lower of cost or fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in other real estate below carrying value are recognized by a charge to income. Mortgage Servicing Rights (MSRs) The rights to service mortgage loans for others are included in other assets on the consolidated balance sheet. MSRs are capitalized based on the allocated cost which is determined when the underlying loans are sold. MSRs are amortized over the life of the underlying loan as an adjustment of servicing income. Impairment reviews of MSRs are performed on a quarterly basis. 36 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: buildings and improvements, 10 to 50 years and furniture and equipment, 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated life of the improvement or the term of the lease. Intangible Assets In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Also, SFAS No. 142 will require that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Corporation was required to adopt the provisions of SFAS No. 141 as of June 30, 2001 and will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature issued prior to SFAS No. 142. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized in 2001 prior to the adoption of SFAS No. 142 on January 1, 2002. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Corporation evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Corporation will be required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, any intangible asset classified as goodwill under SFAS No. 142 will be subjected to a transitional impairment test during the first six months of 2002 based on the level of goodwill as of January 1, 2002. Any impairment losses identified as a result of this transitional impairment test will be recognized in the 2002 statement of income as the effect of a change in accounting principle. As of December 31, 2001, the Corporation had no goodwill and had intangible assets, totaling $1,000, related to deposit and branch purchase acquisitions that are being accounted for in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions". SFAS No. 72, which was not amended by SFAS No. 142, requires that identified intangible assets and unidentified intangible assets associated with deposit and branch purchase acquisitions be amortized into expense. Accordingly, these intangible assets will continue to be amortized over their useful lives (generally ten years). Management periodically reviews the useful lives of these assets and adjusts them downward where appropriate. The amortization expense associated with these intangible assets was $9,000, $14,000, and $19,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Income Taxes Income tax expense includes both a current provision based on the amounts computed for income tax return purposes and a deferred provision that results from application of the asset and liability method of accounting for deferred taxes. 37 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Corporation's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share (EPS) As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation is provided in a footnote of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Comprehensive Income Comprehensive income is defined as the change in equity of an enterprise during a period from transactions and other events and circumstances from nonowner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income. The items of other comprehensive income are included in the consolidated statement of shareholders' equity and comprehensive income. The accumulated balance of other comprehensive income is included in the shareholders' equity section of the consolidated balance sheet. Employee Benefit Plans The Corporation has a defined benefit pension plan covering substantially all full-time employees. Pension costs, which are actuarially determined using the projected unit credit method, are charged to current operations. Annual funding contributions are made up to the maximum amounts allowable for Federal income tax purposes. In 2000, the Corporation adopted a noncontributory, nonqualified supplemental executive retirement plan (the "SERP") covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. SERP costs, which are actuarially determined using the projected unit credit method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet. Medical and life insurance benefits are provided by the Corporation on a postretirement basis under defined benefit plans covering substantially all full-time employees. Postretirement benefit costs, which are actuarially determined using the attribution method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet. Stock Options The Corporation accounts for awards under employee stock-based compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, no compensation cost has been recognized for such awards in the consolidated financial statements. As required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Corporation discloses in a footnote the pro forma effect on net income and earnings per share that would result from the use of the fair value based method to measure compensation costs related to awards granted after December 15, 1994. Derivatives On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as further amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" (collectively referred to as "SFAS No. 133"). This statement establishes accounting and reporting 38 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. As permitted by SFAS No. 133, on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio as follows:
Securities Transferred ----------------------------- Estimated Unrealized Amortized Fair Gain Cost Value (Loss) --------- --------- ---------- (in thousands) U.S. Government agencies and corporations $36,089 $35,759 $(330) Mortgage-backed securities............... 483 488 5 State, county and municipal.............. 19,735 20,352 617 Other debt securities.................... 3,054 3,128 74 ------- ------- ----- Total.................................... $59,361 $59,727 $ 366 ======= ======= =====
As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. On January 1, 2001, the Corporation had no embedded derivative instruments requiring separate accounting treatment. The Corporation does not engage in hedging activities and has identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation's consolidated financial statements. The fair value of these commitments at December 31, 2001 was not material to the Corporation's consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at December 31, 2001. NOTE 2--MERGER INFORMATION Carolina Fincorp, Inc. On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested restricted stock plan shares became fully vested, resulting in certain expenses considered merger-related. Other primary components of merger-related expenses were professional fees, investment banking fees, contract termination costs, data processing conversion fees and 39 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--MERGER INFORMATION--(Continued) severance payments. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. The primary components of merger-related expenses, all recorded in 2000, are as follows (in thousands): Professional fees............................... $ 569 Investment banking fees......................... 558 Contract termination costs...................... 467 ESOP and restricted stock plan termination costs 385 Data processing conversion fees................. 209 Severance payments.............................. 161 Other merger expenses........................... 447 ------ Total........................................ $2,796 ======
For purposes of preparing the 1999 consolidated balance sheet, the year-end for Carolina Fincorp was conformed from a June 30 year-end to the December 31 year-end of the Corporation. In preparing other consolidated financial statements for 1999 and prior years and for the consolidated balance sheets before December 31, 1999, the results of operations for Carolina Fincorp are included based on the June 30 year-end. The net results of operations for Carolina Fincorp for the six months ended December 31, 1999 are included as a conforming adjustment in preparing the consolidated statement of shareholders' equity and comprehensive income and consolidated statement of cash flows for the year ended December 31, 1999. The equity adjustment to conform fiscal periods for the consolidated statement of shareholders' equity and comprehensive income consisted of the following for the operations of Carolina Fincorp for the six months ended December 31, 1999 (in thousands): Net income....................................... $ 476 Cash dividends declared.......................... (202) ESOP and restricted stock plan transactions...... 128 Unrealized securities losses, net of income taxes (20) ----- Equity adjustment to conform fiscal periods... $ 382 =====
Separate financial information for the pooled entities for the year ended December 31, 1999 is as follows:
FNB Carolina Corp. Fincorp Combined -------- -------- -------- (in thousands) Total assets................ $396,067 $121,401 $517,468 Total revenues.............. 30,734 9,156 39,890 Net interest income......... 15,497 4,122 19,619 Net income.................. 4,657 933 5,590 Net income per common share: Basic.................... 1.27 .54 1.11 Diluted.................. 1.23 .54 1.09
Rowan Bancorp, Inc. On February 11, 2002, the Corporation entered into a definitive merger agreement to acquire Rowan Bancorp, Inc. ("Rowan Bancorp"), holding company for Rowan Savings Bank, SSB, Inc. ("Rowan Bank"), headquartered in China Grove, North Carolina. Under the terms of the agreement, Rowan Bancorp will be merged with a wholly-owned subsidiary of FNB Corp. formed for the purposes of effecting the merger, immediately after which, the subsidiary will be merged into FNB Corp. Rowan Bank will then become a separate subsidiary of FNB Corp. The merger will be accounted for as a purchase 40 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--MERGER INFORMATION--(Continued) business combination and is subject to several conditions, including approval by the shareholders of Rowan Bancorp and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the third quarter of 2002. Rowan Bancorp shareholders will be permitted to elect FNB Corp. common stock or cash, or a combination of each. Subject to the Corporation's ability to limit the overall stock consideration to 45%, each share of Rowan Bancorp common stock, at the election of the shareholder, will be converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash. At December 31, 2001, Rowan Bancorp operated three offices through Rowan Bank and had approximately $116,033,000 in total assets, $96,494,000 in deposits and $10,043,000 in shareholders' equity. NOTE 3--INVESTMENT SECURITIES Summaries of the amortized cost and estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair --------- Gains Losses Value (in thousands) Available For Sale December 31, 2001 U.S. Government agencies and corporations. $129,731 $1,668 $ 615 $130,784 Mortgage-backed securities................ 330 11 -- 341 State, county and municipal............... 25,042 574 392 25,224 Other debt securities..................... 3,601 194 -- 3,795 Equity securities......................... 2,981 25 -- 3,006 -------- ------ ------ -------- Total................................... $161,685 $2,472 $1,007 $163,150 ======== ====== ====== ======== December 31, 2000 U.S. Treasury............................. $ 749 $ 4 $ -- $ 753 U.S. Government agencies and corporations. 69,854 67 649 69,272 Equity securities......................... 2,969 29 -- 2,998 -------- ------ ------ -------- Total................................... $ 73,572 $ 100 $ 649 $ 73,023 ======== ====== ====== ======== Held To Maturity December 31, 2000 U.S. Government agencies and corporations. $ 36,089 $ -- $ 330 $ 35,759 Mortgage-backed securities................ 483 5 -- 488 State, county and municipal............... 19,735 622 5 20,352 Other debt securities..................... 3,054 78 4 3,128 -------- ------ ------ -------- Total................................... $ 59,361 $ 705 $ 339 $ 59,727 ======== ====== ====== ========
41 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--INVESTMENT SECURITIES--(Continued) The amortized cost and estimated fair value of investment securities at December 31, 2001, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.
Available For Sale ------------------- Amortized Estimated Cost Fair --------- Value (in thousands) Due in one year or less............... $ 2,118 $ 2,151 Due after one year through five years. 7,570 7,901 Due after five years through ten years 90,568 92,132 Due after ten years................... 58,118 57,619 -------- -------- Total.............................. 158,374 159,803 Mortgage-backed securities............ 330 341 Equity securities..................... 2,981 3,006 -------- -------- Total investment securities........ $161,685 $163,150 ======== ========
Debt securities with an estimated fair value of $75,819,000 at December 31, 2001 and $68,433,000 at December 31, 2000 were pledged to secure public funds and trust funds on deposit. Debt securities with an estimated fair value of $21,128,000 at December 31, 2001 and $18,800,000 at December 31, 2000 were pledged to secure retail repurchase agreements. Proceeds from the sales of investment securities classified as available-for-sale amounted to $77,000 in 2000 and $500,000 in 1999. Gross gains of $76,000 were realized on the sales in 2000. There were no securities sales in 2001. The Bank, as a member of the Federal Home Loan Bank (the "FHLB") of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of residential mortgage loans and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. At December 31, 2001 and 2000, the Bank owned a total of $2,557,000 of FHLB stock. NOTE 4--LOANS Major classifications of loans are as follows:
December 31 ----------------- 2001 2000 -------- -------- (in thousands) Commercial and agricultural $177,577 $160,057 Real estate -- construction 11,249 5,734 Real estate -- mortgage: 1-4 family residential.... 146,347 165,057 Commercial and other...... 15,269 16,050 Consumer................... 20,978 25,290 Leases..................... 7,376 13,679 -------- -------- Loans held for investment.. 378,796 385,867 Loans held for sale........ 12,836 9,870 -------- -------- Gross loans............... $391,632 $395,737 ======== ========
42 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--LOANS--(Continued) Loans as presented are reduced by net deferred loan fees of $514,000 and $405,000 at December 31, 2001 and 2000, respectively. Nonaccrual loans amounted to $4,144,000 at December 31, 2001 and $1,478,000 at December 31, 2000. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2001, 2000 and 1999 had they performed in accordance with their original terms, amounted to approximately $373,000, $137,000 and $153,000, respectively. Interest income on all such loans included in the results of operations amounted to approximately $213,000 in 2001, $98,000 in 2000 and $90,000 in 1999. At December 31, 2001, the Bank had impaired loans which totaled $512,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $155,000. At December 31, 2000 the Bank had impaired loans which totaled $321,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $73,000. The average carrying value of impaired loans was $536,000 in 2001, $330,000 in 2000 and $1,508,000 in 1999. Interest income recognized on impaired loans amounted to approximately $51,000 in 2001, $17,000 in 2000 and $87,000 in 1999. Loans with outstanding balances of $673,000 in 2001 and $1,173,000 in 2000 were transferred from loans to other real estate acquired through foreclosure. Other real estate acquired through loan foreclosures amounted to $758,000 at December 31, 2001 and $163,000 at December 31, 2000 and is included in other assets on the consolidated balance sheet. Loans are primarily made in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The real estate loan portfolio can be affected by the condition of the local real estate markets. Loans have been made by the Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity during 2001 with respect to related party loans is as follows (in thousands): Balance, December 31, 2000 $ 8,020 New loans during 2001..... 17,055 Repayments during 2001.... (21,791) -------- Balance, December 31, 2001 $ 3,284 ========
NOTE 5--ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
Years Ended December 31 ----------------------- 2001 2000 1999 ------- ------ ------ (in thousands) Balance at beginning of year.............. $ 4,352 $3,289 $2,954 Provision for losses charged to operations 1,200 1,802 511 Loans charged off......................... (1,259) (913) (357) Recoveries on loans previously charged off 167 253 154 Allowance adjustment for loans sold....... (43) (79) -- Adjustment to conform fiscal periods...... -- -- 27 ------- ------ ------ Balance at end of year.................... $ 4,417 $4,352 $3,289 ======= ====== ======
43 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31 --------------- 2001 2000 ------- ------- (in thousands) Land.......................................... $ 2,356 $ 2,342 Buildings and improvements.................... 7,773 6,672 Furniture and equipment....................... 9,834 9,207 Leasehold improvements........................ 434 434 ------- ------- Total........................................ 20,397 18,655 Less accumulated depreciation and amortization 10,129 9,059 ------- ------- Premises and equipment, net................... $10,268 $ 9,596 ======= =======
NOTE 7--INCOME TAXES Income taxes as reported in the consolidated income statement included the following expense (benefit) components:
2001 2000 1999 ------ ------ ------ (in thousands) Current: Federal.............. $2,640 $2,106 $2,633 State................ 3 6 62 ------ ------ ------ Total.............. 2,643 2,112 2,695 ------ ------ ------ Deferred--Federal..... 20 (398) (191) ------ ------ ------ Total income taxes. $2,663 $1,714 $2,504 ====== ====== ======
A reconciliation of income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented below:
2001 2000 1999 ------ ------ ------ (in thousands) Amount of tax computed using Federal statutory tax rate of 34%...................... $3,193 $1,778 $2,752 Increases (decreases) resulting from effects of: Non-taxable income............................. (565) (329) (316) Non-deductible merger-related expenses......... -- 331 -- Other.......................................... 35 (66) 68 ------ ------ ------ Total........................................ $2,663 $1,714 $2,504 ====== ====== ======
44 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--INCOME TAXES--(Continued) The components of deferred tax assets and liabilities and the tax effect of each are as follows:
December 31 -------------- 2001 2000. ------ ------ (in thousands) Deferred tax assets: Allowance for loan losses.................. $1,272 $1,161 Net unrealized securities losses........... -- 186 Compensation and benefit plans............. 927 924 Other...................................... 67 80 ------ ------ Total.................................... 2,266 2,351 ------ ------ Deferred tax liabilities: Depreciable basis of premises and equipment 401 337 Net unrealized securities gains............ 498 -- Prepaid pension cost....................... 250 297 Net deferred loan fees and costs........... 220 225 Mortgage servicing rights.................. 164 47 Other...................................... 157 165 ------ ------ Total.................................... 1,690 1,071 ------ ------ Net deferred tax asset...................... $ 576 $1,280 ====== ======
There is no valuation allowance for deferred tax assets as it is management's contention that realization of the deferred tax assets is more likely than not based upon the Corporation's history of taxable income and estimates of future taxable income. The Corporation is permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This addition differs significantly from the provisions for losses for financial reporting purposes. Under accounting principles generally accepted in the United States of America, the Corporation is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year. Retained earnings at December 31, 2001, includes approximately $1,400,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reductions of such amounts for purposes other than bad debt losses could create income for tax purposes in certain remote instances, which would then be subject to the then current corporate income tax rate. NOTE 8--TIME DEPOSITS The scheduled maturities of time deposits at December 31, 2001 are as follows (in thousands):
Years ending December 31 ------------------------ 2002.................. $237,135 2003.................. 23,179 2004.................. 15,146 2005.................. 2,295 2006.................. 12,890 -------- Total time deposits... $290,645 ========
45 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 9--SHORT-TERM BORROWED FUNDS Funds are borrowed on an overnight basis through retail repurchase agreements with Bank customers and federal funds purchased from other financial institutions. Retail repurchase agreement borrowings are collateralized by securities of the U.S. Treasury and U.S. Government agencies and corporations. Information concerning retail repurchase agreements and federal funds purchased is as follows:
2001 2000 ------------------- ------------------- Retail Federal Retail Federal Repurchase Funds Repurchase Funds Agreements Purchased Agreements Purchased ---------- --------- ---------- --------- (dollars in thousands) Balance at December 31......... $14,812 $6,000 $11,201 $4,750 Average balance during the year 13,010 940 11,091 1,112 Maximum month-end balance...... 14,812 7,900 12,580 5,000 Weighted average interest rate: At December 31................ 1.92% 1.71% 4.82% 6.84% During the year............... 3.22 5.04 4.64 6.47
NOTE 10--FEDERAL HOME LOAN BANK (FHLB) ADVANCES The Bank has a $71,200,000 line of credit with the FHLB, secured by a blanket collateral agreement on qualifying 1-4 family residential mortgage loans. At December 31, 2001, FHLB advances under this line amounted to $30,000,000 and were at interest rates ranging from 3.49% to 5.92%. At December 31, 2000, FHLB advances amounted to $15,000,000 and were at interest rates ranging from 4.92% to 5.92%. The scheduled maturities of FHLB advances at December 31, 2001 are as follows (in thousands):
Years ending December 31 ------------------------ 2009................... $ 7,000 2010................... 8,000 2011................... 15,000 ------- Total FHLB Advances.. $30,000 =======
46 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS Pension Plan The Corporation has a noncontributory defined benefit pension plan covering substantially all full-time employees who qualify as to age and length of service. Benefits are based on the employee's compensation, years of service and age at retirement. The Corporation's funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes. Information concerning the status of the plan is as follows:
2001 2000 ------ ------ (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year......... $6,228 $5,742 Service cost.................................... 238 255 Interest cost................................... 452 428 Net actuarial loss.............................. 184 139 Benefits paid................................... (347) (336) ------ ------ Benefit obligation at end of year............... $6,755 $6,228 ====== ====== Change in Plan Assets: Fair value of plan assets at beginning of year.. $7,448 $7,832 Actual loss on plan assets...................... (774) (192) Employer contributions.......................... -- 56 Benefits paid................................... (347) (336) Other........................................... 48 88 ------ ------ Fair value of plan assets at end of year........ $6,375 $7,448 ====== ====== Prepaid Pension Cost Components: Funded status (liability) of plan................ $ (380) $1,221 Unrecognized net actuarial loss (gain)........... 657 (932) Unrecognized prior service cost.................. 458 565 Unrecognized transition obligation............... -- 21 ------ ------ Prepaid pension cost at end of year.............. $ 735 $ 875 ====== ====== Weighted-Average Plan Assumptions at End of Year: Discount rate................................... 7.25% 7.50% Expected long-term rate of return on plan assets 9.00 9.00 Rate of increase in compensation levels......... 5.50 5.50
Net periodic pension cost included the following components:
