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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1997
OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to ________
Commission file no. 333-1546
FNB BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
South Carolina 57-1033165
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
303 North Granard Street
Gaffney, South Carolina 29341
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(Address of Principal Executive Offices) (Zip Code)
(864) 488-2265
Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's loss for its most recent fiscal year was $185,145. As of
March 15, 1998, 616,338 shares of Common Stock were issued and outstanding.
The aggregate market value of the Common Stock held by non-affiliates
of the Company on March 15, 1998 was $4,436,580. This calculation is based upon
an estimate of the fair market value of the Common Stock by the Company's Board
of Directors of $10 per share. There is not an active trading market for the
Common Stock and it is not possible to identify precisely the market value of
the Common Stock.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report to Shareholders for the year ended December 31, 1997
is incorporated by reference in this Form 10-KSB in Part II, Items 6 and 7. The
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 28, 1998 is incorporated by reference in this Form 10-KSB in Part III,
Items 9 through 12.
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ITEM 1. DESCRIPTION OF BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
GENERAL
FNB Bancshares, Inc. (the "Company") was incorporated as a South
Carolina corporation on September 27, 1995, primarily to own and control all of
the capital stock of First National Bank of the Carolinas (the "Bank"). The
Company initially will engage in no business other than owning and managing the
Bank. The organizers of the Bank chose a holding company structure because the
holding company structure provides flexibility that would not otherwise be
available.
The holding company structure can assist the Bank in maintaining its
required capital ratios because, subject to compliance with Federal Reserve
Board debt guidelines, the Company may borrow money and contribute the proceeds
to the Bank as primary capital. Moreover, a holding company may engage in
certain non-banking activities that the Federal Reserve Board has deemed to be
closely related to banking. See "Supervision and Regulation."
The Bank is organized as a national banking association under the laws
of the United States and engages in the commercial banking business from its
office in the Cherokee County area, with deposits insured by the FDIC. The Bank
is a member of the Federal Reserve System. The Bank commenced business on
October 18, 1996 after receiving an OCC charter and FDIC approval for deposit
insurance.
LOCATION AND SERVICE AREA
The Bank engages in a general commercial and retail banking business,
emphasizing the needs of small- to medium-sized businesses, professional
concerns, and individuals, primarily in Gaffney, South Carolina and the
surrounding area, including Cherokee County. The principal executive offices of
both the Company and the Bank are located in a modular building at 303 North
Granard Street, Gaffney, South Carolina 29342. The Bank intends to move the
Gaffney Office into a permanent facility across the street at 217 North Granard
Street in the first quarter of 1999. The address of the Blacksburg office is 207
West Cherokee Street, Blacksburg, South Carolina 29702. The Company's telephone
number is (864) 488-2265. See "Item 2. Description of Property."
Blacksburg and Gaffney are approximately eight miles from each other
and are the two largest municipalities in Cherokee County. As of 1994, Cherokee
County had a population of 46,120, 13,622 of whom lived in the city of Gaffney
and 1,976 of whom lived in the Blacksburg town limits. Within a 15 mile radius
of Gaffney reside over 130,276 people, within a 30 mile radius over 539,400, and
within a 60 mile radius, approximately 2,250,000.
The Bank's primary service area is Cherokee County, South Carolina.
Cherokee County is part of a five-county metropolitan statistical area covering
the "upstate" area of South Carolina, including Greenville,
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Spartanburg, Pickens, Cherokee, and Laurens Counties. Cherokee County is located
between the major metropolitan statistical areas of
Greenville-Spartanburg-Anderson of South Carolina and Charlotte-Gastonia-Rock
Hill of North Carolina. The counties from Greenville-Spartanburg-Anderson to
Charlotte-Gastonia-Rock Hill and Cherokee and Laurens make up an area that is
known to many as the "I-85 Business Belt." The presence of I-85 enhances the
economic potential of the area by linking the seven counties to other major
southeastern markets, including the Charlotte and Atlanta markets, which are
easily accessible to this area by I-85.