2001 2000 1999 ----- ----- ----- (in thousands) Service cost......................... $ 238 $ 255 $ 225 Interest cost........................ 452 428 392 Expected return on plan assets....... (658) (697) (634) Amortization of prior service cost... 107 107 107 Amortization of transition obligation 21 21 21 Recognized net actuarial gain........ (20) (84) (16) ----- ----- ----- Net periodic pension cost............ $ 140 $ 30 $ 95 ===== ===== =====
47 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS--(Continued) Supplemental Executive Retirement Plan In 2000, the Corporation adopted a noncontributory, nonqualified supplemental executive retirement plan (the "SERP") covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. In 2001, the social security offset was changed from 100% to 50%, increasing the net periodic SERP cost, the accrued SERP cost and the benefit obligation by $46,000, $140,000 and $196,000, respectively. Information concerning the status of the plan is as follows:
2001 2000 ----- ----- (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year........ $ 329 $ -- Service cost................................... 38 20 Interest cost.................................. 43 21 Amendments..................................... 196 288 Net actuarial loss............................. 77 -- Benefits paid.................................. (14) -- ----- ----- Benefit obligation at end of year.............. $ 669 $ 329 ===== ===== Change in Plan Assets: Fair value of plan assets at beginning of year. $ -- $ -- Actual return on plan assets................... -- -- Employer contributions......................... 14 -- Benefits paid.................................. (14) -- ----- ----- Fair value of plan assets at end of year....... $ -- $ -- ===== ===== Accrued SERP Cost Components: Funded status (liability) of plan.............. $(669) $(329) Unrecognized net actuarial loss................ 77 -- Unrecognized prior service cost................ 402 256 Unrecognized transition obligation............. -- -- ----- ----- Accrued SERP cost at end of year............... $(190) $ (73) ===== ===== Weighted-Average Plan Assumption at End of Year: Discount rate.................................. 7.25% 7.50%
Net periodic SERP cost included the following components:
2001 2000 ---- ---- (in thousands) Service cost......................... $ 38 $20 Interest cost........................ 43 21 Expected return on plan assets....... -- -- Amortization of prior service cost... 50 32 Amortization of transition obligation -- -- Recognized net actuarial gain........ -- -- ---- --- Net periodic SERP cost............... $131 $73 ==== ===
48 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS--(Continued) Other Postretirement Defined Benefit Plans The Corporation has postretirement medical and life insurance plans covering substantially all full-time employees who qualify as to age and length of service. The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change. The life insurance plan is noncontributory. Information concerning the plans, which are unfunded, is as follows:
2001 2000 ------- ------ (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year................. $ 751 $ 729 Service cost............................................ 43 29 Interest cost........................................... 71 52 Net actuarial gain (loss)............................... 238 (13) Benefits paid........................................... (45) (46) ------- ------ Benefit obligation at end of year....................... $ 1,058 $ 751 ======= ====== Accrued Postretirement Benefit Cost Components: Funded status (liability) of plan....................... $(1,058) $ (751) Unrecognized net actuarial loss......................... 290 64 Unrecognized prior service cost......................... 39 49 Unrecognized transition obligation...................... 223 243 ------- ------ Accrued postretirement benefit cost at end of year...... $ (506) $ (395) ======= ====== Weighted-Average Plan Assumptions at End of Year: Discount rate........................................... 7.25% 7.50% Annual rate of increase in the cost of medical benefits: Current year.......................................... 9.00 10.00 Final constant amount................................. 6.00 6.00 Annual decrease....................................... 1.00 1.00
Increasing or decreasing the assumed medical cost trend rate by one percentage point would not have a significant effect on either the postretirement benefit obligation at December 31, 2001 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2001. Net periodic postretirement benefit cost included the following components:
2001 2000 1999 ---- ---- ---- (in thousands) Service cost............................ $ 43 $ 29 $ 22 Interest Cost........................... 71 52 48 Amortization of prior service cost...... 10 10 10 Amortization of transition obligation... 20 20 20 Recognized net actuarial loss........... 12 -- 4 ---- ---- ---- Net periodic postretirement benefit cost $156 $111 $104 ==== ==== ====
Matching Retirement/Savings Plan The Corporation has a matching retirement/savings plan which permits eligible employees to make contributions to the plan up to a specified percentage of compensation as defined by the plan. A portion of the employee contributions are 49 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--EMPLOYEE BENEFIT PLANS--(Continued) matched by the Corporation based on the plan formula. The matching contributions amounted to $154,000 in 2001, $117,000 in 2000 and $107,000 in 1999. Carolina Fincorp maintained a 401(k) retirement plan. Upon completion of the merger with Carolina Fincorp in 2000, the plan was rolled into the Corporation's matching retirement/savings plan. The matching contributions for the Carolina Fincorp 401(k) retirement plan amounted to $24,000 in 1999. ESOP and Restricted Stock Plans Carolina Fincorp had established an ESOP, or employee stock ownership plan, for the benefit of all qualified employees. Under the terms of the ESOP, shares of Carolina Fincorp common stock, for future allocation to plan participants, were purchased with proceeds from a loan by the parent company with repayments to be made by the subsidiary bank. Under a restricted stock plan for directors, officers and employees, newly issued shares of Carolina Fincorp common stock were awarded to plan participants on a deferred vesting schedule. Compensation expense related to the ESOP and restricted stock plans amounted to $115,000 in 2000 and $231,000 in 1999. Upon the change in control when the merger occurred in 2000, the ESOP plan terminated according to its terms and unvested restricted stock plan shares became fully vested, resulting in $385,000 of merger-related expenses. NOTE 12--LEASES Future obligations at December 31, 2001 for minimum rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows (in thousands):
Years ending December 31 ------------------------ 2002............................ $ 48 2003............................ 24 2004............................ 9 2005............................ 9 2006............................ 7 2007 and later years............ 50 ---- Total minimum lease payments. $147 ====
Net rental expense for all operating leases amounted to $86,000 in 2001, $87,000 in 2000 and $81,000 in 1999. One operating lease for real property contains a purchase option considered to approximate fair market value. NOTE 13--SUPPLEMENTARY INCOME STATEMENT INFORMATION Significant components of other expense were as follows:
2001 2000 1999 ---- ---- ---- (in thousands) Stationery, printing and supplies $518 $521 $493 Advertising and marketing........ 331 392 460
50 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 14--FNB CORP. (PARENT COMPANY) FINANCIAL DATA The Parent Company's principal asset is its investment in the Bank subsidiary, and its principal source of income is dividends from that subsidiary. The Parent Company's condensed balance sheets as of December 31, 2001 and 2000, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2001 are as follows: Condensed Balance Sheets
December 31 --------------- 2001 2000 ------- ------- (in thousands) Assets: Cash......................................... $ 2,961 $ 1,718 Investment in wholly-owned bank subsidiary... 52,902 53,278 Other assets................................. 862 885 ------- ------- Total assets............................... $56,725 $55,881 ======= ======= Liabilities and Shareholders' Equity: Accrued liabilities.......................... $ 818 $ 759 Shareholders' equity......................... 55,907 55,122 ------- ------- Total liabilities and shareholders' equity. $56,725 $55,881 ======= =======
Condensed Statements of Income
Years Ended December 31 ---------------------- 2001 2000 1999 ------- ------ ------ (in thousands) Income: Dividends from bank subsidiary..................................................... $ 8,457 $2,403 $6,554 Other income....................................................................... 24 139 130 ------- ------ ------ Total income..................................................................... 8,481 2,542 6,684 ------- ------ ------ Expenses: Operating.......................................................................... 33 89 170 Merger related..................................................................... -- 146 -- ------- ------ ------ Total expenses................................................................... 33 235 170 ------- ------ ------ Income before income taxes and equity in undistributed net income of bank subsidiary 8,448 2,307 6,514 Income taxes (benefit).............................................................. 15 28 (4) ------- ------ ------ Income before equity in undistributed net income of bank subsidiary................. 8,433 2,279 6,518 Equity in undistributed net income of bank subsidiary............................... (1,705) 1,237 (928) ------- ------ ------ Net income.......................................................................... $ 6,728 $3,516 $5,590 ======= ====== ======
51 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 14--FNB CORP. (PARENT COMPANY) FINANCIAL DATA--(Continued) Condensed Statements of Cash Flows
Years Ended December 31 ------------------------- 2001 2000 1999 ------- ------- ------- (in thousands) Operating activities: Net income....................................................................... $ 6,728 $ 3,516 $ 5,590 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of bank subsidiary.......................... 1,705 (1,237) 928 Other, net..................................................................... (8) 407 (582) ------- ------- ------- Net cash provided by operating activities.................................... 8,425 2,686 5,936 ------- ------- ------- Investing activities: Proceeds from sales of available-for-sale securities............................. -- 77 -- Other, net....................................................................... 39 64 29 ------- ------- ------- Net cash provided by investing activities.................................... 39 141 29 ------- ------- ------- Financing activities: Decrease in borrowed funds....................................................... -- -- (3,200) Common stock issued.............................................................. 250 203 96 Common stock repurchased......................................................... (4,905) (105) (327) Cash dividends and fractional shares paid........................................ (2,566) (2,465) (2,284) ------- ------- ------- Net cash used in financing activities........................................ (7,221) (2,367) (5,715) ------- ------- ------- Net increase in cash.............................................................. 1,243 460 250 Cash at beginning of year......................................................... 1,718 1,258 1,366 Adjustment to conform fiscal periods.............................................. -- -- (358) ------- ------- ------- Cash at end of year............................................................... $ 2,961 $ 1,718 $ 1,258 ======= ======= =======
NOTE 15--CAPITAL ADEQUACY REQUIREMENTS Certain regulatory requirements restrict the lending of funds by the Bank to FNB Corp. and the amount of dividends which can be paid to FNB Corp. In 2002, the maximum amount of dividends the Bank can pay to FNB Corp., without the approval of the Comptroller of the Currency, is equal to the retained net income in 2002 up to the date of any dividend declaration. The Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. For the reserve maintenance period in effect at December 31, 2001, the average daily reserve requirement was $2,155,000. FNB Corp. and the Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System. In addition, the Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Regulatory capital amounts and ratios are set forth in the table below. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off- 52 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 15--CAPITAL ADEQUACY REQUIREMENTS--(Continued) balance sheet exposures. Tier 1 capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution's ongoing trading activities. At December 31, 2001, FNB Corp. and the Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. The Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must meet minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no events or conditions since the notification that management believes have changed the Bank's category.
Minimum Ratios ------------------- To Be Well Capitalized Under For Prompt Capital Amount Ratio Capital Corrective --------------- ------------ Adequacy Action 2001 2000 2001 2000 Purposes Provisions ------- ------- ----- ----- -------- ----------- (dollars in thousands) As of December 31 Total capital (to risk-weighted assets): FNB Corp.................. $59,319 $59,833 14.29% 15.15% 8.00% N/A Bank...................... 56,314 57,982 13.56 14.69 8.00 10.00% Tier 1 capital (to risk-weighted assets): FNB Corp.................. 54,891 55,468 13.22 14.05 4.00 N/A Bank...................... 51,886 53,617 12.50 13.58 4.00 6.00% Tier 1 capital (to average assets): FNB Corp.................. 54,891 55,468 9.39 9.92 4.00 N/A Bank...................... 51,886 53,617 8.87 9.58 4.00 5.00%
NOTE 16--SHAREHOLDERS' EQUITY Stock Buyback Program Under a stock buyback program authorized by the Board of Directors for the repurchase of up to 500,000 shares of common stock, the Corporation repurchased 320,841 shares in 2001. Under previous buyback authorizations, there were repurchases of 6,700 shares in 2000 and 28,460 shares in 1999. 53 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--SHAREHOLDERS' EQUITY--(Continued) Earnings Per Share (EPS) Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporation's dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:
2001 2000 1999 --------- --------- --------- Basic EPS denominator--Weighted average number of common shares outstanding 4,988,084 5,035,529 5,022,403 Dilutive share effect arising from assumed exercise of stock options....... 92,683 42,408 115,962 --------- --------- --------- Diluted EPS denominator.................................................... 5,080,767 5,077,937 5,138,365 ========= ========= =========
For the years 2001, 2000 and 1999, there were 134,667, 323,601 and 96,364 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective years. Stock Options The Corporation adopted a stock compensation plan in 1993 that allows for the granting of incentive and nonqualified stock options to key employees and directors. Under terms of the plan, options are granted at prices equal to the fair market value of the common stock on the date of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. A maximum of 720,000 shares of common stock has been reserved for issuance under the stock compensation plan. At December 31, 2001, there were 183,025 shares available under the plan for the granting of additional options. The Corporation assumed a stock compensation plan in its merger acquistion of Carolina Fincorp in 2000. One grant of incentive and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. The total stock options assumed on April 10, 2000, the date of completion of the merger, amounted to 109,300 shares after adjustment for the exchange ratio in converting from Carolina Fincorp shares to FNB Corp. shares. All unvested options of Carolina Fincorp that were outstanding on April 10, 2000 became immediately vested as a result of a change-in-control provision in the plan that was triggered by the merger. Based on the stock options outstanding at December 31, 2001, a maximum of 78,134 shares of common stock has been reserved for issuance under the stock compensation plan. The Corporation applies APB Opinion No. 25 in accounting for stock compensation plans and, accordingly, no compensation cost has been recognized for stock option grants in the consolidated financial statements. As required by Statement of Financial Accounting Standards No. 123, disclosures are presented below for the effect on net income and net income per share that would result from the use of the fair value based method to measure compensation costs related to stock option grants in 1995 and subsequent years. 54 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--SHAREHOLDERS' EQUITY--(Continued)
2001 2000 1999 ------ ------ ------ (in thousands, except per share data) Net Income: As reported......... $6,728 $3,516 $5,590 Pro forma........... 6,345 3,199 5,346 Net Income Per Share: Basic: As reported....... 1.35 .70 1.11 Pro forma......... 1.27 .64 1.06 Diluted: As reported....... 1.32 .69 1.09 Pro forma......... 1.25 .63 1.04
The weighted-average fair value per share of options granted in 2000 and 1999 amounted to $4.16 and $4.21, respectively. There were no options granted in 2001. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 ------- ------- Risk-free interest rate 5.00% 6.23% Dividend yield......... 3.50 3.20 Volatility............. 44.00 41.00 Expected life.......... 6 years 6 years
The following is a summary of stock option activity. For comparison purposes, Carolina Fincorp and the Corporation were consolidated using conforming fiscal years.
Years Ended December 31 ------------------------------------------------------ 2001 2000 1999 ------------------ ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- ------- -------- ------- -------- Outstanding at beginning of year.. 728,145 $12.69 567,315 $14.25 396,089 $15.53 Granted........................... -- -- 222,500 11.74 185,070 11.58 Exercised......................... (24,461) 9.63 (15,355) 9.24 (7,619) 11.29 Forfeited......................... (140,175) 21.05 (46,315) 16.69 (6,225) 19.22 -------- ------- ------- Outstanding at end of year........ 563,509 11.71 728,145 13.44 567,315 14.25 ======== ======= ======= Options exercisable at end of year 349,274 11.37 371,645 12.69 289,359 12.10 ======== ======= =======
55 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--SHAREHOLDERS' EQUITY--(Continued) At December 31, 2001, information concerning stock options outstanding and exercisable is as follows:
Options Outstanding -------------------- Weighted Average Remaining Exercise Contractual Options Price Shares Life (Years) Exercisable ----- ------- ------------ ----------- $ 8.13 71,150 2.96 71,150 12.00 55,900 3.96 55,900 14.00 69,500 4.96 69,500 16.00 2,000 5.75 1,600 17.50 3,000 5.96 2,400 27.00 2,500 6.96 1,500 9.82 78,134 7.13 78,134 14.13 64,125 7.96 25,650 10.00 1,000 8.58 200 11.63 1,000 8.79 200 11.75 215,200 8.96 43,040 ------- ------- 563,509 6.81 349,274 ======= =======
NOTE 17--COMMITMENTS In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 2001, a summary of significant commitments is as follows: Commitments to extend credit $103,135,000 Standby letters of credit... 351,000
In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. Commitments to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower. Standby letters of credit are commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that in extending loans to customers. There were no binding commitments for the origination of mortgage loans intended to be held for sale at December 31, 2001 and 2000. The Corporation does not have any special purpose entities or other similar forms of off-balance sheet financing. 56 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value for each class of financial instruments. Cash and Cash Equivalents. For cash on hand, amounts due from banks, and federal funds sold, 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 price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans. The fair value of 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. Deposits. The fair value of demand, 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. Borrowed Funds. The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar remaining maturities. 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 are disclosed in Note 17. The estimated fair values of financial instruments are as follows:
December 31, 2001 December 31, 2000 ------------------ ------------------ Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value -------- --------- -------- --------- (in thousands) Financial Assets Cash and cash equivalents...... $ 13,617 $ 13,617 $ 14,202 $ 14,202 Investment securities: Available for sale........... 163,150 163,150 73,023 73,023 Held to maturity............. -- -- 59,361 59,727 Net loans...................... 387,215 400,614 391,385 385,698 Financial Liabilities Deposits....................... 480,230 486,886 472,448 474,656 Retail repurchase agreements... 14,812 14,812 11,201 11,201 Federal Home Loan Bank advances 30,000 33,168 15,000 15,219 Federal funds purchased........ 6,000 6,000 4,750 4,750
57 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS--Continued The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be considered in an actual sale considered. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, 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 judgment 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. 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 21, 2002. FNB CORP. (Registrant) By: /s/ MICHAEL C. MILLER ------------------------------ Michael C. Miller Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 21, 2002. Signature Title --------- ----- /s/ MICHAEL C. Chairman and MILLER President (Principal - ----------------------------- Executive Officer) Michael C. Miller /s/ JERRY A. Treasurer and LITTLE Secretary (Principal - ----------------------------- Financial and Accounting Jerry A. Little Officer) /s/ JAMES M. Director CAMPBELL, JR. - ----------------------------- James M. Campbell, Jr /s/ R. LARRY Director CAMPBELL - ----------------------------- R. Larry Campbell /s/ DARRELL L. Director FRYE - ----------------------------- Darrell L. Frye /s/ WILBERT L. Director HANCOCK - ----------------------------- Wilbert L. Hancock /s/ THOMAS A. Director JORDAN - ----------------------------- Thomas A. Jordan /s/ COOPER M. Director MCLAURIN - ----------------------------- Cooper M. McLaurin /s/ R. REYNOLDS Director NEELY, JR. - ----------------------------- R. Reynolds Neely, Jr. /s/ RICHARD K. Director PUGH - ----------------------------- Richard K. Pugh /s/ J. M. Director RAMSAY III - ----------------------------- J. M. Ramsay III /s/ CHARLES W. Director STOUT, M.D. - ----------------------------- Charles W. Stout, M.D. 59 INDEX TO EXHIBITS
Exhibit No. Description of Exhibit - ----------- ---------------------- 2.10 Agreement and Plan of Merger dated as of February 11, 2002 by and between the Registrant and Rowan Bancorp, Inc. The schedules to this agreement have been omitted. The Registrant will furnish supplementally a copy of any omitted schedule to the Commission upon request. 3.10 Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985. 3.11 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 3.12 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 3.20 Amended and Restated Bylaws of the Registrant, adopted May 21, 1998, incorporated herein by reference to Exhibit 3.20 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 4 Specimen of Registrant's Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985. 10.10* Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 10.11* Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.20* Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 10.21* Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.22* Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.30* Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1995. 10.31* Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-54702). 10.32* Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 2000. 10.33* Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc.for the fiscal year ended June 30, 1997. 21 Subsidiaries of the Registrant. 23 Independent Auditors' Consent.
- -------- *Management contract, or compensatory plan or arrangement. 60 EX-2.10 3 dex210.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 2.10 AGREEMENT AND PLAN OF MERGER by and between FNB CORP. and ROWAN BANCORP, INC. THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of the 11th day of February, 2002 by and between ROWAN BANCORP, INC., a North Carolina corporation and registered bank holding company ("Rowan"), and FNB CORP., a North Carolina corporation and registered bank holding company ("FNB"); W I T N E S S E T H: - - - - - - - - - - WHEREAS, the parties hereto have agreed that it is in their mutual best interests and in the best interests of their respective shareholders for FNB Acquisition Corp., a corporation to be organized under the laws of the State of North Carolina as a wholly owned subsidiary of FNB (the "Merger Sub"), to be merged with and into Rowan pursuant to a plan of merger (the "Plan of Merger") in the form attached hereto as Schedule A, which Merger shall be immediately ---------- followed by the merger of Rowan with and into FNB, and the parties desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the Merger and transactions contemplated hereby. NOW, THEREFORE, in consideration of the premises, the mutual benefits to be derived from this Agreement, and of the representations, warranties, conditions, covenants and promises herein contained, and subject to the terms and conditions hereof, the parties hereto mutually agree as follows: ARTICLE I. THE MERGER 1.1 Merger. Subject to the provisions of this Agreement and the Plan of ------ Merger, as of the Effective Time (as defined in Section 1.12 hereof), Merger Sub shall be merged with and into Rowan (the "Merger"), the separate corporate existence of Merger Sub shall cease and the corporate existence of Rowan, as the surviving corporation in the Merger, shall continue under the laws of the State of North Carolina. Rowan, as the surviving corporation in the Merger, is hereinafter sometimes referred to as the "Surviving Corporation." 1.2 Effect of the Merger. At the Effective Time and by reason of the -------------------- Merger, and in accordance with applicable law, all of the property, assets and rights of every kind and character of Merger Sub and of Rowan including, without limitation, its stock in its wholly owned subsidiary, Rowan Savings Bank SSB, Inc. ("Rowan Bank"), and all real, personal or mixed property, all debts due on whatever account, all other choses in action and every other interest of or belonging to or due to Rowan, whether tangible or intangible, shall vest in the Surviving Corporation, and the Surviving Corporation shall succeed to all the rights, privileges, immunities, powers, purposes and franchises of a public or private nature of Rowan and Merger Sub, all without any conveyance, assignment or further act or deed; and the Surviving Corporation shall become responsible for all of the liabilities, duties and obligations of every kind, nature and description of Rowan and Merger Sub as of the Effective Time. 1.3 Articles of Incorporation, Bylaws and Management. The Articles of ------------------------------------------------ Incorporation and bylaws of Rowan in effect at the Effective Time shall be the Articles of Incorporation and bylaws of the Surviving Corporation until thereafter amended in accordance with applicable laws. The officers and directors of Rowan at the Effective Time shall continue to hold such offices and positions of the Surviving Corporation until removed as provided by law or until the election or appointment of their respective successors. 1.4 Conversion of Shares. -------------------- (a) Rowan Stock. Except as otherwise provided herein, at the Effective ----------- Time, all rights of Rowan's shareholders with respect to all then outstanding shares of the common stock of Rowan, no par value ("Rowan Stock"), shall cease to exist, and the holders of shares of Rowan Stock shall cease to be, and shall have no further rights as, shareholders of Rowan. At the Effective Time, each such outstanding share of Rowan Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by Rowan, FNB or any of their subsidiaries, which shall be canceled in the Merger, and for Dissenting Shares (as defined in Section 1.9)) shall be converted, without any action on the part of the holder of such shares, into the right to receive the Merger Consideration (as defined in Section 1.5) in accordance with this Article I. Following the Effective Time, certificates representing shares of Rowan Stock outstanding at the Effective Time shall evidence only the right of the registered holder thereof to receive, and may be exchanged for, the Merger Consideration. (b) Outstanding FNB Stock. Each share of common stock of FNB, par --------------------- value $2.50 ("FNB Stock"), issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding and shall not be affected by the Merger. (c) Merger Sub Stock. Each share of common stock of Merger Sub issued ---------------- and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. 1.5 Merger Consideration. -------------------- (a) Per Share Consideration. Subject to the provisions of this Article ----------------------- I, at the Effective Time each outstanding share of Rowan Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by Rowan, FNB or any of their subsidiaries and for Dissenting Shares) shall cease to represent any interest (equity, shareholder or otherwise) in Rowan and shall automatically be converted exclusively into the right to receive, at the election of the holder thereof, either: (A) $36.00 in cash, without interest; (B) 2.3715 shares (the "Exchange Ratio") of FNB Stock; or (C) 55% of the cash amount set forth in clause (A) above and a number of shares of FNB Stock equal to 45% of the Exchange Ratio; provided, 2 however, that a holder of Rowan Stock may, pursuant to Section 1.6, make no election, in which case such shares of Rowan Stock held by such holder shall be converted exclusively into the right to receive the consideration set forth in Section 1.6(e) below with respect to Non-Election Shares (as defined in Section 1.6(b)). The amount of cash into which shares of Rowan Stock shall be converted pursuant to this Agreement is sometimes hereinafter referred to as "Cash Consideration," and the number of shares of FNB Stock into which shares of Rowan Stock shall be converted pursuant to this Agreement is sometimes hereinafter referred to as "Stock Consideration." The Cash Consideration and Stock Consideration are sometimes referred to herein collectively as the "Merger Consideration." No share of Rowan Stock, other than Dissenting Shares (as defined in Section 1.9), shall be deemed to be outstanding or have any rights other than those set forth in this Section 1.5(a) after the Effective Time. The Exchange Ratio is subject to possible adjustment in accordance with Section 1.5(c) below. (b) Fractional Shares. Notwithstanding any other provision of this ----------------- Agreement, each holder of shares of Rowan Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of FNB Stock (after taking into account all certificates delivered by such holder under Sections 1.6(c) and 1.8(a) below and the elections made pursuant to Section 1.6) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of FNB Stock multiplied by the market value of one share of FNB Stock at the Effective Time. The market value of one share of FNB Stock at the Effective Time shall be the last sale price of FNB Stock on Nasdaq Stock Market, Inc. National Market System ("Nasdaq") as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source selected by FNB, on the last trading day preceding the Effective Time. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares. (c) Anti-Dilution Provisions. In the event FNB changes the number of ------------------------ shares of FNB Stock issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend, recapitalization, reclassification, combination, exchange of shares, or similar transaction with respect to such stock and the record date therefor (in the case of a stock dividend) or the effective date thereof (in the case of a stock split, recapitalization, reclassification, combination, exchange of shares, or similar transaction for which a record date is not established) shall be prior to the Effective Time, the Exchange Ratio shall be appropriately adjusted to reflect such change. 1.6 Election and Allocation Procedures. ---------------------------------- (a) An election form (an "Election Form") and other appropriate and customary transmittal materials, which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing Rowan Stock shall pass, only upon proper delivery of such certificates to the Exchange Agent (as hereinafter defined) in such form as Rowan and FNB shall mutually agree shall be mailed on the Mailing Date (as defined below) to each shareholder of record of Rowan. The "Mailing Date" shall be the date on which proxy materials relating to the Merger are mailed to holders of shares of Rowan Stock. (b) Each Election Form shall entitle the holder of shares of Rowan Stock (or the beneficial owner through appropriate and customary documentation and instructions) to (i) 3 elect to receive the Cash Consideration for all of such holder's shares (a "Cash Election"), (ii)elect to receive the Stock Consideration for all of such holder's shares (a "Stock Election"), (iii)elect to receive Merger Consideration in accordance with clause (C) of the first sentence of Section 1.5(a) (a "Mixed Election"), or (iv) make no election or to indicate that such holder has no preference as to the receipt of the Cash Consideration or the Stock Consideration (a "Non-Election"). Shareholders of record of Rowan who hold shares of Rowan Stock as nominees, trustees or in other representative capacities may submit multiple Election Forms, provided that such representative certifies that each such Election Form covers all the shares of Rowan Stock held by that representative for a particular beneficial owner. Shares of Rowan Stock in respect of which a Cash Election shall have been made are referred to herein as "Cash Election Shares." Shares of Rowan Stock in respect of which a Stock Election shall have been made are referred to herein as "Stock Election Shares." Shares of Rowan Stock in respect of which no election shall have been made are referred to as "Non-Election Shares." The aggregate number of shares of Rowan Stock with respect to which a Stock Election shall have been made is referred to herein as the "Stock Election Number." Shares of Rowan Stock with respect to which a Mixed Election shall have been made shall not be deemed either Stock Election Shares or Cash Election Shares, but shall in all events be converted into the right to receive the Merger Consideration as specified in subsection (e) of this Section 1.6. (c) To be effective, a properly completed Election Form shall be submitted to the Exchange Agent on or before 5:00 p.m. North Carolina time on the last business day prior to the date of the shareholders' meeting contemplated by Section 4.3(a) (or such other time and date as Rowan and FNB may mutually agree) (the "Election Deadline"). An election shall have been properly made only if the Exchange Agent shall have actually received a properly completed Election Form by the Election Deadline. An Election Form shall be deemed properly completed only if accompanied by one or more certificates (or customary affidavits and, if required by FNB pursuant to Section 1.8(b), indemnification regarding the loss or destruction of such certificates or the guaranteed delivery of such certificates) representing all shares of Rowan Stock covered by such Election Form, together with duly executed transmittal materials included with the Election Form. Any Rowan shareholder may at any time prior to the Election Deadline change his or her election by written notice received by the Exchange Agent prior to the Election Deadline accompanied by a properly completed and signed revised Election Form. Any Rowan shareholder may, at any time prior to the Election Deadline, revoke his or her election by written notice received by the Exchange Agent prior to the Election Deadline or by withdrawal prior to the Election Deadline of his or her certificates, or of the guarantee of delivery of such certificates, previously deposited with the Exchange Agent. All elections shall be revoked automatically if the Exchange Agent is notified in writing by FNB and Rowan that this Agreement has been terminated. If a Rowan shareholder either (i) does not submit a properly completed Election Form by the Election Deadline, or (ii) revokes its Election Form prior to the Election Deadline, the shares of Rowan Stock held by such shareholder shall be designated Non-Election Shares. FNB shall cause the certificates representing Rowan Stock described in clause (ii) above to be promptly returned without charge to the person submitting the Election Form upon written request to that effect from the person who submitted the Election Form. Subject to the terms of this Agreement and of the Election Form, the Exchange Agent shall have reasonable discretion to determine whether any election, revocation or change has been properly or timely made and to disregard immaterial defects in any Election Form, and any good faith decisions of the Exchange Agent regarding such matters shall be binding and conclusive. 4 (d) Notwithstanding any other provision contained in this Agreement, 45% (the "Stock Conversion Number") of the total number of shares of Rowan Stock outstanding at the Effective Time to be converted into Merger Consideration pursuant to Section 1.5(a) excluding such shares as may be subject to an effective Mixed Election (the "Adjustable Conversion Shares"), shall be converted into the Stock Consideration and the remaining Adjustable Conversion Shares shall be converted into the Cash Consideration (in each case, excluding shares of Rowan Stock to be canceled as provided in Section 1.4(a) and Dissenting Shares); provided, however, that for federal income tax purposes, it is intended that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code and in order that the Merger will not fail to satisfy continuity of interest requirements under applicable federal income tax principles relating to reorganizations under Section 368(a) of the Code, as reasonably determined by counsel to FNB, FNB shall increase the number of Adjustable Conversion Shares that will be converted into the Stock Consideration and reduce the number of Adjustable Conversion Shares that will be converted into the right to receive the Cash Consideration. (e) Within five business days after the later to occur of the Election Deadline or the Effective Time, FNB shall cause the Exchange Agent to effect the allocation among holders of Rowan Stock of rights to receive the Cash Consideration and the Stock Consideration as follows: (i) In any event, all shares of Rowan Stock with respect to which a Mixed Election shall have been made shall be converted into 55% of the amount of cash set forth in clause (A) of the first sentence of Section 1.5(a) and a number of shares of FNB Stock equal to 45% of the Exchange Ratio; (ii) If the Stock Election Number exceeds the Stock Conversion Number, then all Cash Election Shares and all Non-Election Shares shall be converted into the right to receive the Cash Consideration, and each holder of Stock Election Shares will be entitled to receive the Stock Consideration in respect of that number of Stock Election Shares equal to the product obtained by multiplying (x) the number of Stock Election Shares held by such holder by (y) a fraction, the numerator of which is the Stock Conversion Number and the denominator of which is the Stock Election Number, with the remaining number of such holder's Stock Election Shares being converted into the right to receive the Cash Consideration; and (iii) If the Stock Election Number is less than the Stock Conversion Number (the amount by which the Stock Conversion Number exceeds the Stock Election Number being referred to herein as the "Shortfall Number"), then all Stock Election Shares shall be converted into the right to receive the Stock Consideration and the Non-election Shares and Cash Election Shares shall be treated in the following manner: (A) If the Shortfall Number is less than or equal to the number of Non-Election Shares, then all Cash Election Shares shall be converted into the right to receive the Cash Consideration and each holder of Non-Election Shares shall receive the Stock Consideration in respect of that 5 number of Non-Election Shares equal to the product obtained by multiplying (x) the number of Non-Election Shares held by such holder by (y) a fraction, the numerator of which is the Shortfall Number and the denominator of which is the total number of Non-Election Shares, with the remaining number of such holder's Non-Election Shares being converted into the right to receive the Cash Consideration; or (B) If the Shortfall Number exceeds the number of Non-Election Shares, then all Non-Election Shares shall be converted into the right to receive the Stock Consideration, and each holder of Cash Election Shares shall receive the Stock Consideration in respect of that number of Cash Election Shares equal to the product obtained by multiplying (x) the number of Cash Election Shares held by such holder by (y) a fraction, the numerator of which is the amount by which (1) the Shortfall Number exceeds (2) the total number of Non-Election Shares and the denominator of which is the total number of Cash Election Shares, with the remaining number of such holder's Cash Election Shares being converted into the right to receive the Cash Consideration. For purposes of this Section 1.6(e), if FNB is obligated to increase the number of Adjustable Conversion Shares to be converted into shares of FNB Stock as a result of the application of the last clause of Section 1.6(d) above, then the higher number shall be the Stock Conversion Number in the calculations set forth in this Section 1.6(e). 1.7 Closing Payment. As of the Effective Time, FNB shall deposit, or shall --------------- cause to be deposited, with First National Bank and Trust Company, a national bank wholly owned by FNB ("First National") and transfer agent of FNB Stock (the "Exchange Agent"), for the benefit of each holder of Rowan Stock for exchange in accordance with this Article I, (i) certificates representing the aggregate number of whole shares of FNB Stock to be issued as Stock Consideration, and (ii) an aggregate amount of cash to be delivered to holders of Rowan Stock as Cash Consideration and in lieu of any fractional shares, to be issued and paid pursuant to this Article I for outstanding shares of Rowan Stock (such certificates for shares of FNB Stock and such cash are referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions in accordance with this Article I, deliver the FNB Stock and cash contemplated to be issued with respect to Rowan Stock out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose. The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by FNB, on a daily basis. Any interest and other income resulting from such investments shall be paid to FNB. 1.8 Exchange of Shares. ------------------ (a) Exchange Procedures. After the Effective Time, FNB shall cause the ------------------- Exchange Agent to mail to the shareholders of Rowan of record at the Effective Time who did not previously submit a completed Election Form transmittal materials and other appropriate written instructions (collectively, a "Transmittal Letter") (which shall specify that delivery shall be effected, and risk of loss and title to the certificate representing shares of Rowan Stock prior to such Effective Time shall pass, only upon proper delivery of such certificates to the Exchange 6 Agent and which shall be in such form and have such other provisions as FNB may reasonably specify). After the Effective Time and upon the proper surrender of certificate(s) representing shares of Rowan Stock to the Exchange Agent, together with a properly completed and duly executed Transmittal Letter or, as applicable, Election Form, the holder of such certificate(s) shall be entitled to receive in exchange therefor the number of shares of FNB Stock and the cash to which such holder is entitled hereunder (including any cash payments to which such holder is entitled hereunder in respect of rights to receive fractional shares and any dividends or other distributions to which such holder is entitled pursuant to Section 1.8(c)), subject to any required withholding of applicable taxes. Neither FNB nor the Exchange Agent shall be obligated to deliver any of such payments in cash or stock until such holder surrenders the certificate(s) representing such holder's shares. The certificate(s) so surrendered shall be duly endorsed as the Exchange Agent may require. If there is a transfer of ownership of any shares of Rowan Stock not registered in the transfer records of Rowan, the Merger Consideration shall be issued to the transferee thereof if the certificates representing such Rowan Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of FNB and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Any portion of the Exchange Fund which remains undistributed to the holders of certificates representing Rowan Stock for six months after the Effective Time shall be delivered to FNB, upon demand, and any shareholders of Rowan who have not previously complied with the provisions of this Article I shall thereafter look only to FNB for payment of their claim for FNB Stock and/or cash and any dividends or distributions with respect to FNB Stock. Any portion of the Exchange Fund remaining unclaimed by holders of Rowan Stock five years after the Effective Time (or such earlier date immediately prior to such time as such portion would otherwise escheat to or become property of any government entity) shall, to the extent permitted by applicable law, become the property of FNB free and clear of any claims or interest of any person previously entitled therein. Any other provision of this Agreement notwithstanding, neither FNB nor the Exchange Agent shall be liable to any holder of shares of Rowan Stock for any amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property law. (b) Lost Certificates. Any shareholder of Rowan whose certificate ----------------- representing shares of Rowan Stock has been lost, destroyed, stolen or otherwise is missing shall be entitled to receive a certificate representing the shares of FNB Stock and/or any cash, including cash in lieu of fractional shares, to which he or she is entitled in accordance with and upon compliance with conditions reasonably imposed by the Exchange Agent or FNB (including, without limitation, a requirement that the shareholder provide a lost instruments indemnity bond in form, substance and amount reasonably satisfactory to the Exchange Agent and FNB). (c) Rights of Former Rowan Shareholders. At the Effective Time, the ----------------------------------- stock transfer books of Rowan shall be closed as to holders of Rowan Stock immediately prior to the Effective Time and no transfer of Rowan Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 1.8(a) of this Agreement, each certificate theretofore representing shares of Rowan Stock (other than shares to be canceled pursuant to Section 1.4(a) of this Agreement and Dissenting Shares) shall from and after the Effective Time represent for all purposes only the right to receive the Merger Consideration. If, after the Effective Time, certificates representing Rowan Stock are 7 presented to Rowan, FNB or the Exchange Agent for any reason, they shall be cancelled and exchanged as provided in this Article I. To the extent permitted by North Carolina law, former shareholders of record of Rowan shall be entitled to vote after the Effective Time at any meeting of shareholders of FNB the number of whole shares of FNB Stock into which their respective shares of Rowan Stock are converted, regardless of whether such holders have exchanged their certificates representing Rowan Stock for certificates representing FNB Stock in accordance with the provisions of this Agreement. Whenever a dividend or other distribution is declared by FNB on the FNB Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares of FNB Stock to be issued pursuant to the Merger, but beginning at the Effective Time no dividend or other distribution payable to the holders of record of FNB Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of Rowan Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section 1.8(a) of this Agreement; provided, however, that upon surrender of such Rowan Stock certificate (or compliance with Section 1.8(b) of this Agreement), the FNB Stock certificate, together with all undelivered dividends or other distributions (without interest) and any cash payments to be paid for fractional share interests (without interest), shall be delivered and paid with respect to each share represented by such Rowan Stock certificate. 1.9 Dissenting Shares. Notwithstanding any other provision of this ----------------- Agreement to the contrary, shares of Rowan Stock that are outstanding immediately prior to the Effective Time and that are held by shareholders who shall have not voted in favor of the Merger or consented thereto in writing and who properly shall have demanded appraisal for such shares in accordance with Article 13 of the North Carolina Business Corporation Act (collectively, the "Dissenting Shares") shall not be converted into or represent the right to receive the Merger Consideration. Such shareholders instead shall be entitled to receive payment of the appraised value of such shares held by them in accordance with the provisions of Article 13 of the North Carolina Business Corporation Act, except that all Dissenting Shares held by shareholders who shall have failed to perfect or who effectively shall have withdrawn or otherwise lost their rights to appraisal of such shares under Article 13 of the North Carolina Business Corporation Act shall thereupon be deemed to have been converted into and to have become exchangeable, as of the Effective Time, for the right to receive, without any interest thereon, the Merger Consideration upon surrender in the manner provided in Section 1.8 of the certificate or certificates that, immediately prior to the Effective Time, evidenced such shares. Rowan shall give FNB (i)prompt notice of any written demands for appraisal of any shares of Rowan Stock, attempted withdrawals of such demands for appraisal or any other instruments served pursuant to Article 13 of the North Carolina Business Corporation Act and received by Rowan relating to shareholders' rights of appraisal, and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands under Article 13 of the North Carolina Business Corporation Act consistent with the obligations of Rowan thereunder. Rowan shall not, except with the prior written consent of FNB, (x) make any payment with respect to such demand, (y) offer to settle or settle any demand for appraisal, or (z) waive any failure to timely deliver a written demand for appraisal or timely take any other action to perfect appraisal rights in accordance with Article 13 of the North Carolina Business Corporation Act. 8 1.10 Treatment of Rowan Stock Options. -------------------------------- (a) At the Effective Time, FNB shall assume each option to purchase Rowan Stock granted and outstanding under the Rowan Bancorp, Inc. Incentive Stock Option Plan or the Rowan Bancorp, Inc. Non-Statutory Stock Option Plan (collectively, the "Rowan Option Plan"), whether or not then exercisable, in accordance with the terms of the Rowan Option Plan and stock option agreement by which it is evidenced, except that from and after the Effective Time with respect to each such plan or agreement: (i) FNB shall be substituted for Rowan; (ii) the FNB stock option committee shall be substituted for the compensation committee of the Rowan Board of Directors administering the Rowan Option Plan; (iii) each stock option granted and outstanding under the Rowan Option Plan may be exercised solely for shares of FNB Stock; (iv) the number of shares of FNB Stock subject to each such stock option shall be the number of whole shares of FNB Stock (omitting any fractional share) determined by multiplying the number of shares of Rowan Stock subject to such stock option immediately prior to the Effective Time by the Exchange Ratio; and (v) the per share exercise price under each such stock option shall be adjusted by dividing the per share exercise price under each such stock option by the Exchange Ratio and rounding up to the nearest cent. In addition, each stock option which is an "incentive stock option" under the Rowan Option Plan shall be adjusted as required by Section 424 of the Code and the regulations promulgated thereunder so as to continue as an incentive stock option under Section 424(a) of the Code, and so as not to constitute a modification, extension, or renewal of the option, within the meaning of Section 424(h) of the Code. FNB and Rowan shall take all necessary steps to effectuate the foregoing provisions of this Section 1.10, including appropriate amendments to the Rowan Option Plan if necessary. (b) As soon as practicable after the Effective Time, FNB shall deliver to each of the participants in the Rowan Option Plan an appropriate notice setting forth such participant's rights pursuant thereto, and the grants pursuant to the Rowan Option Plan shall continue in effect on the same terms and conditions (subject to the adjustments required by Section 1.10(a) after giving effect to the Merger). At or prior to the Effective Time, FNB shall take all corporate action necessary to reserve for issuance sufficient shares of FNB Stock for delivery upon exercise of the stock options assumed by it in accordance with this Section 1.10. Rowan hereby represents that the Rowan Option Plan in its current form complies with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, as in effect as of the date hereof. (c) As soon as practicable after the Effective Time, FNB will use its best efforts to cause the shares subject to options granted under the Rowan Option Plan prior to the Effective Time (or any substitute options) to be registered under the Securities Act of 1933, as amended (the "1933 Act"), on a Form S-8 (or equivalent successor form) registration statement. 1.11 Closing. The closing of the transactions contemplated by this ------- Agreement (the "Closing") shall take place at the offices of Schell Bray Aycock Abel & Livingston P.L.L.C. in Greensboro, North Carolina, or at such other place as FNB shall designate, on a date mutually agreeable to Rowan and FNB (the "Closing Date") after the expiration of any and all required waiting periods following the effective date of all required approvals of the Merger by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the North Carolina Commissioner of Banks (the "Commissioner") and any other governmental or regulatory authorities (as soon as practicable, but in no event to be more than 60 days following the 9 expiration of all such required waiting periods). At the Closing, FNB and Rowan shall take such actions (including, without limitation, the delivery of certain closing documents and the execution of Articles of Merger under North Carolina law) as are required herein and as otherwise shall be required by law to consummate the Merger and cause it to become effective. 