Cherokee County's economy is dominated by manufacturing and
agriculture. With over 60 manufacturing plants, including the Nestle Frozen
Foods Company, Milliken & Co. - Magnolia Finishing Plant, and the Timken
Company, Cherokee County enjoys a diversified manufacturing community.
Manufacturing companies employ approximately 48% of the county's workforce, and
the textile mills products sector accounts for nearly 50% of this manufacturing
employment.
MARKETING FOCUS
Most of the banks in the Cherokee County area are now local branches of
large regional banks. Although size gives the larger banks certain advantages in
competing for business from large corporations, including higher lending limits
and the ability to offer services in other areas of South Carolina and the
Cherokee County area, management believes there has been a void in the community
banking market in the Cherokee County area and believe that the Bank can
successfully fill this void. As a result, the Company generally does not attempt
to compete for the banking relationships of large corporations, but concentrates
its efforts on small- to medium-sized businesses and on individuals.
The Bank advertises through various forms of media, as well as direct
mail, targeting market segments and emphasizing the Company's local ownership,
community bank nature, and ability to provide more personalized service than its
competition. Management believes that the community bank focus of the Bank is
likely to succeed in this market. Management believes that the area will react
favorably to the Bank's emphasis on service to small businesses, individuals,
and professional concerns. However, no assurances in this respect can be given.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts, and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the
Cherokee County area. In addition, the Bank offers certain retirement account
services, such as Individual Retirement Accounts (IRAs). All deposit accounts
are insured by the FDIC up to the maximum amount allowed by law (generally,
$100,000 per depositor, subject to aggregation rules). The Bank solicits these
accounts from individuals, businesses, associations and organizations, and
governmental authorities.
LENDING ACTIVITIES
General. The Bank emphasizes a range of lending services, including
real estate, commercial and consumer loans, to individuals and small- to
medium-sized businesses and professional concerns that are located in or conduct
a substantial portion of their business in the Bank's market area.
Real Estate Loans. One of the primary components of the Bank's loan
portfolio is loans secured by first or second mortgages on real estate. These
loans generally consist of commercial real estate loans,
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construction and development loans, and residential real estate loans (but
exclude home equity loans, which are classified as consumer loans). Loan terms
generally are limited to five years or less, although payments may be structured
on a longer amortization basis. Interest rates are fixed or adjustable. The Bank
generally charges an origination fee. Management attempts to reduce credit risk
in the commercial real estate portfolio by emphasizing loans on owner-occupied
office and retail buildings where the loan-to-value ratio, established by
independent appraisals, does not exceed 80%. In addition, the Bank typically
requires personal guarantees of the principal owners of the property backed with
a review by the Bank of the personal financial statements of the principal
owners. The principal economic risk associated with each category of loans,
including real estate loans, is the creditworthiness of the Bank's borrowers.
The risks associated with real estate loans vary with many economic factors,
including employment levels and fluctuations in the value of real estate. The
Bank competes for real estate loans with a number of bank competitors which are
well established in the Cherokee County area. Most of these competitors have
substantially greater resources and lending limits than the Bank. As a result,
the Bank occasionally must charge a lower interest rate to attract borrowers.
See "--Competition". The Bank also originates loans for sale into the secondary
market. The Bank attempts to limit interest rate risk and credit risk on these
loans by locking the interest rate for each loan with the secondary investor and
receiving the investor's underwriting approval prior to originating the loan.
Commercial Loans. The Bank makes loans for commercial purposes in
various lines of businesses. Equipment loans typically are made for a term of
five years or less at fixed or variable rates, with the loan fully amortized
over the term and secured by the financed equipment and with a loan-to-value
ratio of 80% or less. Working capital loans typically have terms not exceeding
one year and are usually secured by accounts receivable, inventory, or personal
guarantees of the principals of the business. For loans secured by accounts
receivable or inventory, principal is typically repaid as the assets securing
the loan are converted into cash, and in other cases principal is typically due
at maturity. The principal economic risk associated with each category of loans,
including commercial loans, is the creditworthiness of the Bank's borrowers. The
risks associated with commercial loans vary with many economic factors,
including the economy in the Cherokee County area, especially the tourist
economy. The well-established banks in the Cherokee County area will make
proportionately more loans to medium- to large-sized businesses than the Bank.