1.12 Effective Time. Subject to satisfaction or waiver of all conditions -------------- precedent set forth in this Agreement, the Merger shall become effective (the "Effective Time") on the date and at the time on which Articles of Merger containing the Plan of Merger and the other provisions required by, and executed in accordance with applicable North Carolina and applicable federal law shall have been accepted for filing by the Secretary of State of the State of North Carolina (or such later time as may be specified in the Articles of Merger); provided, however, that unless otherwise mutually agreed upon by the parties hereto, the Effective Time shall in no event be more than ten days following the Closing Date. 1.13 Further Assurances. If at any time after the Effective Time FNB shall ------------------ consider or be advised that any further deeds, assignments or assurances in law or any other actions are necessary, desirable or proper to vest, perfect or confirm of record or otherwise, in the Surviving Corporation, the title to any property or rights of Rowan acquired or to be acquired by reason of, or as a result of, the Merger, Rowan, its subsidiaries and their officers and directors shall execute and deliver all such proper deeds, assignments and assurances in law and do all things necessary, desirable or proper to vest, perfect or confirm title to such property or rights in FNB and otherwise to carry out the purpose of this Agreement, and that the officers and directors of FNB are fully authorized and directed in the name of Rowan or otherwise to take any and all such actions. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF ROWAN Except as otherwise specifically provided herein or as "Previously Disclosed" to FNB, Rowan hereby makes the following representations and warranties to FNB. ("Previously Disclosed" shall mean, as to Rowan, the disclosure of information in a letter delivered by Rowan to FNB specifically referring to this Agreement and arranged in sections corresponding to the sections, subsections and items of this Agreement applicable thereto, and which letter has been delivered prior to the execution of this Agreement. Information shall be deemed Previously Disclosed for the purpose of a given section, subsection or item of this Agreement only to the extent that a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.) 2.1 Corporate Organization, Capacity and Authority. ---------------------------------------------- (a) Organization. Rowan is a corporation duly organized and validly ------------ existing under the laws of the State of North Carolina and is registered with the Commissioner as a savings institution holding company and with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as amended. (b) Subsidiary. Rowan has one wholly owned subsidiary, Rowan Bank. ---------- Rowan Bank is sometimes referred to in this Agreement as the subsidiary of Rowan. Other than Rowan Bank, Rowan has no subsidiaries, direct or indirect, and does not own, directly or 10 indirectly, any stock or other equity interest in any other corporation, service corporation, joint venture, partnership or other entity, except for equity issues reflected in Rowan's investment portfolio and securities held in a fiduciary capacity. (c) Organization of Subsidiary. Rowan Bank is duly organized and -------------------------- validly existing under the laws of the State of North Carolina, and all of the outstanding capital stock of Rowan Bank is owned of record and beneficially, free and clear of all security interests and claims, by Rowan. All of the outstanding shares of capital stock of Rowan Bank are duly authorized, validly issued, fully paid and nonassessable. (d) Power and Authority. Each of Rowan and Rowan Bank has all ------------------- requisite power and authority (corporate and other) to own, lease and operate its properties and to carry on its business as it is now being conducted, is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect (as defined herein) on Rowan and its subsidiary, and, to the best knowledge and belief of the management of Rowan, is not transacting business or operating any properties owned or leased by it in violation of any provision of federal, state or local law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on Rowan and its subsidiary. For purposes of this Article II, "Material Adverse Effect" shall mean: (a) with respect to references to Rowan, any change in the business of Rowan that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, investments, properties or operations of Rowan, or (b) with respect to references to Rowan and its subsidiary, any change in the business of Rowan or its subsidiary that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations of Rowan and its subsidiary considered as one enterprise. (e) Constituent Documents. Rowan has previously delivered to FNB true, --------------------- accurate and complete copies of the currently effective charter and bylaws or equivalent organizational documents of Rowan and Rowan Bank, including all amendments and proposed amendments thereto. 2.2 Capital Stock. The authorized capital stock of Rowan consists of ------------- 5,000,000 shares of common stock, no par value, of which 565,883 shares are issued and outstanding as of February 6, 2002, and 1,000,000 shares of preferred stock, no par value, of which no shares are issued and outstanding. Other than the Rowan Stock, Rowan has no outstanding class of capital stock. Each outstanding share of Rowan Stock has been duly authorized and validly issued, is fully paid and nonassessable, has been issued in compliance with applicable federal and state securities laws and has not been issued in violation of the preemptive rights of any shareholder. 2.3 Principal Shareholders. Except as Previously Disclosed, there are no ----------------------- persons or entities known to Rowan that own beneficially, directly or indirectly, more than 5% of the outstanding shares of Rowan Stock. 2.4 Convertible Securities, Options, Etc. Except for the Rowan Option Plan ------------------------------------ and the stock options granted thereunder and the option granted to FNB pursuant to an option 11 agreement of even date herewith (the "FNB Option"), Rowan does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of Rowan Stock or any other securities of Rowan, (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of Rowan Stock or any other securities of Rowan, or (iii) plan, agreement or other arrangement pursuant to which shares of Rowan Stock or any other securities of Rowan or options, warrants, rights, calls or other commitments of any nature pertaining thereto, have been or may be issued. 2.5 Authorization and Validity of Agreement. This Agreement has been duly --------------------------------------- and validly approved by Rowan's Board of Directors. Subject only to approval of the Plan of Merger by the shareholders of Rowan, (i) Rowan has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to be taken to authorize Rowan to enter into this Agreement and to perform its obligations and agreements and to carry out the transactions described herein have been duly and properly taken, and (iii) this Agreement constitutes the valid and binding agreement of Rowan enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors' rights generally, (B) legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions). 2.6 Validity of Transactions; Absence of Required Consents or Waivers. ----------------------------------------------------------------- Provided the required approvals of Rowan's shareholders and of governmental or regulatory authorities are obtained, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by Rowan with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, the Articles of Incorporation or bylaws or the equivalent organizational documents of Rowan or Rowan Bank, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which Rowan or Rowan Bank is bound or by which it or its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of the properties or assets of Rowan or Rowan Bank; (iii) violate any applicable federal or state statute, law, rule or regulation, or any judgment, order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of Rowan or Rowan Bank; or (v) interfere with or otherwise adversely affect the ability of Rowan to carry on its business as presently conducted, or interfere with or otherwise adversely affect the ability of FNB to carry on such business after the Effective Time. No consents, approvals or waivers are required to be obtained from any person or entity in connection with Rowan's execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of Rowan's shareholders as described in Section 7.1(a) below and of governmental or regulatory authorities as described in Section 7.1(d) below and approvals previously obtained. 12 2.7 Books and Records. The books of account of each of Rowan and its ----------------- subsidiary have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books of account are complete and reflect accurately in all material respects Rowan's and Rowan Bank's, respectively, items of income and expense and all of its assets, liabilities and shareholders' equity. The minute books of each of Rowan and Rowan Bank accurately reflect in all material respects the corporate actions which its respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to FNB and its representatives. 2.8 Regulatory Reports. Since January 1, 1998, each of Rowan and Rowan ------------------ Bank has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the FDIC, (ii) the North Carolina Savings Institutions Division (the "Division") or the Commissioner and (iii) any other governmental or regulatory authorities having jurisdiction over Rowan or Rowan Bank except to the extent that failure to file such reports, registrations and statements would not have a Material Adverse Effect on Rowan and Rowan Bank. All such reports, registrations and statements filed by Rowan or Rowan Bank with the FDIC, the Division, the Commissioner or other such regulatory authority are collectively referred to herein as the "Rowan Reports." As of their respective dates, the Rowan Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and neither Rowan nor Rowan Bank has been notified that any such Rowan Reports were deficient as to form or content. Following the date of this Agreement, Rowan shall deliver to FNB, simultaneous with the filing thereof, a copy of each report, registration, statement or other regulatory filing made thereafter by Rowan or Rowan Bank, with the FDIC, the Division, the Commissioner or any other such regulatory authority. 2.9 Shareholder Communications and SEC Filings; Financial Statements. ---------------------------------------------------------------- (a) Shareholder Communications and SEC Filings. Rowan has made ------------------------------------------ available to FNB true, accurate and complete copies of all annual reports, quarterly reports, proxy statements and other communications by Rowan or Rowan Bank to its shareholders generally since December 31, 1997 (collectively, the "Rowan Shareholder Reports"). The Rowan Shareholder Reports did not as of their respective dates contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Rowan Shareholder Reports or necessary in order to make the statements in such Rowan Shareholder Reports, in light of the circumstances under which they were made, not misleading. Neither Rowan nor Rowan Bank has ever filed any report or registration statement pursuant to the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), and neither is or has been required by applicable law to do so. (b) Financial Statements. Rowan has made available to FNB the -------------------- following financial statements (collectively, the "Rowan Financial Statements"): (i) its consolidated balance sheets as of December 31, 2000 and 1999 and its consolidated statements of operations, 13 changes in shareholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998, together with notes thereto, all as audited by KPMG LLP, independent certified public accountants; (ii) its balance sheets as of March 31, 2001 and 2000, June 30, 2001 and 2000, and September 30, 2001 and 2000, and the related statements of income for the three-month, six-month and nine-month periods then ended. Following the date of this Agreement, Rowan promptly will deliver to FNB all other annual or interim financial statements prepared by or for Rowan. The Rowan Financial Statements (including any related notes and schedules thereto) (x) are in accordance with Rowan's books and records, and (y) except as stated therein, were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and present fairly Rowan's consolidated financial condition, assets and liabilities, results of operations, changes in shareholders' equity and changes in cash flows as of the dates indicated and for the periods specified therein subject, in the case of unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein, which adjustments will not be material in amount or effect. 2.10 Tax Returns and Other Tax Matters. (i) Each of Rowan and Rowan Bank --------------------------------- has timely filed or caused to be filed, or obtained proper extensions of time for filing, all federal, state and local income tax returns and reports which are required by law to have been filed, and all such returns and reports were true, correct and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state and local income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against Rowan, Rowan Bank or their respective properties have been fully paid or, if not yet due, a reserve or accrual which is reasonably believed by the management of Rowan to be adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes is reflected on the Rowan Financial Statements; (iii) tax returns and reports of Rowan and its subsidiary have not been subject to audit by the Internal Revenue Service (the "IRS") or the North Carolina Department of Revenue in the last seven years and neither Rowan nor Rowan Bank has received any indication of the pendency of any audit or examination in connection with any such tax return or report or has any knowledge that any such return or report is subject to adjustment; and (iv) neither Rowan nor Rowan Bank has executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax. 2.11 Absence of Material Adverse Changes or Certain Other Events. ----------------------------------------------------------- (a) Since December 31, 2000, each of Rowan and Rowan Bank has conducted its respective business only in the ordinary course, and there has been no Material Adverse Effect, and there has occurred no event or development and there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a Material Adverse Effect, on Rowan and Rowan Bank. (b) Since December 31, 2000, and other than in the ordinary course of its business, neither Rowan nor Rowan Bank has incurred any material liability or engaged in any material transaction or entered into any material agreement, increased the salaries, compensation or general benefits payable to its employees, suffered any loss, destruction or damage to any of its respective properties or assets, or made a material acquisition or disposition of any assets or 14 entered into any material contract or lease. For purposes of this Section 2.11(b), "material" means material to Rowan and Rowan Bank considered as one enterprise. 2.12 Absence of Undisclosed Liabilities. Neither Rowan nor Rowan Bank has ---------------------------------- any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent or otherwise, whether due or to become due (including, without limitation, tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the Rowan Financial Statements, or (ii) obligations or liabilities incurred in the ordinary course of its business since December 31, 2000 and which are not, individually or in the aggregate, material to Rowan and Rowan Bank considered as one enterprise. No facts or circumstances exist that could reasonably be expected to serve as the basis for any other liabilities of Rowan or Rowan Bank. 2.13 Litigation and Compliance with Law. ---------------------------------- (a) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of Rowan, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any governmental or regulatory authority, which currently exist or are ongoing, pending or, to the best knowledge and belief of management of Rowan, threatened, contemplated or probable of assertion, against, relating to or otherwise affecting Rowan and Rowan Bank, or any of their respective properties, assets or employees which, if determined adversely, could result in liability on the part of Rowan or Rowan Bank for, or subject Rowan or Rowan Bank to, material monetary damages, fines or penalties or an injunction, or which could have a Material Adverse Effect on Rowan and Rowan Bank or on Rowan's ability to consummate the Merger. (b) Except for such licenses, permits, orders, authorizations or approvals ("Permits") the absence of which would not have a Material Adverse Effect on Rowan or Rowan Bank, each of Rowan and Rowan Bank has all Permits of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its respective business or to own, lease and operate its respective properties. Except as would not have a Material Adverse Effect on Rowan and Rowan Bank, all such Permits are in full force and effect and no violations are or have been recorded in respect of any such Permits. No proceeding is pending or, to the best knowledge and belief of management of Rowan, threatened or probable of assertion to suspend, cancel, revoke or limit any Permit. (c) Neither Rowan nor Rowan Bank is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the Federal Reserve Board, the FDIC or the Commissioner) relating to its financial condition, directors or officers, employees, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against Rowan or Rowan Bank that in any manner limit, restrict, regulate, enjoin or prohibit any present or past business or practice of Rowan or Rowan Bank; and neither Rowan nor Rowan Bank has been advised or has any reason to believe that any regulatory or other governmental authority or any court is 15 contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award. (d) Neither Rowan nor Rowan Bank is in violation or default under, and each has complied with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including, without limitation, all provisions of North Carolina law relating to usury, the Consumer Credit Protection Act, and all other laws and regulations applicable to extensions of credit) except for any such violation, default or noncompliance as does not or would not have a Material Adverse Effect on Rowan and Rowan Bank, and, to the best knowledge and belief of management of Rowan, there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing. 2.14 Real Properties. Rowan has Previously Disclosed to FNB a listing of --------------- all real property owned or leased by Rowan or Rowan Bank (the "Real Property") and all leases pertaining to any such Real Property to which Rowan or Rowan Bank is a party (the "Real Property Leases"). With respect to all Real Property, Rowan or Rowan Bank has good and marketable fee simple title to, or a valid and subsisting leasehold interest in, such Real Property and owns the same free and clear of all mortgages, liens, leases, encumbrances, title defects and exceptions to title other than (i) the lien of current taxes not yet due and payable, and (ii) such imperfections of title and restrictions, covenants and easements (including utility easements) which do not materially affect the value of the Real Property and which do not and will not materially detract from, interfere with or restrict the present or future use of the properties subject thereto or affected thereby. With respect to each Real Property Lease (i) such lease is valid and enforceable in accordance with its terms, (ii) there currently exists no circumstance or condition which constitutes an event of default by Rowan or Rowan Bank (as lessor or lessee) or its respective lessor or which, with the passage of time or the giving of required notices will or could constitute such an event of default, and (iii) subject to any required consent of Rowan's lessor, each such Real Property Lease may be assigned to FNB and the execution and delivery of this Agreement does not constitute an event of default thereunder. To the best knowledge and belief of management of Rowan, the Real Property complies with all applicable federal, state and local laws, regulations, ordinances or orders of any governmental authority, including those relating to zoning, building and use permits, except for such noncompliance as does not or would not have a Material Adverse Effect on Rowan and Rowan Bank, and the Real Property may be used under applicable zoning ordinances for commercial banking facilities as a matter of right rather than as a conditional or nonconforming use. All improvements and fixtures included in or on the Real Property are in good condition and repair, ordinary wear and tear excepted, and there does not exist any condition which materially adversely affects the economic value thereof or materially adversely interferes (or will interfere after the Merger) with the contemplated use thereof. 2.15 Loans, Accounts, Notes and Other Receivables. -------------------------------------------- (a) All loans, accounts, notes and other receivables reflected as assets on the books and records of Rowan and Rowan Bank (i) have resulted from bona fide business transactions in the ordinary course of operations of Rowan and Rowan Bank, (ii) were made in 16 accordance with the standard loan policies and procedures of Rowan and Rowan Bank, and (iii)are owned by Rowan or Rowan Bank free and clear of all liens, encumbrances, assignments, participation or repurchase agreements or other exceptions to title or to the ownership or collection rights of any other person or entity. (b) All of the records of Rowan and Rowan Bank regarding all outstanding loans, accounts, notes and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to such loans the loan documentation of which indicate are secured by any real or personal property or property rights ("Loan Collateral"), such loans are in all material respects secured by valid, perfected and enforceable liens on all such Loan Collateral having the priority described in the records of such loan. Neither Rowan nor Rowan Bank has engaged in any form of indirect lending and no such indirect loans are outstanding. (c) To the best knowledge and belief of management of Rowan, each loan reflected as an asset on the books of Rowan and Rowan Bank and each guaranty therefor, is the legal, valid and binding obligation of the obligor or guarantor thereon, and no defense, offset or counterclaim has been asserted with respect to any such loan or guaranty. (d) Rowan has previously delivered to FNB (i) a written listing of each loan, extension of credit or other asset of Rowan or Rowan Bank which, as of December 31, 2001, is classified by the FDIC or the Commissioner as "Loss," "Doubtful," "Substandard" or "Special Mention" (or otherwise by words of similar import), or which it has designated as a special asset or for special handling or placed on any "watch list" because of concerns regarding the ultimate collectibility or deteriorating condition of such asset or any obligor or Loan Collateral therefor, and (ii) a written listing of each loan or extension of credit that, as of December 31, 2001, was past due as to the payment of principal or interest or both, or as to which any obligor thereon (including the borrower or any guarantor) otherwise was in default, is the subject of a proceeding in bankruptcy or otherwise has indicated any inability or intention not to repay such loan or extension of credit. Each such listing is accurate and complete in all material respects as of the date indicated. (e) As of December 31, 2001, Rowan's, or Rowan Bank's, reserve for possible loan losses (the "Loan Loss Reserve") has been established in conformity with GAAP, sound banking practices and all applicable requirements, rules and policies of the FDIC and the Commissioner and, in the best judgment of management of Rowan, is reasonable in view of the size and character of its loan portfolio, current economic conditions and other relevant factors, and is adequate to provide for losses relating to or the risk of loss inherent in its loan portfolio. At December 31, 2001, Rowan's Loan Loss Reserve was $729,070. 2.16 Securities Portfolio and Investments. All securities owned by Rowan or ------------------------------------ Rowan Bank (whether owned of record or beneficially) are held free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory, which would materially impair the ability of Rowan or Rowan Bank to dispose freely of any such security or otherwise to realize the benefits of ownership thereof at any time. There are no voting trusts or other agreements or undertakings to which Rowan or Rowan Bank is a party with respect to the voting of any such securities. With respect to all "repurchase agreements" to which Rowan or Rowan Bank has "purchased" securities under 17 agreement to resell, Rowan or Rowan Bank 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 owed that is secured by such collateral. Except for fluctuations in the market values of its investment securities, since December 31, 2001, there has been no significant deterioration or material adverse change in the quality, or any material decrease in the value, of Rowan's securities portfolio as a whole. 2.17 Personal Property and Other Assets. All tangible personal property of ---------------------------------- Rowan or Rowan Bank material to the business operations of Rowan and Rowan Bank (including, without limitation, all banking equipment, data processing equipment, vehicles, and all other tangible personal property located in any office of or used by Rowan or Rowan Bank in the operation of its business) is owned or leased by Rowan or Rowan Bank free and clear of all liens, encumbrances, leases, title defects or exceptions to title other than such as are not material in character, amount or extent, and which do not materially detract from the value of, or interfere with the present or future use or ability to convey, the property subject thereto or affected thereby. All of Rowan or Rowan Bank's tangible personal property material to its business is in good operating condition and repair, ordinary wear and tear excepted. 2.18 Patents and Trademarks. Rowan and Rowan Bank own, possess or have the ---------------------- right to use any and all patents, licenses, trademarks, trade names, copyrights, trade secrets and proprietary and other confidential information necessary to conduct their business as now conducted; and neither Rowan nor Rowan Bank has violated, and currently is not in conflict with, any patent, license, trademark, trade name, copyright or proprietary right of any other person or entity. 2.19 Environmental Matters. --------------------- (a) Rowan has Previously Disclosed to FNB copies of all written reports, correspondence, notices or other materials, if any, in its or any subsidiary's possession pertaining to environmental surveys or assessments of the Real Property or any of its Loan Collateral and any improvements thereon, or to any violation of "Environmental Laws" (as defined below) on, affecting or otherwise involving the Real Property or any Loan Collateral. (b) There has been no presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any "Hazardous Substances" (as defined below) by any person prior to the date hereof on, from or relating to the Real Property or, to the best knowledge and belief of management of Rowan, the Loan Collateral, which constitutes a violation of any Environmental Laws. (c) Neither Rowan nor Rowan Bank has violated any federal, state or local law, rule, regulation, order, permit or other requirement relating to health, safety or the environment or imposing liability, responsibility or standards of conduct applicable to environmental conditions, and there has been no violation of any Environmental Laws (as defined in Section 2.19(f) below) (including, to the best knowledge and belief of management of Rowan, any violation with respect to or relating to any Loan Collateral) by any other person or 18 entity for whose liability or obligation with respect to any particular matter or violation Rowan or Rowan Bank is or may be responsible or liable, except to the extent any violations of which, when taken as a whole, would not have a Material Adverse Effect on Rowan or Rowan Bank. (d) Neither Rowan nor Rowan Bank is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to the Real Property or, to the best knowledge and belief of management of Rowan, any Loan Collateral by any person or entity. (e) No facts, events or conditions relating to the Real Property or, to the best knowledge and belief of management of Rowan, any Loan Collateral, or the operations of Rowan or Rowan Bank, will prevent, hinder or limit continued compliance with Environmental Laws, or give rise to any investigatory, emergency removal, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws. (f) For purposes of this Agreement, "Environmental Laws" shall include: (i) all federal, state and local statutes, regulations, ordinances, orders, decrees, and similar provisions having the force or effect of law, (ii) all contractual agreements, and (iii) all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all standards of conduct and bases of obligations relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, discharge, release, threatened release, control, emergency removal, clean-up or remediation of any Hazardous Substances (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, any "Superfund" or "Superlien" law, the Americans with Disabilities Act, and the Occupational Safety and Health Act), as such may now or at any time hereafter be defined or in effect. (g) For purposes of this Agreement, "Hazardous Substances" shall include hazardous, toxic or otherwise regulated materials, substances or wastes; chemical substances or mixtures; pesticides; pollutants; contaminants; toxic chemicals; oil or other petroleum products, byproducts, or constituents (including but not limited to crude oil, diesel oil, fuel oil, gasoline, lubrication oil, oil refuse, oil mixed with other waste, oil sludge, and all other liquid hydrocarbons regardless of specific gravity); asbestos or asbestos containing material; flammable 19 explosives; polychlorinated biphenyls ("PCBs") or any material containing PCBs; radioactive materials; biological micro organisms, viruses, fungi, spores; environmental tobacco smoke; radon or radon gas; formaldehyde or any material containing formaldehyde; fumigants; any material or substance comprising or contributing to conditions known as "sick building syndrome," "building-related illness" or similar conditions or exposures; and/or any hazardous, toxic, regulated or dangerous waste, substance or material defined as such by the United States Environmental Protection Agency or any other federal, state or local governmental agency or political subdivision thereof, or for the purpose of or by any Environmental Laws, as now or at any time hereafter may be in effect. 2.20 Brokerage or Finders' Commissions. All negotiations relative to this --------------------------------- Agreement and the transactions described herein have been carried on by Rowan or its representative, Trident Securities, a division of McDonald Investments Inc. ("Trident"), directly with FNB or its representatives, and no person or firm other than Trident has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, Rowan or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein. 2.21 Material Contracts. ------------------ (a) Except as Previously Disclosed, neither Rowan nor Rowan Bank is a party to or bound by any agreement, other than loans made in the ordinary course of business, (i)involving money or other property in an amount or with a value in excess of $50,000, (ii) which calls for the provision of goods or services to Rowan and cannot be terminated without material penalty upon written notice to the other party thereto, (iii) which is material to Rowan or Rowan Bank and was not entered into in the ordinary course of business, (iv) which involves hedging, options or any similar trading activity, or interest rate exchanges or swaps, (v) which commits Rowan or Rowan Bank to extend any loan or credit (with the exception of letters of credit, lines of credit and loan commitments extended in the ordinary course of a subsidiary's business), (vi) which involves the purchase or sale of any assets of Rowan or Rowan Bank, or the purchase, sale, issuance, redemption or transfer of any capital stock or other securities of Rowan or Rowan Bank, or (vii) with any director, officer or principal shareholder of Rowan or Rowan Bank (including, without limitation, any consulting agreement, but not including any agreement relating to loans or other banking services which were made in the ordinary course of its business and on substantially the same terms and conditions as were prevailing at that time for similar agreements with unrelated persons). (b) Neither Rowan nor Rowan Bank is in default, and there has not occurred any event which with the lapse of time or giving of notice or both would constitute such a default, under any contract, lease, insurance policy, commitment or arrangement to which it is a party or by which it or its property is or may be bound or affected or under which it or its property receives benefits. 2.22 Employment Matters; Employee Relations. -------------------------------------- 20 (a) Each of Rowan and Rowan Bank (i) has paid in full to or accrued on behalf of all its respective directors, officers and employees all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services rendered, including all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services performed by them to the date of this Agreement and all vacation pay, sick pay, severance pay and other amounts promised to the extent required by law or its existing policies or practices, and (ii) is in compliance in all material respects with all applicable federal, state and local laws, statutes, rules and regulations with regard to employment and employment practices, terms and conditions, and wages and hours and other compensation matters; and no person has, to the best knowledge and belief of management of Rowan, asserted that Rowan or Rowan Bank is liable in any amount for any arrearages in wages or employment taxes or for any penalties for failure to comply with any of the foregoing. (b) There is no action, suit or proceeding by any person pending or, to the best knowledge and belief of management of Rowan, threatened against Rowan or Rowan Bank (or their employees), involving employment discrimination, harassment, wrongful discharge or similar claims. Neither Rowan nor Rowan Bank is a party to or bound by any collective bargaining agreement with any of its employees, any labor union or any other collective bargaining unit or organization. There is no pending or threatened labor dispute, work stoppage or strike involving Rowan, Rowan Bank, or any of their employees, or any pending or threatened proceeding in which it is asserted that Rowan or Rowan Bank has committed an unfair labor practice; and, neither Rowan nor Rowan Bank is aware of any activity involving it or any of its employees seeking to certify a collective bargaining unit or engaging in any other labor organization activity. 2.23 Employment Agreements; Employee Benefit Plans. --------------------------------------------- (a) Rowan has Previously Disclosed to FNB a true and complete list of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans; all employment and severance contracts; all medical, dental, health, and life insurance plans; all vacation, sickness and other leave plans, disability and death benefit plans; and all other employee benefit plans, contracts, or arrangements maintained or contributed to by Rowan or Rowan Bank for the benefit of any employees, former employees, directors, former directors or any of their beneficiaries (collectively, the "Plans"). True and complete copies of all Plans, including, but not limited to, any trust instruments or insurance contracts, if any, forming a part thereof, and all amendments thereto, previously have been supplied to FNB. Neither Rowan nor Rowan Bank maintains, sponsors, contributes to or otherwise participates in any "Employee Benefit Plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), any "Multiemployer Plan" within the meaning of Section 3(37) of ERISA, or any "Multiple Employer Welfare Arrangement" within the meaning of Section 3(40) of ERISA. Each Plan that is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA and which is intended to be qualified under Section 401(a) of the Code, has received or applied for a favorable determination letter from the IRS and Rowan is not aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter. All reports and returns with respect to the Plans (and any Plans previously maintained by Rowan or Rowan Bank) required to be filed with any governmental department, 21 agency, service or other authority, including, without limitation, Internal Revenue Service Form 5500 (Annual Report), have been properly and timely filed. (b) All "Employee Benefit Plans" maintained by or otherwise covering employees or former employees of Rowan or Rowan Bank currently are, and at all times have been, in compliance with all provisions and requirements of ERISA except those the noncompliance of which, when taken as a whole, would not have a Material Adverse Effect on Rowan or its subsidiary. There is no pending or threatened litigation relating to any Plan or any such Plan previously maintained by Rowan. Neither Rowan nor Rowan Bank has engaged in a transaction with respect to any Plan that has subjected it, or absent the exemption under which the transaction was effected, would subject it to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA. (c) Rowan has delivered to FNB a true, correct and complete copy (including copies of all amendments thereto) of each of its retirement plans that is intended to be qualified under Section 401(a) of the Code (collectively, the "Retirement Plans"), together with true, correct and complete copies of the summary plan descriptions relating to the Retirement Plans, the most recent determination letters received from the IRS regarding the Retirement Plans, and the most recent Annual Reports (Form 5500 series) and related schedules, if any, for the Retirement Plans. The Retirement Plans are qualified under the provisions of Section 401(a) of the Code, the trusts under the Retirement Plans are exempt trusts under Section 501(a) of the Code, and determination letters have been issued or applied for with respect to the Retirement Plans to said effect, including determination letters covering the current terms and provisions of the Retirement Plans. There are no issues relating to said qualification or exemption of the Retirement Plans currently pending before the IRS, the United States Department of Labor, the Pension Benefit Guaranty Corporation or any court. The Retirement Plans and the administration thereof meet (and have met since the establishment of the Retirement Plans) the requirements of ERISA, the Code and all other laws, rules and regulations applicable to the Retirement Plans and do not violate (and since the establishment of the Retirement Plans have not violated) any of the provisions of ERISA, the Code and such other laws, rules and regulations, except to the extent such violation, when taken as a whole, would not have a Material Adverse Effect on Rowan or Rowan Bank. Without limiting the generality of the foregoing, all reports and returns with respect to the Retirement Plans required to be filed with any governmental department, agency, service or other authority have been properly and timely filed. There are no disputes or unresolved disagreements with respect to the Retirement Plans or the administration thereof currently existing between Rowan, Rowan Bank or any trustee or other fiduciary thereunder, and any governmental agency, any current or former employee of Rowan, Rowan Bank or beneficiary of any such employee or any other person or entity. No "reportable event" within the meaning of Section 4043(b) of ERISA has occurred at any time with respect to the Retirement Plans, other than those, when taken as a whole, would not have a Material Adverse Effect on Rowan or Rowan Bank. (d) No liability under subtitle C or D of Title IV of ERISA has been or is expected to be incurred by Rowan or Rowan Bank with respect to the Retirement Plans or with respect to any other ongoing, frozen or terminated defined benefit pension plan currently or formerly maintained by Rowan or Rowan Bank. Neither Rowan nor Rowan Bank presently contributes to a "Multiemployer Plan" or has ever contributed to such a plan. All contributions 22 required to be made pursuant to the terms of each of the Plans (including without limitation the Retirement Plans and any other "pension plan" (as defined in Section 3(2) of ERISA, provided such plan is intended to qualify under the provisions of Section 401(a) of the Code) maintained by Rowan or Rowan Bank have been timely made. Neither the Retirement Plans nor any other "pension plan" maintained by Rowan or Rowan Bank have an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither Rowan nor Rowan Bank has provided, and is not required to provide, security to any "pension plan" or to any "Single Employer Plan" pursuant to Section 401(a)(29) of the Code. Under the Retirement Plans and any other "pension plan" maintained by Rowan or Rowan Bank as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all "benefit liabilities," within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan's most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of any such plan since the last day of the most recent plan year. (e) There are no restrictions on the rights of Rowan or Rowan Bank to amend or terminate any Plan. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (except as otherwise specifically provided for or contemplated by the transactions described in this Agreement) (i) result in any payment to any person (including, without limitation, any severance compensation or payment, unemployment compensation, "golden parachute" or "change in control" payment, or otherwise) becoming due under any plan or agreement to any director, officer, employee or consultant, (ii)increase any benefits otherwise payable under any plan or agreement, or (iii) result in any acceleration of the time of payment or vesting of any such benefit. 2.24 Insurance. Rowan has in effect a "financial institutions bond" and --------- such other policies of general liability, casualty, directors and officers liability, employee fidelity, errors and omissions and other property and liability insurance as have been Previously Disclosed to FNB (the "Policies"). The Policies provide coverage in such amounts and against such liabilities, casualties, losses or risks as is required by applicable law or regulation; and, in the judgment of management of Rowan, the insurance coverage provided under the Policies is reasonable and adequate in all respects for Rowan and Rowan Bank. Each of the Policies is in full force and effect and is valid and enforceable in accordance with its terms, and is underwritten by an insurer of recognized financial responsibility that is qualified to transact business in North Carolina; and Rowan and Rowan Bank have taken all requisite actions (including the giving of required notices) under each such Policy to preserve all rights thereunder with respect to all matters. Neither Rowan nor Rowan Bank is in default under the provisions of, has received notice of cancellation or nonrenewal of or any premium increase on, or has any knowledge of any failure to pay any premium on or any inaccuracy in any application for any Policy. There are no pending claims under any Policy, and Rowan has no knowledge of any facts or of the occurrence of any event that is reasonably likely to result in any such claim. 2.25 Insurance of Deposits. Rowan Bank is an "insured institution" as --------------------- defined in the Federal Deposit Insurance Act and applicable regulations thereunder. The deposits of each depositor in Rowan Bank are insured by the FDIC to the maximum amount provided by law, all deposit insurance premiums due from Rowan Bank to the FDIC have been paid in full in a 23 timely fashion, and, to the best knowledge and belief of Rowan, no proceedings have been commenced or are contemplated by the FDIC or otherwise to terminate such insurance. 2.26 Compensation; Stock Ownership. Rowan has Previously Disclosed (i) the ----------------------------- name and current salary or wage rate for each present employee of Rowan or Rowan Bank, (ii) the name of and number of shares of Rowan Stock beneficially owned by each of the directors and officers of Rowan and by any person or entity known to Rowan to own beneficially 5% or more of Rowan Stock, and (iii) the name, number and vesting schedule of outstanding options and restricted stock awards held by each person to whom a stock option or restricted stock award has been granted and currently is outstanding under any stock option or other plan of Rowan, including, without limitation, the Rowan Option Plan. 2.27 Affiliates. Rowan will deliver to FNB within 15 days of the date ---------- hereof a listing of those persons deemed by Rowan and its counsel as of the date of this Agreement to be "Affiliates" of Rowan as that term is defined in Rule 405 promulgated under the 1933 Act, including persons, trusts, estates or other entities related to persons deemed to be Affiliates of Rowan. 2.28 Obstacles to Regulatory Approval or Tax Treatment. To the best ------------------------------------------------- knowledge and belief of management of Rowan, there exists no fact or condition relating to Rowan or Rowan Bank that may reasonably be expected to (i) prevent, impede or delay FNB or Rowan from obtaining the regulatory approvals required to consummate transactions described herein, or (ii) prevent the Merger from qualifying to be a tax-free reorganization under Section 368(a)(1)(A) of the Code; and, if any such fact or condition becomes known to Rowan, Rowan shall promptly (and in any event within three days after obtaining such knowledge) communicate such fact or condition to the President of FNB. 2.29 Disclosure. To the best knowledge and belief of management of Rowan, ---------- no written statement, certificate, schedule, list or other written information furnished by or on behalf of Rowan at any time to FNB in connection with this Agreement (including without limitation the statements contained herein), 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 Rowan to FNB is or will be a true and complete copy of such document, unmodified except by another document delivered by Rowan. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF FNB Except as otherwise specifically described herein or as "Previously Disclosed" to Rowan, FNB hereby makes the following representations and warranties to Rowan. ("Previously Disclosed" shall mean, as to FNB, the disclosure of information in a letter delivered by FNB to Rowan specifically referring to this Agreement and arranged in sections corresponding to the sections, subsections and items of this Agreement applicable thereto, and which letter has been delivered prior to the execution of this Agreement. Information shall be deemed Previously Disclosed for the purpose of a given section, subsection or item of this Agreement only to the 24 extent a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.) 3.1 Corporate Organization, Capacity and Authority. ---------------------------------------------- (a) Organization. FNB is a corporation duly organized and validly ------------ existing under the laws of the State of North Carolina and is registered with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as amended. (b) Subsidiaries. FNB has one wholly owned subsidiary, First National ------------ Bank and Trust Company, a national banking corporation. First National has one wholly owned subsidiary, First National Investor Services, Inc., a North Carolina corporation ("FNIS"). First National and FNIS are sometimes referred to as the subsidiaries of FNB. Other than First National and FNIS, FNB has no subsidiaries, direct or indirect, and does not own, directly or indirectly, any stock or other equity interest in any other corporation, service corporation, joint venture, partnership or other entity, except for equity issues reflected in First National's investment portfolio and securities held in a fiduciary capacity. (c) Organization of Subsidiaries. First National is duly organized and ---------------------------- validly existing under the laws of the United States. FNIS is duly organized and validly existing under the laws of the State of North Carolina. All of the outstanding capital stock of each such subsidiary is owned of record and beneficially, free and clear of all security interests and claims, by FNB or First National. All of the outstanding shares of capital stock of each of FNB's subsidiaries are duly authorized, validly issued, fully paid and nonassessable. (d) Power and Authority. Each of FNB and its subsidiaries has all ------------------- requisite power and authority (corporate and other) to own, lease and operate its properties and conduct its business as now being conducted, is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect (as defined herein) on FNB and its subsidiaries, and is not transacting business, or operating any properties owned or leased by it, in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on FNB and its subsidiaries. For purposes of this Article III, "Material Adverse Effect" shall mean: (a) with respect to references to FNB, any change in the business of FNB that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, investments, properties or operations of FNB, or (b) with respect to references to FNB and its subsidiaries, any change in the business of FNB or its subsidiaries that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations of FNB and its subsidiaries considered as one enterprise. (e) Constituent Documents. FNB has previously delivered to Rowan true, --------------------- accurate and complete copies of the currently effective charter and bylaws or equivalent organizational documents of each of its subsidiaries, including all amendments and proposed amendments thereto. 25 3.2 Capital Stock. The authorized capital stock of FNB consists of ------------- 10,000,000 shares of FNB Stock, of which 4,763,261 shares are issued and outstanding as of February 6, 2002, and 200,000 shares of preferred stock, par value $10.00, of which no shares are issued and outstanding. Each outstanding share of FNB Stock has been duly authorized and validly issued, is fully paid and nonassessable, has been issued in compliance with applicable federal and state securities laws and has not been issued in violation of the preemptive rights of any shareholder. The shares of FNB Stock issued to Rowan's shareholders pursuant to this Agreement, when issued as described herein, will be duly authorized, validly issued, fully paid and nonassessable, and will be issued in compliance with applicable federal and state securities laws. 3.3 Convertible Securities, Options, Etc. Except for the FNB Corp. Stock ------------------------------------ Compensation Plan and the stock options granted thereunder and the Carolina Fincorp, Inc. Stock Option Plan and the stock options granted thereunder, FNB does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of FNB Stock or any other securities of FNB, (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of FNB Stock or any other securities of FNB, or (iii) plan, agreement or other arrangement pursuant to which shares of FNB Stock or any other securities of FNB, or options, warrants, rights, calls or other commitments of any nature pertaining thereto, have been or may be issued. 3.4 Authorization and Validity of Agreement. This Agreement has been duly --------------------------------------- and validly approved by FNB's Board of Directors. Subject to required shareholder approval, (i)FNB has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to be taken to authorize FNB to enter into this Agreement and to perform its respective obligations and agreements and to carry out the transactions described herein have been duly and properly taken, and (iii) this Agreement constitutes the valid and binding agreement of FNB enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors' rights generally, (B) legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions). 3.5 Validity of Transactions; Absence of Required Consents or Waivers. ----------------------------------------------------------------- Provided the required approvals of FNB's shareholders and of governmental or regulatory authorities are obtained, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by FNB with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, the Articles of Incorporation or bylaws or the equivalent organizational documents of FNB or any subsidiary, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which FNB or any subsidiary, is bound or by which it, its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of the properties or assets of FNB or any subsidiary; (iii) violate any applicable federal or state statute, 26 law, rule or regulation, or any order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of FNB or any subsidiary; or (v) interfere with or otherwise adversely affect FNB's ability to carry on its business as presently conducted. No consents, approvals or waivers are required to be obtained from any governmental or regulatory authority in connection with FNB's execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of governmental or regulatory authorities described in Section 7.1(d) below and approvals previously obtained. 3.6 Books and Records. The books of account of FNB and its subsidiaries ----------------- have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books of account are complete and reflect accurately in all material respects FNB's and its subsidiaries', respectively, items of income and expense and all of its assets, liabilities and shareholders' equity. The minute books of each of FNB and its subsidiaries accurately reflect in all material respects the corporate actions which its respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to Rowan and its representatives. 3.7 Regulatory Reports. Since January 1, 1998, FNB and its subsidiaries ------------------ have filed all reports, registrations and statements, together with any amendments that were required to be made with respect thereto, that were required to be filed with the Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency ("OCC") and any other governmental or regulatory authorities having jurisdiction over FNB or its subsidiaries except to the extent that failure to file such reports, registrations and statements would not have a Material Adverse Effect on FNB and its subsidiaries. All such reports and statements filed with the Federal Reserve Board, the FDIC, the OCC or other such regulatory authority are collectively referred to herein as the "FNB Reports." As of their respective dates, the FNB Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and, FNB has not been notified that any such FNB Reports were deficient in any material respect as to form or content. Following the date of this Agreement, FNB shall deliver to Rowan upon its request a copy of any report, registration, statement or other regulatory filing made by FNB or its subsidiaries with the Federal Reserve Board, the FDIC, the OCC or any other such regulatory authority. 3.8 SEC Filings; Financial Statements. --------------------------------- (a) SEC Filings. FNB has filed and made available to Rowan all forms, ----------- reports, and documents required to be filed by FNB with the SEC since December 31, 1998 (collectively, the "FNB SEC Reports"). The FNB SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the 1933 Act and the 1934 Act and (ii)did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or 27 omit to state a material fact required to be stated in such FNB SEC Reports or necessary in order to make the statements in such FNB SEC Reports, in light of the circumstances under which they were made, not misleading. (b) Financial Statements. FNB has filed with the SEC and made -------------------- available to Rowan the following financial statements (collectively, the "FNB Financial Statements"): (i)its consolidated balance sheets as of December 31, 2000 and 1999 and its consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998, together with notes thereto, all as audited by KPMG LLP, independent certified public accountants, and (ii) its balance sheets as of March 31, 2001 and 2000, June 30, 2001 and 2000, and September 30, 2001 and 2000, and the related statements of income for the three-month, six-month and nine-month periods then ended. Following the date of this Agreement, FNB promptly will deliver to Rowan all other annual or interim financial statements prepared by or for FNB. The FNB Financial Statements (including any related notes and schedules thereto) (i) are in accordance with FNB's books and records, and (ii) were prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated and present fairly FNB's consolidated financial condition, assets and liabilities, results of operations, changes in shareholders' equity and changes in cash flows as of the dates indicated and for the periods specified therein subject, in the case of unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein, which adjustments will not be material in amount or effect. 3.9 Tax Returns and Other Tax Matters. (i) Each of FNB and its --------------------------------- subsidiarieshas timely filed or caused to be filed, or obtained proper extensions of time for filing, all federal, state and local income tax returns and reports which are required by law to have been filed, and all such returns and reports were true, correct and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state and local income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against FNB, its subsidiaries or their respective properties have been fully paid or, if not yet due, a reserve or accrual which is reasonably believed by the management of FNB to be adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes is reflected on the FNB Financial Statements; (iii) tax returns and reports of FNB and its subsidiaries have not been subject to audit by the Internal Revenue Service (the "IRS") or the North Carolina Department of Revenue in the last seven years and neither FNB nor any of its subsidiaries has received any indication of the pendency of any audit or examination in connection with any such tax return or report or has any knowledge that any such return or report is subject to adjustment; and (iv) neither FNB nor any of its subsidiaries has executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax. 3.10 Absence of Material Adverse Changes. Since December 31, 2000, there ----------------------------------- has been no material adverse change, and there has occurred no event or development and there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a Material Adverse Effect on FNB and its subsidiaries. 28 3.11 Absence of Undisclosed Liabilities. Neither FNB nor its subsidiaries ---------------------------------- have any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent or otherwise, whether due or to become due (including without limitation tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the FNB Financial Statements, or (ii) obligations or liabilities incurred in the ordinary course of its business since December 31, 2000 and which are not, individually or in the aggregate, material to FNB and its subsidiaries considered as one enterprise. 