Many of the Bank's commercial loans are made to small- to medium-sized
businesses which may be less able to withstand competitive, economic, and
financial conditions than larger borrowers.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. These loans typically carry balances of less than $25,000
and, in the case of non-revolving loans, are amortized over a period not
exceeding 48 months. The revolving loans typically bear interest at a fixed rate
and require monthly payments of interest and a portion of the principal balance.
The underwriting criteria for home equity loans and lines of credit is generally
the same as applied by the Bank when making a first mortgage loan, as described
above, and home equity lines of credit typically expire fifteen years or less
after origination. As with the other categories of loans, the principal economic
risk associated with consumer loans is the creditworthiness of the Bank's
borrowers, and the principal competitors for consumer loans is the established
banks in the Cherokee County area.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds an individual officer's lending authority, the loan
request is considered and approved by an officer with a higher lending limit.
The Bank has established a Board loan committee that must approve any loan over
the President's lending limit. The Bank does not make any loans to directors,
officers, or employees of the Bank unless the loan is approved by the board of
directors of the Bank and is made on terms not more favorable to such person
than would be available to a person not affiliated with the Bank (excluding
consumer loans less than $20,000 which are available at employee rates).
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Lending Limits. The Bank's lending activities are subject to a variety
of lending limits imposed by federal law. While differing limits apply in
certain circumstances based on the type of loan or the nature of the borrower
(including the borrower's relationship to the Bank), in general the Bank is
subject to a loan-to-one-borrower limit. This limit will increase or decrease as
the Bank's capital increases or decreases. Unless the Bank is able to sell
participations in its loans to other financial institutions, the Bank will not
be able to meet all of the lending needs of loan customers requiring aggregate
extensions of credit above these limits.
OTHER BANKING SERVICES
Other bank services include cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
and automatic drafts for various accounts. The Bank is associated with a shared
network of automated teller machines that may be used by Bank customers
throughout South Carolina and other regions. The Bank also offers MasterCard and
VISA credit card services through a correspondent bank as an agent for the Bank.
The Bank does not currently exercise trust powers. The Bank may in the future
offer a full-service trust department, but cannot do so without the prior
approval of the OCC.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous
additional regulatory requirements have been placed on the banking industry in
the past several years, and additional changes have been proposed. The
operations of the Company and the Bank may be affected by legislative changes
and the policies of various regulatory authorities. The Company is unable to
predict the nature or the extent of the effect on its business and earnings that
fiscal or monetary policies, economic control, or new federal or state
legislation may have in the future.
THE COMPANY
Because it owns the outstanding capital stock of the Bank, the Company
is a bank holding company within the meaning of the federal Bank Holding Company
Act of 1956 (the "BHCA") and The South Carolina Bank Holding Company Act (the
"South Carolina Act"). The activities of the Company are governed by the
Glass-Steagall Act of 1933 (the "Glass-Steagall Act").
The BHCA. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's and the Bank's activities are limited to banking,
managing, or controlling banks; furnishing services to or performing services
for its subsidiaries; and engaging in other activities that the Federal Reserve
determines to be so closely related to banking, managing, or controlling banks
as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any
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bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of disapproval)
prior to any person or company acquiring "control" of a bank holding company,
such as the Company. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
Company has registered securities under Section 12 of the Exchange Act (which
the Company has done) or no other person will own a greater percentage of that
class of voting securities immediately after the transaction. The regulations
provide a procedure for challenge of the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases,
engaging in certain insurance and discount brokerage activities, performing
certain data processing services, acting in certain circumstances as a fiduciary
or investment or financial adviser, owning savings associations, and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board imposes certain capital requirements on the
Company under the BHCA, including a minimum leverage ratio and a minimum ratio
of "qualifying" capital to risk-weighted assets. These requirements are
described below under "Capital Regulations." Subject to its capital requirements
and certain other restrictions, the Company is able to borrow money to make a
capital contribution to the Bank, and such loans may be repaid from dividends
paid from the Bank to the Company (although the ability of the Bank to pay
dividends is subject to regulatory restrictions as described below in "The
Bank-- Dividends"). The Company is also able to raise capital for contribution
to the Bank by issuing securities without having to receive regulatory approval,
subject to compliance with federal and state securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal Reserve
Board may require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve Board's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
Glass-Steagall Act. The Company is restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibits the Company from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale, or distribution of securities. The interpretation, scope, and
application of the provisions of the Glass-Steagall Act currently are being
considered and reviewed by regulators and legislators, and the interpretation
and application of those provisions have been challenged in the federal courts.