3.12 Litigation and Compliance with Law. ---------------------------------- (a) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of FNB, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any governmental or regulatory authority, which currently exist or are ongoing, pending or, to the best knowledge and belief of management of FNB, threatened, contemplated or probable of assertion, against, relating to or otherwise affecting FNB, its subsidiaries or any of their respective properties, assets or employees which, if determined adversely, could result in liability on the part of FNB or its subsidiaries for, or subject FNB or its subsidiary to, material monetary damages, fines or penalties or an injunction, or which could have a Material Adverse Effect on FNB and its subsidiaries or on FNB's ability to consummate the Merger. (b) Except for such licenses, permits, orders, authorizations or approvals ("Permits") the absence of which would not have a Material Adverse Effect on FNB or its subsidiaries, each of FNB and its subsidiaries has all Permits of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its respective business or to own, lease and operate its respective properties. Except as would not have a Material Adverse Effect on FNB and its subsidiaries, all such Permits are in full force and effect and no violations are or have been recorded in respect of any such Permits. No proceeding is pending or, to the best knowledge and belief of management of FNB, threatened or probable of assertion to suspend, cancel, revoke or limit any Permit. (c) Neither FNB nor any of its subsidiaries is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the Federal Reserve Board, the FDIC or the OCC) relating to its financial condition, directors or officers, employees, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against FNB or its subsidiaries which in any manner limits, restricts, regulates, enjoins or prohibits any present or past business or practice of FNB or its subsidiaries; and neither FNB nor any of its subsidiaries has been advised or has any reason to believe that any regulatory or other governmental authority or any court is contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award. (d) Neither FNB nor any of its subsidiaries is in violation or default under, and each has complied with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or 29 regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including without limitation all provisions of North Carolina law relating to usury, the Consumer Credit Protection Act, and all other laws and regulations applicable to extensions of credit) except for any such violation, default or noncompliance as does not or would not have a Material Adverse Effect on FNB and its subsidiaries, and, to the best knowledge and belief of management of FNB, there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing. 3.13 Absence of Brokerage or Finders' Commissions. All negotiations -------------------------------------------- relative to this Agreement and the transactions described herein have been carried on by FNB or its representative, Keefe, Bruyette & Woods, Inc. ("KBW") directly with Rowan or its representatives and no person or firm or other than KBW has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, FNB or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein. 3.14 Obstacles to Regulatory Approval or Tax Treatment. To the best of the ------------------------------------------------- knowledge and belief of the management of FNB, no fact or condition relating to FNB exists that may reasonably be expected to (i) prevent, impede or delay FNB or Rowan from obtaining the regulatory approvals required in order to consummate transactions described herein, or (ii) prevent the Merger from qualifying to be a tax-free reorganization under Section 368(a)(1)(A) of the Code; and, if any such fact or condition becomes known to the executive officers of FNB, FNB promptly (and in any event within three days after obtaining such knowledge) shall communicate such fact or condition to the President of Rowan. 3.15 Loans, Accounts, Notes and Other Receivables. -------------------------------------------- (a) All loans, accounts, notes and other receivables reflected as assets on the books and records of FNB and its subsidiaries (i) have resulted from bona fide business transactions in the ordinary course of operations of FNB and its subsidiaries, (ii) were made in accordance with the standard loan policies and procedures of FNB and its subsidiaries, and (iii)are owned by FNB or a subsidiary free and clear of all liens, encumbrances, assignments, participation or repurchase agreements or other exceptions to title or to the ownership or collection rights of any other person or entity. (b) All of the records of FNB and its subsidiaries regarding all outstanding loans, accounts, notes and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to such loans the loan documentation of which indicate are secured by any Loan Collateral, such loans are in all material respects secured by valid, perfected and enforceable liens on all such Loan Collateral having the priority described in the records of such loan. (c) To the best knowledge and belief of management of FNB, each loan reflected as an asset on the books of FNB and its subsidiaries and each guaranty therefor, is the legal, valid and binding obligation of the obligor or guarantor thereon, and no defense, offset or counterclaim has been asserted with respect to any such loan or guaranty. 30 3.16 Securities Portfolio and Investments. All securities owned by FNB or ------------------------------------ any subsidiary (whether owned of record or beneficially) are held free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory, which would materially impair the ability of FNB or any subsidiary to dispose freely of any such security or otherwise to realize the benefits of ownership thereof at any time. There are no voting trusts or other agreements or undertakings to which FNB or any subsidiary is a party with respect to the voting of any such securities. With respect to all "repurchase agreements" to which FNB or any subsidiary has "purchased" securities under agreement to resell, FNB or any subsidiary 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 owed that is secured by such collateral. Except for fluctuations in the market values of its investment securities, since December 31, 2001, there has been no significant deterioration or material adverse change in the quality, or any material decrease in the value, of FNB's securities portfolio as a whole. 3.17 Disclosure. To the best of the knowledge and belief of FNB, no written ---------- statement, certificate, schedule, list or written information furnished by or on behalf of FNB at any time to Rowan in connection with this Agreement (including, without limitation, the statements contained herein), 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 Rowan is or will be a true and complete copy of such document, unmodified except by another document delivered by FNB. ARTICLE IV. COVENANTS OF ROWAN 4.1 Affirmative Covenants of Rowan. Rowan hereby covenants and agrees as ------------------------------ follows with FNB: (a) "Affiliates" of Rowan. Rowan will use its best efforts to cause -------------------- each Affiliate disclosed to FNB (in addition to each additional person who shall become an Affiliate of Rowan after the date of this Agreement or who shall be deemed by FNB or its counsel, in their sole discretion, to be an Affiliate of Rowan, and including persons, trusts, estates, corporations or other entities related to persons deemed to be Affiliates of Rowan) to execute and deliver to FNB prior to the Closing a written agreement (the "Affiliates' Agreement") relating to restrictions on shares of FNB Stock to be received by such Affiliates pursuant to this Agreement, which Affiliates' Agreement shall be in form and content reasonably satisfactory to FNB. Certificates for the shares of FNB Stock issued to Affiliates of Rowan 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. (b) Conduct of Business Prior to Effective Time. Between the date of ------------------------------------------ this Agreement and the Effective Time, except as otherwise agreed by FNB in writing, Rowan will carry on its business in and only in the regular and usual course in substantially the same manner 31 as such business heretofore was conducted, and will, and where applicable will cause each of its subsidiaries to: (i) make all reasonable efforts to preserve intact its present business organization, keep available their present officers and employees, and preserve its relationships with customers, depositors, creditors, correspondents, suppliers, and others having business relationships with them; (ii) maintain all of its properties and equipment used in its business in customary repair, order and condition, ordinary wear and tear excepted; (iii) maintain its books of account and records in the usual, regular and ordinary manner in accordance with sound business practices applied on a consistent basis except to the extent otherwise reasonably required by applicable laws or regulations or GAAP; (iv) comply in all material respects with all laws, rules and regulations applicable to it, its properties, assets or employees and to the conduct of its business; (v) not change its existing loan underwriting guidelines, policies or procedures except as may be required by law; (vi) continue to maintain in force insurance such as is described in Section 2.24 above; not modify any bonds or policies of insurance in effect as of the date hereof unless the same, as modified, provides substantially equivalent coverage; and, not cancel, allow to be terminated or, to the extent available, fail to renew, any such bond or policy of insurance unless the same is replaced with a bond or policy providing substantially equivalent coverage; and (vii) promptly provide to FNB such information about its financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations as FNB reasonably shall request. (c) Loans. Rowan will obtain FNB's prior approval for each new ----- extension of credit (including the issuance of unfunded commitments) that it or Rowan Bank proposes to make within the following categories: (i) loan participations, (ii) loans for acquisition and development purposes, and (iii) non-residential construction loans exceeding $500,000 in principal amount. Neither Rowan nor Rowan Bank will enter into any form of indirect lending. Additionally, Rowan will make available and provide to FNB the following information with respect to its and Rowan Bank's loans and other extensions of credit (such assets herein referred to as "Loans") as of December 31, 2001 and as of the end of each month thereafter until the Effective Time, such information for each month to be in form and substance as is usual and customary in the conduct of its business and to be furnished within 25 days of the end of each month ending after the date hereof, except as otherwise provided: (i) a list of Loans past due for 30 days or more as to principal or interest; 32 (ii) an analysis of the Loan Loss Reserve and management's assessment of the adequacy of the Loan Loss Reserve, which analysis and assessment shall include a list of all classified or "watch list" Loans, along with the outstanding balance and amount specifically allocated to the Loan Loss Reserve for each such classified or "watch list" Loan; (iii) a list of Loans in nonaccrual status; (iv) a list of all Loans over $50,000 without principal reduction for a period of longer than one year; (v) a list of all foreclosed real property or other real estate owned and all repossessed personal property; (vi) a list of reworked or restructured Loans over $50,000 and still outstanding, including original terms, restructured terms and status; and (vii) a list of any actual or threatened litigation by or against Rowan or Rowan Bank pertaining to any Loans or credits, together with the pleadings and other filed documents related thereto. (d) Notice of Certain Changes or Events. Following the execution of ----------------------------------- this Agreement and up to the Effective Time, Rowan promptly will notify FNB in writing of and provide to it such information as it shall request regarding (i) any material adverse change in its consolidated financial condition, consolidated results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or of (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation or warranty of Rowan herein to be or become inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the breach or violation of any of Rowan's covenants or agreements contained herein or in the failure of any of the conditions described in Sections 7.1 or 7.3 below. (e) Consents to Assignment of Contracts and Leases. Rowan will use its ---------------------------------------------- best efforts to obtain all required consents to the assignment to FNB of Rowan's or Rowan Bank's rights and obligations under any contracts or personal or real property leases, each of which consents shall be in such form as shall be specified by FNB. (f) Qualified Plans. Rowan shall take all appropriate action as shall --------------- be necessary to maintain the Rowan Savings Bank Financial Institutions Thrift Plan (the "Rowan 401(k) Plan"), and the Rowan Savings Bank SSB Inc. Paychex Section 125 Plan (the "Rowan Cafeteria Plan") as qualified plans for purposes of ERISA. Rowan acknowledges that FNB intends (i) that the Rowan 40l(k) Plan will be merged into FNB's Section 401(k) Savings Plan (the "FNB 401(k) Plan") as soon as practicable after the Effective Time and (ii) that the Rowan Cafeteria Plan will be terminated as soon as practical after the Effective Time. Rowan shall take all such actions with respect to such plans as shall be necessary to accomplish such intent and, 33 until the Effective Time, will not take any other extraordinary actions with respects to such plans without the written consent of FNB. (g) Further Action; Instruments of Transfer. Rowan shall (i) use its --------------------------------------- best efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the expeditious consummation of the transactions described herein, (ii) perform all acts and execute and deliver to FNB all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested of Rowan in consummating such transactions and (iii) cooperate with FNB fully in carrying out, and will pursue diligently the expeditious completion of, such transactions. 4.2 Negative Covenants of Rowan. Between the date hereof and the Effective --------------------------- Time, neither Rowan nor, if applicable, Rowan Bank, will do any of the following things or take any of the following actions without the prior written consent and authorization of the President of FNB: (a) Amendments to Articles of Incorporation or Bylaws. Amend its ------------------------------------------------- Articles of Incorporation or bylaws. (b) Change in Capital Stock. Make any change in its authorized capital ----------------------- stock, or create any other or additional authorized capital stock or other securities, or issue (except pursuant to the exercise of options heretofore granted and outstanding under the Rowan Option Plan), sell, purchase, redeem, retire, reclassify, combine or split any shares of its capital stock or other securities (including securities convertible into capital stock), or enter into any agreement or understanding with respect to any such action. (c) Options, Warrants and Rights. Grant or issue any options, ---------------------------- warrants, calls, puts or other rights of any kind relating to the purchase, redemption or conversion of shares of its capital stock or any other securities (including securities convertible into capital stock) or enter into any agreement or understanding with respect to any such action, other than the FNB Option. (d) Dividends. Declare or pay any dividends on the outstanding shares --------- of capital stock or make any other distributions on or in respect of any shares of its capital stock or otherwise to its shareholders, other than its regularly scheduled semi-annual regular dividend in the amount of $.20 per share of Rowan Stock; provided, however, that Rowan may declare and pay prior to the Effective Time such additional regular semi-annual dividend of up to $.20 per share if necessary to prevent its shareholders from failing to receive regular dividends from either Rowan or FNB or both during the first or last six months of a calendar year of $.20 per share. (e) Employment, Benefit or Retirement Agreements or Plans. Except as ----------------------------------------------------- required by law, contemplated by this Agreement or Previously Disclosed, (i) enter into, become bound by, renew or extend any oral or written contract, agreement or commitment for the employment or compensation of any director, officer, employee or consultant which is not immediately terminable by Rowan or Rowan Bank without cost or other liability on no more than 30 days' notice; (ii) amend any existing, or adopt, enter into or become bound by any new 34 or additional, profit-sharing, bonus, incentive, change in control or "golden parachute," stock option, stock purchase, pension, retirement, insurance (hospitalization, life or other), paid leave (sick leave, vacation leave or other) or similar contract, agreement, commitment, understanding, plan or arrangement (whether formal or informal) with respect to or which provides for benefits for any of its current or former directors, officers, employees or consultants; (iii) grant or amend any existing options under the Rowan Option Plan; (iv) make contributions to the Rowan 401(k) Plan other than basic and matching contributions in accordance with the terms of the Rowan 401(k) Plan as Previously Disclosed; or (v) enter into or become bound by any contract with or commitment to any labor or trade union or association or any collective bargaining group. (f) Increase in Compensation. With the exception of the anticipated ------------------------ increases in annual salary and annual officer and employee bonuses Previously Disclosed to FNB and such other raises as are in the ordinary course of business and in accordance with historical practices, increase the compensation or benefits of, or pay any bonus or other special or additional compensation to, any of its directors, officers, employees or consultants. (g) Accounting Practices. Make any changes in its accounting methods, -------------------- practices or procedures or in depreciation or amortization policies, schedules or rates heretofore applied (except as required by GAAP or governmental regulations). (h) Acquisitions; Additional Branch Offices. Directly or indirectly --------------------------------------- (i)acquire or merge with, or acquire any branch or all or any significant part of the assets of, any other person or entity, (ii) open any new branch office, or (iii) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction or the opening of a new branch office. (i) Changes in Business Practices. Except as may be required by the ----------------------------- FDIC, the Commissioner or any other governmental or other regulatory agency or as shall be required by applicable law, regulation or this Agreement, (i) change in any material respect the nature of its business or the manner in which it conducts its business, (ii) discontinue any material portion or line of its business or (iii) change in any material respect its lending, investment, asset-liability management or other material banking or business policies (except to the extent required by Section 4.1(b) above and Section 6.9 below). (j) Exclusive Merger Agreement. Directly or indirectly, through any -------------------------- person (i) encourage, solicit or attempt to initiate or procure discussions, negotiations or offers with or from any person or entity (other than FNB) relating to a merger or other acquisition of Rowan or the purchase or acquisition of any Rowan Stock or all or any significant part of Rowan's assets; or, except as required by law or by fiduciary obligations owed to the person assisted, provide assistance to any person in connection with any such offer; (ii) except to the extent required by law, disclose to any person or entity any information not customarily disclosed to the public concerning Rowan or its business, or afford to any other person or entity access to its properties, facilities, books or records; (iii) sell or transfer all or any significant part of Rowan's assets to any other person or entity; or (iv) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction. 35 (k) Acquisition or Disposition of Assets. ------------------------------------ (i) Except in the ordinary course of business consistent with its past practices, sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any real estate; or sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any equipment or any other fixed or capital asset (other than real estate) having a book value or a fair market value, whichever is greater, of more than $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets; (ii) Except in the ordinary course of business consistent with past practices, purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any real property; or purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any equipment or any other fixed assets (other than real estate) having a purchase price, or involving aggregate lease payments, in excess of $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets; (iii) Enter into any purchase commitment for supplies or services which calls for prices of goods or fees for services materially higher than current market prices or fees or which obligates Rowan or Rowan Bank for a period longer than six months; (iv) Except in the ordinary course of its business consistent with its past practices, sell, purchase or repurchase, or enter into or become bound by any contract, agreement, option or commitment to sell, purchase or repurchase, any loan or other receivable or any participation in any loan or other receivable; or (v) Sell or dispose of, or enter into or become bound by any contract, agreement, option or commitment relating to the sale or other disposition of, any other asset (whether tangible or intangible, and including without limitation any trade name, trademark, copyright, service mark or intellectual property right or license) other than assets that are obsolete or no longer used in Rowan's business; or assign its right to or otherwise give any other person its permission or consent to use or do business under the corporate name of Rowan or any subsidiary or any name similar thereto; or release, transfer or waive any license or right granted to it by any other person to use any trademark, trade name, copyright, service mark or intellectual property right. (l) Debt; Liabilities. Except in the ordinary course of its business ----------------- consistent with its past practices, (i) enter into or become bound by any promissory note, loan agreement or other agreement or arrangement pertaining to its borrowing of money, (ii) assume, guarantee, 36 endorse or otherwise become responsible or liable for any obligation of any other person or entity, or (iii) incur any other liability or obligation (absolute or contingent). (m) Liens; Encumbrances. Mortgage, pledge or subject any of its assets ------------------- to, or permit any of its assets to become or (with the exception of those liens and encumbrances Previously Disclosed to FNB with specificity) remain subject to, any lien or any other encumbrance (other than in the ordinary course of business consistent with its past practices in connection with borrowings from the Federal Home Loan Bank of Atlanta, securing of public funds deposits, repurchase agreements or other similar operating matters). (n) Waiver of Rights. Waive, release or compromise any material rights ---------------- in its favor (except in the ordinary course of business) except in good faith for fair value in money or money's worth, nor waive, release or compromise any rights against or with respect to any of its officers, directors or shareholders or members of families of officers, directors or shareholders. (o) Other Contracts. Except as Previously Disclosed, enter into or --------------- become bound by any contracts, agreements, commitments or understandings (other than those described elsewhere in this Section 4.2) (i) for or with respect to any charitable contributions in excess of $15,000; (ii) with any governmental or regulatory agency or authority; (iii) pursuant to which Rowan or any subsidiary would assume, guarantee, endorse or otherwise become liable for the debt, liability or obligation of any other person or entity; (iv) which is entered into other than in the ordinary course of its business; or (v) which, in the case of any one contract, agreement, commitment or understanding and whether or not in the ordinary course of its business, would obligate or commit Rowan or any subsidiary to make expenditures of more than $25,000 (other than contracts, agreements, commitments or understandings entered into in the ordinary course of Rowan's or any subsidiary's lending operations). (p) Deposit Liabilities. Make any change in its current deposit ------------------- policies, including pricing and acceptance, and shall not take any actions designed to materially decrease the aggregate level of deposits as of the date of this Agreement. 4.3 Shareholder Approval. ------------------------- (a) Meeting of Shareholders. Rowan shall cause a meeting of its ----------------------- shareholders to be duly called and held as soon as practicable for the purpose of voting on the approval and adoption of this Agreement and Plan of Merger. In connection with the call and conduct of and all other matters relating to its shareholders' meeting (including the solicitation of proxies), Rowan shall fully comply with all provisions of applicable federal and state law and regulations and with its Articles of Incorporation and bylaws. (b) Recommendation of Board of Directors. Subject to its fiduciary ------------------------------------ obligations, the Board of Directors of Rowan shall recommend to the shareholders of Rowan that they vote their shares at the shareholders' meeting contemplated by Section 4.3(a) above to approve this Agreement and Plan of Merger and the Proxy Statement/Prospectus (as defined in Section 6.1(b) will so indicate and state that Rowan's Board of Directors considers the Merger to be advisable and in the best interests of Rowan and its shareholders. 37 ARTICLE V. COVENANTS OF FNB FNB hereby covenants and agrees as follows with Rowan: 5.1 NASDAQ Notification. Prior to the Effective Time, FNB shall file with ------------------- the National Association of Securities Dealers such notifications and other materials (and shall pay such fees) as shall be required for the listing on Nasdaq of the shares of FNB Stock to be issued to Rowan's shareholders pursuant to the Merger. 5.2 Employment. ---------- (a) Bruce D. Jones. Provided he remains employed as President and -------------- Chief Executive Officer of Rowan and Rowan Bank at the Effective Time, Rowan Bank shall enter into an employment agreement with Bruce D. Jones as of the Effective Time which shall contain substantially the same terms and conditions and be in substantially the same form as is attached hereto as Schedule B. ---------- (b) Janet D. Abernethy. Provided she remains employed as Senior Vice ------------------ President and Chief Lending Officer of Rowan Bank at the Effective Time, FNB will, or will cause a subsidiary to, (i) grant an option to acquire 5,000 shares of FNB Stock to Janet D. Abernethy under the FNB Stock Compensation Plan, which option shall become exercisable one year after the date of grant, with 20% of the shares covered by the option becoming exercisable at that time and an additional 20% of the options shares becoming exercisable on each successive anniversary date provided that such option shall become immediately exercisable in full upon the termination of Ms. Abernethy's employment by FNB or Rowan Bank other than for cause, at an option price equal to the fair market value of FNB Stock on the date of grant; (ii) continue or assume the obligations of Rowan Bank under Ms. Abernethy's employment agreement dated March 23, 1999 but only as such agreement is amended with the prior approval of FNB, (iii)continue or assume the obligations of Rowan Bank under Ms. Abernethy's existing Change-of-Control Agreement with Rowan Bank subject, however, to the provisions of Ms. Abernethy's employment agreement dated March 23, 1999 as such agreement is amended with the prior approval of FNB; and (iv) continue or assume the obligations of Rowan Bank to pay the premiums for supplemental term life insurance for Ms. Abernethy as Previously Disclosed. (c) Eric E. Rhodes. Provided he remains employed as Senior Vice -------------- President and Chief Financial Officer of Rowan Bank at the Effective Time, FNB will, or will cause a subsidiary to, (i) grant an option to acquire 5,000 shares of FNB Stock to Eric E. Rhodes under the FNB Stock Compensation Plan, which option shall become exercisable one year after the date of grant, with 20% of the shares covered by the option becoming exercisable at that time and an additional 20% of the options shares becoming exercisable on each successive anniversary date provided that such option shall become immediately exercisable in full upon the termination of Mr. Rhodes's employment by FNB or Rowan Bank other than for cause, at an option price equal to the fair market value of FNB Stock on the date of grant; (ii) continue or assume the obligations of Rowan Bank under Mr. Rhodes's existing Change-of-Control Agreement with Rowan Bank; and (iii) continue or assume the obligations of Rowan Bank to pay the premiums for supplemental term life insurance for Mr. Rhodes as Previously Disclosed. 38 (d) Other Employees; Severance. After the Effective Time, FNB may, but -------------------------- shall be under no obligation to, retain other employees of Rowan and Rowan Bank. Any such person retained shall be an employee of FNB on an "at-will" basis, and nothing in this Agreement shall be deemed to constitute an employment agreement with any such person or to obligate FNB to employ any such person for any specific period of time or in any specific position or location or to restrict FNB's right to change the rate of compensation or terminate the employment of any such person at any time and for any reason. For a period of one year following the Effective Time, FNB shall cause Rowan Bank or First National (if successor to Rowan Bank) to pay severance benefits to employees of Rowan Bank who are not party to either a written employment agreement or change-of-control agreement with Rowan Bank if their employment is terminated by Rowan Bank, FNB or First National after the Effective Time other than for cause. The severance benefit shall be equal to two weeks' salary at the employee's existing salary rate at the time of termination multiplied by the employee's number of complete years of service as an employee of Rowan Bank; provided, however, that the severance benefit will not exceed one half of the annual salary payable to the employee at his or her salary rate existing on the date of such termination. 