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South Carolina Act. As a bank holding company registered under the
South Carolina Act, the Company is subject to regulation by the South Carolina
Board. Consequently, the Company must receive the approval of the South Carolina
Board prior to engaging in the acquisition of banking or nonbanking institutions
or assets. The Company must also file with the South Carolina Board periodic
reports with respect to its financial condition and operations, management, and
intercompany relationships between the Company and its subsidiaries.
THE BANK
General. The Bank operates as a national banking association
incorporated under the laws of the United States and subject to examination by
the OCC. Deposits in the Bank are insured by the FDIC up to a maximum amount
(generally $100,000 per depositor, subject to aggregation rules). The OCC and
the FDIC regulate or monitor virtually all areas of the Bank's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The OCC
requires the Bank to maintain certain capital ratios and imposes limitations on
the Bank's aggregate investment in real estate, bank premises, and furniture and
fixtures. The Bank is required by the OCC to prepare quarterly reports on the
Bank's financial condition and to conduct an annual audit of its financial
affairs in compliance with minimum standards and procedures prescribed by the
OCC.
Under FDICIA, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates is assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to: (i) internal controls, information
systems, and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.
National banks and their holding companies which have been chartered or
registered or have undergone a change in control within the past two years or
which have been deemed by the OCC or the Federal Reserve Board, respectively, to
be troubled institutions must give the OCC or the Federal Reserve Board,
respectively, thirty days prior notice of the appointment of any senior
executive officer or director. Within the thirty day period, the OCC or the
Federal Reserve Board, as the case may be, may approve or disapprove any such
appointment. The Company and the Bank will meet the criteria which trigger this
additional approval during the first two years after they are registered or
chartered, respectively.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund ("BIF") and Savings Association Insurance Fund
("SAIF") are maintained for commercial banks and thrifts, respectively, with
insurance premiums from the industry used to offset losses from insurance
payouts when banks and thrifts fail. Since 1993, insured depository institutions
like the Bank have paid for deposit insurance under a risk-based premium system.
Under this system, until mid-1995 depositor institutions paid to BIF or SAIF
from $0.23 to $0.31 per $100 of insured deposits depending on its capital levels
and risk profile, as determined by its primary federal regulator on a
semi-annual basis. Once the BIF reached its legally mandated reserve ratio in
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mid-1995, the FDIC lowered premiums for well-capitalized banks, eventually to
$.00 per $100, with a minimum semiannual assessment of $1,000. However, in 1996
Congress enacted the Deposit Insurance Funds Act of 1996, which eliminated this
minimum assessment. It also separated the Financial Corporation (FICO)
assessment to service the interest on its bond obligations. The amount assessed
on individual institutions, including the Bank, by FICO is in addition to the
amount paid for deposit insurance according to the risk-related assessment rate
schedule. Increases in deposit insurance premiums or changes in risk
classification will increase the Bank's cost of funds, and there can be no
assurance that such cost can be passed on the Bank's customers.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and, as to all affiliates combined, to 20% of
the bank's capital and surplus. Furthermore, within the foregoing limitations as
to amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the taking
of low quality assets.
The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with non-affiliated companies. The Bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those available to all employees of the Bank and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
Dividends. A national bank may not pay dividends from its capital. All
dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. In addition, a national
bank is prohibited from declaring a dividend on its shares of common stock until
its surplus equals its stated capital, unless there has been transferred to
surplus no less than one-tenth of the bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the OCC is required if the total of all dividends declared by a national bank
in any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus. In addition, under FDICIA, the Bank may not pay a dividend
if, after paying the dividend, the Bank would be undercapitalized. See "Capital
Regulations."