5.3 Employee Benefits. ----------------- (a) Generally. Except as otherwise provided herein and to the extent --------- permitted by contribution and deduction limitations of ERISA and the Code with respect to FNB's qualified plans, any employee of Rowan or Rowan Bank who continues employment with FNB, Rowan or Rowan Bank at the Effective Time (a "New Employee") shall become entitled to receive all employee benefits and to participate in all benefit plans provided by FNB or First National on the same basis and subject to the same eligibility and vesting requirements, and to the same conditions, restrictions and limitations, as generally are in effect and applicable to other newly hired employees of FNB or First National. However, each New Employee shall be given credit for his or her full years of service with Rowan or Rowan Bank for purposes of (i) entitlement to vacation and sick leave and for participation in all FNB or First National welfare, insurance and other fringe benefit plans, and (ii) eligibility for participation and vesting in the FNB 401(k) Plan and in FNB's defined benefit pension plan (the "FNB Pension Plan"). Notwithstanding any provision herein to the contrary, FNB will not be required to take any action that could adversely affect the continuing qualification of the FNB 40l(k) Plan or the FNB Pension Plan. FNB will grant to each New Employee a pro rata amount of sick leave and vacation leave, in accordance with FNB standard leave policies, for the period between the Effective Time and the end of the calendar year during which the Effective Time occurs. Each New Employee will be permitted to carry over accrued and unused sick leave and vacation leave earned at Rowan Bank but shall thereafter be subject to FNB's leave policies. (b) Health Insurance. Each New Employee shall be entitled to ---------------- participate in First National's group health insurance plan at a cost equal to the cost for any First National employee and such participation shall be without regard to pre-existing condition requirements under First National's group health insurance plan, to the extent any such condition at the Effective Time would have been covered under the health insurance plans of Rowan. For the period commencing on the date a New Employee is enrolled in First National's group health insurance plan and ending on the sooner of (i) the New Employee's discontinuing dependent coverage under First National's group health insurance plan and (ii) the second anniversary of 39 the date of the Effective Time, FNB will pay or cause to be paid to a flexible spending account on behalf of each New Employee (other than any employee whose salary had been adjusted by Rowan Bank for health insurance coverage) who was enrolled in and elected dependent (meaning spousal, family or children only) coverage under Rowan Bank's group health insurance plan at the Effective Time a supplement in the amount by which the New Employee's cost for such coverage under the First National plan exceeds the New Employee's cost for such coverage under Rowan Bank's plan, provided that such amount shall not exceed $203.87 for spousal coverage, $113.55 for children only coverage, and $278.20 for family coverage. In the event a New Employee at any time elects lesser dependent coverage than that in effect for such New Employee at the Effective Time, such as reducing coverage from full family to spousal or children only, the supplement will be reduced accordingly. FNB will not pay or cause to be paid any amount for increases in coverage. The supplements paid or caused to be paid by FNB hereunder will not be considered salary for purposes of bonuses, incremental raises or salary adjustments that may be made from time to time as appropriate on an individual basis or for purposes of any severance benefits. (c) Option Plan. FNB shall assume each stock option granted under the ----------- Rowan Option Plan as provided in Section 1.10(a) above. 5.4 Rowan Directors. --------------- (a) Representation on FNB Board. FNB shall appoint two persons --------------------------- nominated by Rowan, one of whom shall be Bruce D. Jones, at the Effective Time to serve as directors of FNB until the next annual meeting of shareholders at which directors of FNB are elected and shall take such actions as shall be required to increase the number of members of its Board of Directors as may be necessary to permit such nominees to serve as directors. FNB's Board shall, if necessary, nominate such persons for election at annual meetings of FNB shareholders such that such nominees of Rowan, if elected by FNB's shareholders, would be able to serve as directors of FNB for no less than three years after the Effective Time. FNB will take such action as shall be necessary to waive any mandatory retirement policies of FNB with respect to its Board of Directors for such nominees to serve for no less than three years after the Effective Time. (b) Bank Board. Each of the members of Rowan Bank's Board of Directors ---------- at the Effective Time shall continue to serve as a member of Rowan Bank's Board of Directors after the Effective Time notwithstanding, for a period of two years after the Effective Time, any mandatory retirement policy of FNB for its directors generally. Each person so appointed shall diligently discharge his or her duties as a board member and promote in good faith FNB's and Rowan Bank's best interests. For their services as board members or, at FNB's option following any merger of Rowan Bank with First National or other subsidiary of FNB, as members of a local advisory board to such subsidiary and FNB, each person so appointed who is not also an employee of Rowan Bank or FNB shall be compensated at the rate presently in effect as Previously Disclosed, including payment of health insurance premiums for Claude M. Colvard and his spouse at the rate presently in effect, for serving as a member of the Rowan Bank Board of Directors for a period of three years after the Effective Time provided that he or she remains a director of the board or an advisory director for FNB and provided further that he or she not be serving as a director or advisory director of another financial institution or financial institution 40 holding company. Each such person's service as a director or an advisory director will be at FNB's pleasure and will be subject to FNB's normal policies and procedures regarding the appointment and service of directors to the boards of its subsidiaries; provided, however, that if any such person's service as a director or an advisory director is terminated by FNB, FNB shall continue to pay such person compensation for the balance of the three-year period after the Effective Time upon such termination. FNB shall have the right to appoint and elect two additional members to the Rowan Bank Board of Directors and Rowan shall cause Rowan Bank to take such actions as shall be required to increase the number of members of Rowan Bank's Board of Directors as may be necessary to permit such nominees to serve as directors. (c) Deferred Compensation. FNB shall assume the obligations of Rowan --------------------- under Previously Disclosed deferred compensation arrangements presently in effect for Rowan`s directors. 5.5 Indemnification of Directors and Officers. ----------------------------------------- (a) After the Effective Time, without releasing any insurance carrier and after exhaustion of all applicable director and liability insurance coverage for Rowan and its directors and officers, FNB shall indemnify, hold harmless and defend the directors and officers of Rowan in office on the date hereof or the Effective Time, to the same extent as it indemnifies its own directors and officers, from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature including, without limitation, reasonable attorneys' fees and legal costs and expenses therewith whether known or unknown and whether now existing or hereafter arising which may be threatened against, incurred, undertaken, received or paid by such persons in connection with or which arise out of or result from or are based upon any action or failure to act by such person in the ordinary scope of his duties as a director or officer of Rowan (including service as a director or officer of any Rowan subsidiary or fiduciary of any of the Rowan Plans (as defined in Section 2.23(a)) through the Effective Time; provided, however, that FNB shall not be obligated to indemnify such person for (i) any act not available for statutory or permissible indemnification under North Carolina law, (ii) any penalty, decree, order, finding or other action imposed or taken by any regulatory authority, (iii) any violation or alleged violation of federal or state securities laws to the extent that indemnification is prohibited by law, or (iv) any claim of sexual or other unlawful harassment, or any form of employment discrimination prohibited by federal or state law; further, provided, however, that (A) FNB shall have the right to assume the defense thereof and upon such assumption FNB shall not be liable to any director or officer of Rowan for any legal expenses of other counsel or any other expenses subsequently incurred by such director or officer in connection with the defense thereof, except that if FNB elects not to assume such defense or counsel for such director or officer reasonably advises such director or officer that there are issues which raise conflicts of interest between FNB and such director or officer, such director or officer may retain counsel reasonably satisfactory to him, and FNB shall pay the reasonable fees and expenses of such counsel, (B) FNB shall not be liable for any settlement effected without its prior written consent, and (C) FNB shall have no obligation hereunder to any director or officer of Rowan when and if a court of competent jurisdiction shall determine that indemnification of such director or officer in the manner contemplated hereby is prohibited by applicable law. The indemnification provided herein shall be in addition to any indemnification 41 rights an indemnitee may have by law, pursuant to the charter or bylaws of Rowan or Rowan Bank or pursuant to any Plan for which the indemnity serves as a fiduciary. (b) From and after the Effective Time, FNB will directly or indirectly cause the persons who served as directors or officers of Rowan at the Effective Time to be covered by Rowan's existing directors' and officers' liability insurance policy (provided that FNB may substitute therefor policies of at least the same coverage in amounts contained and terms and conditions which are not less advantageous than such policy). Such insurance coverage shall commence at the Effective Time and will be provided for a period of no less than three years after the Effective Time. (c) The indemnification provided by this Section 5.5 is the sole indemnification provided by FNB to the directors and officers of Rowan for service in such positions up to and through the Effective Time. This Section 5.5 is intended to create personal rights in the directors and officers of Rowan, who shall be deemed to be third-party beneficiaries hereof. Notwithstanding any other provision of this Agreement, at the Effective Time, the indemnification rights provided herein shall not be extinguished but shall instead survive for a period of three years after the Effective Time. 5.6 Merger Sub Organization. FNB shall organize Merger Sub under the laws ----------------------- of the State of North Carolina prior to the Effective Time. The outstanding capital stock of Merger Sub shall consist of 1,000 shares of common stock, all of which will be owned by FNB. Prior to the Effective Time, Merger Sub shall not (i) conduct any business operations whatsoever or (ii) enter into any contract or agreement of any kind, acquire any assets, or incur any liability, except as may be expressly contemplated by this Agreement or the Plan of Merger or as FNB and Rowan may otherwise agree. FNB, as the sole shareholder of Merger Sub, shall vote prior to the Effective Time the shares of common stock of Merger Sub in favor of the Plan of Merger and shall take all such other actions as shall be necessary for Merger Sub to consummate the transactions described herein. At the Effective Time, Merger Sub shall be a corporation duly organized and validly existing under the laws of the State of North Carolina with the corporate power and authority necessary to consummate the transactions contemplated by the Plan of Merger. 5.7 Rowan Bank. For a period of not less than 24 months following the ---------- Effective Time, FNB shall hold Rowan Bank as a separate, state-chartered subsidiary of FNB; provided, however, that the Board of Directors of Rowan Bank may elect to cause Rowan Bank to merge with First National or another subsidiary of FNB prior to the termination of such 24-month period. 5.8 Notice of Certain Changes or Events. Following the execution of this ----------------------------------- Agreement and up to the Effective Time, FNB promptly will notify Rowan in writing of and provide to it such information as it shall request regarding (i) any material adverse change in its consolidated financial condition, consolidated results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or 42 may or could cause any statement, representation or warranty of FNB herein to be or become inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the breach or violation of any of FNB's covenants or agreements contained herein or in the failure of any of the conditions described in Sections 7.1 or 7.2 below. 5.9 Further Action; Instruments of Transfer. FNB shall (i) use its best --------------------------------------- efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the expeditious consummation of the transactions described herein, (ii) perform all acts and execute and deliver to Rowan all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested of FNB in consummating such transactions and (iii) cooperate with Rowan fully in carrying out, and will pursue diligently the expeditious completion of, such transactions. ARTICLE VI. MUTUAL AGREEMENTS 6.1 Registration Statement; Proxy Statement/Prospectus. -------------------------------------------------- (a) Registration Statement and "Blue Sky" Approvals. As soon as ----------------------------------------------- practicable following the execution of this Agreement and after the furnishing by Rowan of all information required to be contained therein, FNB shall prepare and file with the SEC under the 1933 Act a registration statement on Form S-4 (or on such other form as FNB shall determine to be appropriate) (the "Registration Statement") covering the FNB Stock to be issued to shareholders of Rowan pursuant to this Agreement. Additionally, FNB shall take all such other actions, if any, as shall be required by applicable state securities or "blue sky" laws (i) to cause the FNB Stock to be issued upon consummation of the Merger, and at the time of the issuance thereof, to be duly qualified or registered (unless exempt) under such laws, (ii) to cause all conditions to any exemptions from qualification or registration under such laws to have been satisfied, and (iii) to obtain any and all required approvals or consents to the issuance of such stock. FNB shall deliver to Rowan and its counsel a preliminary draft of the Registration Statement and the Proxy Statement/Prospectus as soon as practicable after the date of this Agreement. (b) Preparation and Distribution of Proxy Statement/Prospectus. FNB ---------------------------------------------------------- and Rowan jointly shall prepare a "Proxy Statement/Prospectus" for distribution to the shareholders of Rowan as the proxy statement relating to solicitation of proxies for use at the shareholders' meeting contemplated in Section 6.1(b) above and as FNB's prospectus relating to the offer and distribution of FNB Stock as described herein. The Proxy Statement/Prospectus shall be in such form and shall contain or be accompanied by such information regarding the shareholders' meeting, this Agreement, the parties hereto, the Merger and other transactions described herein as is required by applicable law and regulations and otherwise as shall be agreed upon by FNB and Rowan. FNB shall include the Proxy Statement/Prospectus as the prospectus in its "Registration Statement" described above; and FNB and Rowan shall cooperate with each other in good faith and shall use their best efforts to cause the Proxy Statement/Prospectus to comply with any comments of the SEC. Rowan shall mail the Proxy Statement/Prospectus to its shareholders prior to the scheduled date of its shareholders' meeting; provided, however, that no such materials shall be mailed to Rowan's shareholders unless and 43 until FNB shall have determined to its own satisfaction that the conditions specified in Sections 7.1(b) and (c) below have been satisfied and shall have approved such mailing. (c) Information for Proxy Statement/Prospectus and Registration ----------------------------------------------------------- Statement. Each of FNB and Rowan shall promptly respond, and use its best - --------- efforts to cause its directors, officers, accountants and affiliates to promptly respond, to requests by the other party and its counsel for information for inclusion in the various applications for regulatory approvals and in the Proxy Statement/Prospectus. Each of FNB and Rowan hereby covenants with the other that none of the information provided by it for inclusion in the Proxy Statement/Prospectus will, at the time of its mailing, contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading; and, at all times following such mailing up to and including the Effective Time, none of such information contained in the Proxy Statement/Prospectus, as it may be amended or supplemented, will contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 6.2 Regulatory Approvals. Within 75 days after the date of this Agreement, -------------------- each of FNB and Rowan shall prepare and file, or cause to be prepared and filed, all applications for regulatory approvals and actions as may be required of it, by applicable law and regulations with respect to the transactions described herein (including applications to the Federal Reserve Board, the Commissioner and to any other applicable federal or state banking, securities or other regulatory authority). Each party shall use its best efforts in good faith to obtain all necessary regulatory approvals required for consummation of the transactions described herein. Each party shall cooperate with the other party in the preparation of all applications to regulatory authorities and, upon request, promptly shall furnish all documents, information, financial statements or other material that may be required by any other party to complete any such application; and, before the filing therefor, each party to this Agreement shall have the right to review and comment on the form and content of any such application to be filed by any other party. Should the appearance of any of the officers, directors, employees or counsel of any of the parties hereto be requested by any other party or by any governmental agency at any hearing in connection with any such application, such party shall promptly use its best efforts to arrange for such appearance. 6.3 Access. Following the date of this Agreement and to and including the ------ Effective Time, Rowan and FNB shall each provide the other party and such other party's employees, accountants, counsel or other representatives, access to all its books, records, files and other information (whether maintained electronically or otherwise), to all its properties and facilities, and to all its employees, accountants, counsel and consultants as Rowan and FNB, as the case may be, shall, in its sole discretion, consider to be necessary or appropriate; provided, however, that any investigation or reviews conducted by FNB or Rowan shall be performed in such a manner as will not interfere unreasonably with the other party's normal operations or with relationship with its customers or employees, and shall be conducted in accordance with procedures established by the parties having due regard for the foregoing. 44 6.4 Costs. Subject to the provisions of Section 8.3(c) below, and whether ----- or not this Agreement shall be terminated or the Merger shall be consummated, each of FNB and Rowan shall pay its own legal, accounting and financial advisory fees and all its other costs and expenses incurred or to be incurred in connection with the execution and performance of its obligations under this Agreement or otherwise in connection with this Agreement and the transactions described herein (including, without limitation, all accounting fees, legal fees, filing fees, printing costs, mailing costs, travel expenses, and investment banking fees). 6.5 Announcements. No person other than the parties to this Agreement is ------------- authorized to make any public announcements or statements about this Agreement or any of the transactions described herein, and, without the prior review and consent of the others (which consent shall not unreasonably be denied or delayed), no party hereto may make any public announcement, statement or disclosure as to the terms and conditions of this Agreement or the transactions described herein, except for such disclosures as may be required incidental to obtaining the prior approval of any regulatory agency or official to the consummation of the transactions described herein. However, notwithstanding anything contained herein to the contrary, prior review and consent shall not be required if in the good faith opinion of counsel to FNB or Rowan any such disclosure by FNB or Rowan, as the case may be, is required by law or otherwise is prudent. 6.6 Confidentiality. FNB and Rowan each shall treat as confidential and not --------------- disclose to any unauthorized person any documents or other information obtained from or learned about the other during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (including any information obtained during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other party; and that it will not use any such documents or other information for any purpose except for the purposes for which such documents and information were provided to it and in furtherance of the transactions described herein. However, the above obligations of confidentiality shall not prohibit the disclosure of any such document or information by any party to this Agreement to the extent (i) such document or information is then available generally to the public or is already known to the person or entity to whom disclosure is proposed to be made (other than through the previous actions of such party in violation of this Section 6.6), (ii) such document or information was available to the disclosing party on a nonconfidential basis prior to the same being obtained pursuant to this Agreement, (iii) disclosure is required by subpoena or order of a court or regulatory authority of competent jurisdiction, or by the SEC or other regulatory authorities in connection with the transactions described herein, or (iv) to the extent that, in the reasonable opinion of legal counsel to such party, disclosure otherwise is required by law. In the event this Agreement is terminated for any reason, then each of the parties hereto immediately shall return to the other party all copies of any and all documents or other written materials or information (including computer generated and stored data) of or relating to such other party which were obtained from them during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (whether during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other party. The 45 parties' obligations of confidentiality under this Section 6.6 shall survive and remain in effect following any termination of this Agreement. 6.7 Environmental Studies. At its option, FNB may cause to be conducted --------------------- Phase I environmental assessments of the Real Property, the real estate subject to any Real Property Lease, or the Loan Collateral, or any portion thereof, together with such other studies, testing and intrusive sampling and analyses as FNB shall deem necessary or desirable (collectively, the "Environmental Survey"); provided, however, that the Environmental Survey, as much as possible, shall be performed in such a manner as will not interfere unreasonably with Rowan's normal operations, and provided further, however, that Rowan shall use its best efforts to obtain any required consents of third parties to permit any Environmental Survey of any Loan Collateral. FNB shall attempt in good faith to complete all such Phase I environmental assessments within 60 days following the date of this Agreement and thereafter to conduct and complete any such additional studies, testing, sampling and analyses as promptly as practicable. Subject to the provisions of Section 8.3(c) below, the costs of the Environmental Survey shall be paid by FNB. If (i) the final results of any Environmental Survey (or any related analytical data) reflect that there likely has been any discharge, disposal, release or emission by any person of any Hazardous Substance on, from or relating to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral at any time prior to the Effective Time, or that any action has been taken or not taken, or a condition or event likely has occurred or exists, with respect to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral which constitutes or would constitute a violation of any Environmental Laws, and if, (ii) based on the advice of its legal counsel or other consultants, FNB believes that Rowan or, following the Merger, FNB, could become responsible for the remediation of such discharge, disposal, release or emission or for other corrective action with respect to any such violation, or that Rowan or, following the Merger, FNB, could become liable for monetary damages (including without limitation any civil or criminal penalties or assessments) resulting therefrom (or that, in the case of any of the Loan Collateral, Rowan or, following the Merger, FNB, could incur any such liability if it acquired title to such Loan Collateral), and if, (iii) based on the advice of their legal counsel or other consultants, FNB reasonably believes the amount of expenses or liability which either of them could incur or for which either of them could become responsible or liable on account of any and all such remediation, corrective action or monetary damages at any time or over any period of time could equal or exceed an aggregate of $250,000 over any period of time, then FNB shall give Rowan prompt written notice thereof (together with all information in its possession relating thereto) and, at FNB's sole option and discretion, at any time thereafter and up to the Effective Time, it may terminate this Agreement without further obligation or liability to Rowan or its shareholders. 6.8 Tax-Free Reorganization. FNB and Rowan shall each use its best efforts ----------------------- to cause the Merger to qualify as a tax-free "reorganization" within the meaning of Section 368(a)(1)(A) of the Code and that it shall not intentionally take any action that would cause the Merger to fail to so qualify. 6.9 Certain Modifications. FNB and Rowan shall consult with each other with --------------------- respect to their loan, litigation and real estate valuation policies and practices (including loan classifications and levels of reserves) and Rowan shall make such modifications or changes to its policies and practices, if any, prior to the Effective Time, as may be mutually agreed upon. FNB 46 and Rowan also shall consult with each other with respect to the character, amount and timing of restructuring and Merger-related expense charges to be taken by each of them in connection with the transactions contemplated by this Agreement and shall take such charges in accordance with GAAP as may be mutually agreed upon by them. The representations, warranties and covenants of each of FNB and Rowan contained in this Agreement shall not be deemed to be inaccurate or breached in any respect as a consequence of any modifications or charges undertaken by reason of this Section 6.9. 6.10 Transition Team. FNB and Rowan shall create a transition team --------------- comprised of staff and representatives of Rowan and staff and representatives of FNB (the "Transition Team"). The purpose of the Transition Team shall be to provide detailed guidance to FNB in fulfilling and consummating the Merger, to maintain open lines of communication between Rowan and FNB, and to handle customer inquiries regarding the Merger. The Transition Team shall meet as necessary until the Effective Time. Members of the Transition Team shall receive no separate compensation for such service. ARTICLE VII. CONDITIONS PRECEDENT TO MERGER 7.1 Conditions to all Parties' Obligations. Notwithstanding any other -------------------------------------- provision of this Agreement to the contrary, the obligations of each of the parties to this Agreement to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date: (a) Corporate Action. All corporate action necessary to authorize the ---------------- execution, delivery and performance of this Agreement and the Plan of Merger in consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken, including, without limitation, the approval of the shareholders of Rowan of this Agreement and Plan of Merger. (b) Registration Statement Effective. The Registration Statement -------------------------------- (including any post-effective amendments thereto) shall be effective under the 1933 Act, and no stop orders or proceedings shall be pending or, to the knowledge of FNB, threatened by the SEC to suspend the effectiveness of such Registration Statement. (c) "Blue Sky" Approvals. FNB shall have received all state securities -------------------- or "Blue Sky" permits or other authorizations, or confirmations as to the availability of exemptions from Blue Sky registration requirements as may be necessary, and no stop orders or proceedings shall be pending or, to the knowledge of FNB, threatened by any state Blue Sky administration to suspend the effectiveness of any registration statement filed therewith with respect to the issuance of FNB Stock in the Merger. (d) Regulatory Approvals. (i) The Merger and other transactions -------------------- described herein shall have been approved, to the extent required by law, by the Federal Reserve Board, the Commissioner, and by all other governmental or regulatory agencies or authorities having jurisdiction over such transactions, (ii) no governmental or regulatory agency or authority shall have withdrawn its approval of such transactions or imposed any condition on such transactions or conditioned its approval thereof, which condition is reasonably deemed by FNB or Rowan to 47 be materially disadvantageous or burdensome or to so adversely affect the economic or business benefits of this Agreement to FNB or Rowan's shareholders as to render it inadvisable for it to consummate the Merger; (iii) all applicable waiting periods following regulatory approvals shall have expired without objection to the Merger by the Federal Reserve Board or other applicable regulatory authorities; and (iv) all other consents, approvals and permissions, and the satisfaction of all of the requirements prescribed by law or regulation, necessary to the carrying out of the transactions contemplated herein shall have been procured. (e) Adverse Proceedings, Injunction, Etc. There shall not be (i) any ------------------------------------ order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits the Merger or any of the other transactions described herein or any of the parties hereto from consummating any such transaction, (ii) any pending or threatened investigation of the Merger or any of such other transactions by the Federal Reserve Board, or any actual or threatened litigation under federal antitrust laws relating to the Merger or any other such transaction, (iii)any suit, action or proceeding by any person (including any governmental, administrative or regulatory agency), pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit Rowan or FNB from consummating the Merger or carrying out any of the terms or provisions of this Agreement, or (iv) any other suit, claim, action or proceeding pending or threatened against Rowan or FNB or any of their respective officers or directors which shall reasonably be considered by Rowan or FNB to be materially burdensome in relation to the proposed Merger or materially adverse in relation to the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of either such corporation, and which has not been dismissed, terminated or resolved to the satisfaction of all parties hereto within 90 days of the institution or threat thereof. (f) Tax Opinion. The parties shall have received an opinion, dated the ----------- Closing Date, of Schell Bray Aycock Abel & Livingston P.L.L.C. or another tax advisor in form and substance satisfactory to FNB and Rowan, substantially to the effect that, for federal income tax purposes: (i)consummation of the Merger, together with the immediately subsequent merger of the Surviving Corporation with and into FNB (collectively, the "Mergers"), will constitute a "reorganization" as defined in Section 368(a) of the Code; (ii) no gain or loss will be recognized by FNB or Rowan by reason of the Mergers, (iii) the exchange or cancellation of shares of Rowan Stock in the Merger will not give rise to recognition of gain or loss for federal income tax purposes to the shareholders of Rowan to the extent such shareholders receive FNB Stock in exchange for their shares of Rowan Stock (except with respect to cash in lieu of fractional shares); (iv) the basis of the FNB Stock to be received by a shareholder of Rowan will be the same as the basis of the Rowan Stock surrendered in exchange therefor, decreased by the amount of cash received, if any, and increased by the amount of dividend income or gain recognized, if any, as a result of the Merger; and (v) if Rowan Stock is a capital asset in the hands of the shareholder at the Effective Time, the holding period of the FNB Stock received by the shareholder in the Merger will include the holding period of Rowan Stock surrendered in exchange therefor. In rendering its opinion, Schell Bray Aycock Abel & Livingston P.L.L.C. or such other tax advisor will require and rely on representations by officers of FNB and Rowan, and will be entitled to make reasonable assumptions, including that the Merger will be followed immediately by the merger of the Surviving Corporation with and into FNB. 48 (g) Nasdaq Listing. FNB shall have satisfied all requirements for the -------------- shares of FNB Stock to be issued to the shareholders of Rowan and holders of options issued under the Rowan Option Plan in connection with the Merger to be listed on Nasdaq as of the Effective Time. 7.2 Additional Conditions to Rowan's Obligations. Notwithstanding any other -------------------------------------------- provision of this Agreement to the contrary, Rowan's separate obligation to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date: (a) Material Adverse Change. There shall not have been any material ----------------------- adverse change in the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB and its consolidated subsidiaries considered as one enterprise and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change. (b) Compliance with Laws. FNB shall have complied in all material -------------------- respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation could or may have a material adverse effect on the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB and its consolidated subsidiaries considered as one enterprise. (c) FNB's Representations and Warranties and Performance of ------------------------------------------------------- Agreements; Officers' Certificate. Unless waived in writing by Rowan as provided - --------------------------------- in Section 10.2 below, (i) each of the representations and warranties of FNB contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct on and as of the Effective Time with the same force and effect as though made on and as of such date, except (A) for changes which are not, in the aggregate, material and adverse to the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB and its consolidated subsidiaries considered as one enterprise, and (B) for the effect of any activities or transactions that may have taken place after the date of this Agreement and are expressly contemplated by this Agreement; and (ii) FNB shall have performed in all material respects all of its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date. Rowan shall have received a certificate dated as of the Closing Date and executed by the chief executive officer and chief financial officer of FNB to the foregoing effect and as to such other matters as may be reasonably requested by Rowan. (d) Legal Opinion of FNB's Counsel. Rowan shall have received from ------------------------------ Schell Bray Aycock Abel & Livingston P.L.L.C., counsel for FNB, a written opinion dated as of the Closing Date in form and substance customary for transactions of this nature and otherwise reasonably satisfactory to Rowan and its counsel. 49 (e) Fairness Opinion. Rowan shall have received from its financial ---------------- advisor, Trident, an opinion dated as of a date prior to the mailing of the Proxy Statement/Prospectus to Rowan's shareholders in connection with its shareholders' meeting to the effect that the consideration to be received by Rowan's shareholders in the Merger is fair, from a financial point of view, to Rowan and its shareholders. (f) Other Documents and Information from FNB. FNB shall have provided ---------------------------------------- to Rowan correct and complete copies of its Articles of Incorporation, bylaws and Board of Directors resolutions approving this Agreement and the Merger (all certified by its Secretary), together with certificates of the incumbency of its officers and such other closing documents and information as may be reasonably requested by Rowan or its counsel. 7.3 Additional Conditions to FNB's Obligations. Notwithstanding any other ------------------------------------------ provision of this Agreement to the contrary, FNB's obligations to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date: (a) Material Adverse Change. There shall not have occurred any ----------------------- material adverse change in the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Rowan and its subsidiaries considered as one enterprise and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change. (b) Compliance with Laws. Rowan shall have complied in all material -------------------- respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation could or may have a material adverse effect on the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB or Rowan. (c) Rowan's Representations and Warranties and Performance of --------------------------------------------------------- Agreements; Officers' Certificate. Unless waived in writing by FNB as provided - --------------------------------- in Section 10.2 below, (i) each of the representations and warranties of Rowan contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct at and as of the Effective Time with the same force and effect as though made on and as of such date, except (A) for changes which are not, in the aggregate, material and adverse to the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Rowan and its subsidiaries considered as one enterprise, and (B) for the effect of any activities or transactions that may have taken place after the date of this Agreement and are expressly contemplated by this Agreement, and (ii) Rowan shall have performed in all material respects all its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date. FNB shall have received a certificate dated as of the Closing Date and executed by the chief executive officer and chief financial officer of Rowan to the foregoing effect and as to such other matters as may be reasonably requested by FNB. 50 (d) Legal Opinion of Rowan's Counsel. FNB shall have received from -------------------------------- Gaeta & Glesener P.A. counsel to Rowan, a written opinion, dated as of the Closing Date in form and substance customary for transactions of this nature and otherwise reasonably satisfactory to FNB and its counsel. (e) Other Documents and Information from Rowan. Rowan shall have ------------------------------------------ provided to FNB correct and complete copies of Rowan's Articles of Incorporation, bylaws and Board and shareholder resolutions (all certified by Rowan's Secretary), together with certificates of the incumbency of Rowan's officers and such other closing documents and information as may be reasonably requested by FNB or its counsel. (f) Amendments to Benefit Plans. The Board of Directors of Rowan shall --------------------------- have adopted and implemented, effective as of the Effective Time, such amendments to the Rowan Option Plan as may be necessary in accordance with the provisions of this Agreement and otherwise satisfactory to FNB. (g) Consents to Assignment of Property Leases. Rowan shall have ----------------------------------------- obtained all required consents to the assignment to FNB of its rights and obligations under any personal property lease and any Real Property Lease material to the business of Rowan and its subsidiaries considered as one enterprise, and such consents shall be in such form and substance as shall be satisfactory to FNB; and each of the lessors of Rowan shall have confirmed in writing that Rowan is not in default under the terms and conditions of any personal property lease or any Real Property Lease. ARTICLE VIII. TERMINATION; BREACH; REMEDIES 8.1 Mutual Termination. At any time prior to the Effective Time (and ------------------ whether before or after approval hereof by the shareholders of Rowan and FNB), this Agreement may be terminated by the mutual agreement of FNB and Rowan. Upon any such mutual termination, all obligations of Rowan and FNB hereunder shall terminate and each party shall pay costs and expenses as provided in Section 6.4 above. 8.2 Unilateral Termination. This Agreement may be terminated by either FNB ---------------------- or Rowan (whether before or after approval hereof by Rowan's or FNB's shareholders) upon written notice to the other parties and under the circumstances described below. (a) Termination by FNB. This Agreement may be terminated by FNB by ------------------ action of its Board of Directors: (i) if any of the conditions to the obligations of FNB (as set forth in Section 7.1 and 7.3 above) shall not have been satisfied or effectively waived in writing by FNB by September 30, 2002 (except to the extent that the failure of such condition to be satisfied has been caused by the failure of FNB to satisfy any of its obligations, covenants or agreements contained herein); (ii) if Rowan shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article IV or Article VI herein in any material respect; 51 (iii) if FNB determines at any time that any of Rowan's representations or warranties contained in Article II above or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect; (iv) if, notwithstanding FNB's satisfaction of its obligations under Section 6.1 above, Rowan's shareholders do not approve this Agreement and Plan of Merger at its shareholders' meeting held for such purpose; (v) if the Merger shall not have become effective on or before September 30, 2002 unless such date is extended as evidenced by the written mutual agreement of the parties hereto; provided, however, that in the event there is a delay of not more than 30 days caused by circumstances beyond the control of the parties hereto, the dates set forth in this Section 8.2(a) shall be extended by mutual agreement for up to an additional 60 days; or (vi) under the circumstances described in Section 6.7 above. However, before FNB may terminate this Agreement for any of the reasons specified above in (i), (ii) or (iii) of this Section 8.2(a), it shall give written notice to Rowan as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by FNB shall not become effective if, within 30 days following the giving of such notice, Rowan shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of FNB. In the event Rowan cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of FNB within such 30-day period, FNB shall have 30 days to notify Rowan of its intention to terminate this Agreement. A failure to so notify Rowan will be deemed to be a waiver by FNB of the breach, default or violation pursuant to Section 10.2 below. (b) Termination by Rowan. This Agreement may be terminated by Rowan by -------------------- action of its Board of Directors: (i) if any of the conditions of the obligations of Rowan (as set forth in Section 7.1 and 7.2 above) shall not have been satisfied or effectively waived in writing by Rowan by September 30, 2002 (except to the extent that the failure of such condition to be satisfied has been caused by the failure of Rowan to satisfy any of its obligations, covenants or agreements contained herein); (ii) if FNB shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article V or Article VI herein in any material respect; 52 (iii) if Rowan determines that any of FNB's representations and warranties contained in Article III herein or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect; (iv) if, notwithstanding Rowan's satisfaction of its obligations contained in Section 6.1 above, Rowan's shareholders do not approve this Agreement and Plan of Merger at its shareholders' meeting called for such purpose; (v) if the Merger shall not have become effective on or before September 30, 2002 unless such date is extended as evidenced by the written mutual agreement of the parties hereto; provided, however, that in the event there is a delay of not more than 30 days caused by circumstances beyond the control of the parties hereto, the dates set forth in this Section 8.2(b) shall be extended by mutual agreement for up to an additional 60 days; or (vi) if the average of the daily last sales prices of FNB Stock as reported on Nasdaq (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source as chosen by FNB) for the twenty (20) consecutive full trading days in which such shares are traded on Nasdaq ending at the closing of trading on the Determination Date shall be less than $8.28. "Determination Date" shall mean the fifth business day prior to the date of the meeting of the shareholders of Rowan contemplated by Section 4.3(a). If Rowan desires to terminate this Agreement pursuant to this Section 8.2(b)(vi), it shall give prompt written notice thereof to FNB, which notice shall be given no later than the close of business on the second business day prior to the date of the Rowan shareholders' meeting. However, before Rowan may terminate this Agreement for any of the reasons specified above in clause (i), (ii) or (iii) of this Section 8.2(b), it shall give written notice to FNB as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by Rowan shall not become effective if, within 30 days following the giving of such notice, FNB shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Rowan. In the event FNB cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Rowan within such 30-day period, Rowan shall have 30 days to notify FNB of its intention to terminate this Agreement. A failure to so notify FNB will be deemed to be a waiver by Rowan of the breach, default or violation pursuant to Section 10.2 below. 8.3 Breach; Remedies. ---------------- 53 (a) Except as otherwise provided below, in the event of a breach by Rowan of any of its representations or warranties contained in this Agreement or in any other certificate or writing delivered pursuant to this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in this Agreement, then FNB's sole right and remedy shall be to terminate this Agreement prior to the Effective Time as provided in Section 8.2 above, or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof. (b) Likewise, and except as otherwise provided below, in the event of a breach by FNB of any of its representations or warranties contained in this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in this Agreement, then Rowan's sole right and remedy shall be to terminate this Agreement prior to the Effective Time as provided in Section 8.2 above, or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof. (c) Notwithstanding anything contained herein to the contrary, if either party to this Agreement breaches this Agreement by willfully or intentionally failing to perform or violating any of its obligations, agreements or covenants contained in this Agreement, such party shall be obligated to pay all expenses of the other party described in Section 6.4, together with other damages recoverable at law or in equity. ARTICLE IX. INDEMNIFICATION 9.1 Agreement to Indemnify. In the event this Agreement is terminated for ---------------------- any reason and the Merger is not consummated, then Rowan and FNB will indemnify each other as provided below. (a) By Rowan. Rowan shall indemnify, hold harmless and defend FNB from -------- and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature that arise from or are related to claims by third parties, including without limitation reasonable attorneys' fees and legal costs and expenses in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by FNB: (i) in connection with or which arise out of or result from or are based upon (A) Rowan's operations or business transactions or its relationship with any of its employees, or (B) Rowan's failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement; (ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes a breach by Rowan of, or any inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of Rowan to 54 perform any of its covenants, agreements or obligations under or in connection with this Agreement; (iii) in connection with or which arise out of or result from or are based upon any information provided by Rowan which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus at the time of its mailing to Rowan's and FNB's shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading; and (iv) in connection with or which arise out of or result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation on, from or relating to the Real Property by Rowan or any other person of any Hazardous Substances, or any action taken or any event or condition occurring or existing with respect to the Real Property which constitutes a violation of any Environmental Laws by Rowan or any other person. (b) By FNB. FNB shall indemnify, hold harmless and defend Rowan from ------ and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature that arise from or are related to claims by third parties, including without limitation reasonable attorneys' fees and legal costs and expenses in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by Rowan: (i) in connection with or which arise out of or result from or are based upon (A) FNB's operations or business transactions or its relationship with any of its employees, or (B) FNB's failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement; (ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes a breach by FNB of, or any inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of FNB to perform any of its covenants, agreements or obligations under or in connection with this Agreement; and, (iii) in connection with or which arise out of or result from or are based upon any information provided by FNB which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus at the time of its mailing to FNB's and Rowan's shareholders to contain any untrue statement of a material fact or to omit any 55 material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading. 9.2 Procedure for Claiming Indemnification. -------------------------------------- (a) By FNB. If any matter subject to indemnification hereunder arises ------ in the form of a claim against FNB or its successors and assigns (herein referred to as a "Third Party Claim"), FNB promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to Rowan. Within 15 days of such notice, Rowan either (i) shall pay the Third Party Claim either in full or upon agreed compromise or (ii) shall notify FNB that Rowan disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by Rowan and the cost of such defense shall be borne by Rowan except that FNB shall have the right to participate in such defense at its own expense and provided that Rowan shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind upon FNB or its successors or assigns. FNB agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to Rowan without charge therefor except for out-of-pocket expenses. If Rowan fails to take action within 15 days as hereinabove provided or, having taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, FNB shall have the right to pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. FNB also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by Rowan. (b) By Rowan. If any matter subject to indemnification hereunder -------- arises in the form of a claim against Rowan or its successors and assigns (herein referred to as a "Third Party Claim"), Rowan promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to FNB. Within 15 days of such notice, FNB either (i) shall pay the Third Party Claim either in full or upon agreed compromise or (ii) shall notify Rowan that FNB disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by FNB and the cost of such defense shall be borne by FNB except that Rowan shall have the right to participate in such defense at its own expense and provided that FNB shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind upon Rowan or its successors and assigns. Rowan agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to FNB without charge therefor except for out-of-pocket expenses. If FNB fails to take action within 15 days as hereinabove provided or, having taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, Rowan shall have the right to pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. Rowan also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by FNB. 56 ARTICLE X. MISCELLANEOUS PROVISIONS 10.1 Reservation of Right to Revise Structure. Notwithstanding any ---------------------------------------- provision herein to the contrary, FNB shall have the unilateral right to revise the structure of the Merger to achieve the tax consequences described in Section 6.8 or for any other reason FNB may deem advisable; provided, however, that no such change will (i) alter or change the amount or kind of consideration to be received by the shareholders of Rowan in the Merger or (ii) adversely affect the tax treatment to the shareholders of Rowan as a result of receiving such consideration. In the event of such election by FNB, the parties hereto shall execute an appropriate amendment to this Agreement. 10.2 Survival of Representations, Warranties, Indemnification and Other ------------------------------------------------------------------ Agreements. - ---------- (a) Representations, Warranties and Other Agreements. None of the ------------------------------------------------ representations, warranties or agreements herein shall survive the effectiveness of the Merger, and no party shall have any right after the Effective Time to recover damages or any other relief from any other party to this Agreement by reason of any breach of representation or warranty, any nonfulfillment or nonperformance of any agreement contained herein, or otherwise; provided, however, that the parties' agreements contained in Section 6.6 above, FNB's covenants contained in Sections 5.1 through 5.5 above shall survive the effectiveness of the Merger. (b) Indemnification. The parties' indemnification agreements and --------------- obligations pursuant to Section 9.1 above shall become effective only in the event this Agreement is terminated, and neither of the parties shall have any obligations under Section 9.1 in the event of or following consummation of the Merger. 10.3 Waiver. Any term or condition of this Agreement may be waived (except ------ as to matters of regulatory approvals and approvals required by law), either in whole or in part, at any time by the party which is, and whose shareholders are, entitled to the benefits thereof, provided, however, that any such waiver shall be effective only upon a determination by the waiving party (through action of its Board of Directors) that such waiver would not adversely affect the interests of the waiving party or its shareholders; and, provided further, that no waiver of any term or condition of this Agreement by any party shall be effective unless such waiver is in writing and signed by the waiving party or as provided in Sections 8.2(a) and 8.2(b) above, or be construed to be a waiver of any succeeding breach of the same term or condition. No failure or delay of any party to exercise any power, or to insist upon a strict compliance by any other party of any obligation, and no custom or practice at variance with any terms hereof, shall constitute a waiver of the right of any party to demand full and complete compliance with such terms. 10.4 Amendment. This Agreement may be amended, modified or supplemented at --------- any time or from time to time prior to the Effective Time, and either before or after its approval by the shareholders of Rowan and FNB, by an agreement in writing approved by a majority of the Boards of Directors of FNB and Rowan executed in the same manner as this Agreement; provided however, that the provisions of this Agreement relating to the manner or basis in which shares of Rowan Stock are converted into FNB Stock shall not be amended after the approval of 57 this Agreement and Plan of Merger by the shareholders of Rowan without the requisite approval of such shareholders of such amendment. 10.5 Notices. All notices and other communications hereunder shall be in ------- writing and shall be deemed to have been duly given if delivered personally or by courier, or mailed by certified mail, return receipt requested, postage prepaid, and addressed as follows: (a) If to Rowan, to: Rowan Bancorp, Inc. Attention: Bruce D.Jones, President 200 North Main Street China Grove, North Carolina 28023 With copy to: Gaeta & Glesener, P.A. Attention: Anthony Gaeta, Jr. 808 Salem Woods Drive, Suite 201 Raleigh, North Carolina 27615-3345 (b) If to FNB, to: FNB Corp. Attention: Mr. Michael C. Miller, President Post Office Box 1328 (27204) 101 Sunset Avenue Asheboro, North Carolina 27203 With copy to: Schell Bray Aycock Abel & Livingston P.L.L.C. Attention: Doris R. Bray 1500 Renaissance Plaza 230 North Elm Street Greensboro, North Carolina 27420 10.6 Further Assurance. Rowan and FNB shall each furnish to the other such ----------------- further assurances with respect to the matters contemplated herein and their respective agreements, covenants, representations and warranties contained herein, including the opinion of legal counsel, as such other party may reasonably request. 10.7 Headings and Captions. Headings and captions of the sections and --------------------- Sections of this Agreement have been inserted for convenience of reference only and do not constitute a part hereof. 58 10.8 Entire Agreement. This Agreement (including all schedules and exhibits ---------------- attached hereto and all documents incorporated herein by reference) contains the entire agreement of the parties with respect to the transactions described herein and supersedes any and all other oral or written agreement(s) heretofore made, and there are no representations or inducements by or to, or any agreements between, any of the parties hereto other than those contained herein in writing. 10.9 Severability of Provisions. The invalidity or unenforceability of any -------------------------- term, phrase, clause, Section, restriction, covenant, agreement or other provision hereof shall in no way affect the validity or enforceability of any other provision or part hereof. 10.10 Assignment. This Agreement may not be assigned by either party hereto ---------- except with the prior written consent of the other party hereto. 10.11 Counterparts. Any number of counterparts of this Agreement may be ------------ signed and delivered, each of which shall be considered an original and all of which together shall constitute one agreement. 10.12 Governing Law. This Agreement is made in and shall be construed and ------------- enforced in accordance with the laws of North Carolina. 10.13 Inspection. Any right of FNB or Rowan hereunder to investigate or ---------- inspect the assets, books, records, files and other information of the other in no way shall establish any presumption that FNB or Rowan should have conducted any investigation or that such right has been exercised by FNB or Rowan or their agents, representatives or others. Any investigations or inspections that have been made by FNB or Rowan or their 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 Rowan or FNB in this Agreement. [Signatures on Following Page] 59 IN WITNESS WHEREOF, Rowan and FNB each has caused this Agreement to be executed in its name by its duly authorized officers and its corporate seal to be affixed hereto as of the date first above written. ROWAN BANCORP, INC. By /s/ Bruce D. Jones ------------------------------------- President and Chief Executive Officer FNB CORP. By /s/ Michael C. Miller ------------------------------------- President and Chief Executive Officer 60 SCHEDULES TO AGREEMENT AND PLAN OF MERGER SCHEDULE DESCRIPTION A Plan of Merger B Form of Employment Agreement 61 EX-21 4 dex21.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Registrant has one direct, wholly-owned subsidiary as follows: First National Bank and Trust Company -- National banking association headquartered in the State of North Carolina. EX-23 5 dex23.txt CONSENT OF KPMG EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors FNB Corp. We consent to incorporation by reference in the registration statements (Nos. 33-72686 and 333-54702) on Form S-8 of FNB Corp. of our report dated March 7, 2002, with respect to the consolidated balance sheets of FNB Corp. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of FNB Corp. KPMG LLP March 27, 2002 Greenville, South Carolina -----END PRIVACY-ENHANCED MESSAGE-----