Branching. National banks are required by the National Bank Act to
adhere to branch office banking laws applicable to state banks in the states in
which they are located. Under current South Carolina law, the Bank may open
branch offices throughout South Carolina with the prior approval of the OCC. In
addition, with prior regulatory approval, the Bank will be able to acquire
existing banking operations in South Carolina. Furthermore, federal legislation
has recently been passed which permits interstate branching. The new law permits
out-of-state acquisitions by bank holding companies (subject to veto by new
state law), interstate branching by banks if allowed by state law, interstate
merging by banks, and de novo branching by national banks if allowed by state
law. See "--Recent Legislative Developments." Management currently have no plans
or agreements whereby the Bank would acquire other banks or thrifts.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, the OCC, or the Office
of Thrift Supervision shall evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent
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with the safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution will be fulfilling its obligation to
help meet the housing needs of the community it serves; the Equal Credit
Opportunity Act, prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit; the Fair Credit Reporting Act of 1978,
governing the use and provision of information to credit reporting agencies; the
Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of the Bank also are subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that act,
which governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies and account for off-balance sheet items.
The guidelines are minimums, and the federal regulators have noted that banks
and bank holding companies contemplating significant expansion programs should
not allow expansion to diminish their capital ratios and should maintain ratios
in excess of the minimums. Neither the Company nor the Bank has received any
notice indicating that either entity will be subject to higher capital
requirements. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum
8
<PAGE> 10
degree to which a bank holding company may leverage its equity capital base. The
minimum required leverage ratio for top-rated institutions is 3%, but most
institutions are required to maintain an additional cushion of at least 100 to
200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks which requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. The Bank is currently
"well-capitalized."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates, and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or a part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
Effective January 1, 1997, the OCC amended the risk-based capital
standards to incorporate a measure for market risk to cover all positions
located in a institution's trading account, and foreign exchange and commodity
positions wherever located. The effect of the rule is that it requires any bank
or bank holding company with significant exposure to market risk to measure the
risk and hold capital commensurate with that risk. Since the Bank does not
currently engage, nor has any plans to engage, in trading, foreign exchange or
commodity position activities, the rule does not have an effect on the required
Bank capital levels.
These capital guidelines can affect the Company in several ways. The
Company's capital levels are currently more than adequate. However, rapid
growth, poor loan portfolio performance, or poor earnings performance, or a
combination of these factors, could change the Company's capital position in a
relatively short period of time, making an additional capital infusion
necessary. Failure to meet these capital requirements would mean that a bank
would be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time.
ENFORCEMENT POWERS
FIRREA expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties" (primarily including management,
employees, and agents of a financial institution, and independent contractors
such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs). These practices can include the failure of
an institution to timely file required reports or the filing of false or
misleading information or the submission of inaccurate reports. Civil penalties
may be as high as
9
<PAGE> 11
$1,000,000 a day for such violations. Criminal penalties for
some financial institution crimes have been increased to twenty years. In
addition, regulators are provided with greater flexibility to commence
enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance.
Furthermore, FIRREA expanded the appropriate banking agencies' power to issue
cease-and-desist orders that may, among other things, require affirmative action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts, or take other actions as
determined by the ordering agency to be appropriate.
RECENT LEGISLATIVE DEVELOPMENTS
In the 1994 legislative session, South Carolina amended its bank
holding act to allow nationwide interstate banking beginning in 1996. The
Interstate Banking Act, passed by Congress in 1994, allows unrestricted
interstate bank mergers, unrestricted interstate acquisition of banks by bank
holding companies, and interstate de novo branching by banks if allowed by state
law. In 1997, legislation was passed in North Carolina which provides that until
June 1, 1999, an out-of-state bank, such as the Bank, could establish and
maintain a de novo branch in North Carolina or acquire and maintain an existing
branch from another bank only if the laws of the home state of the out-of-state
bank contain reciprocal provisions permitting North Carolina banks to establish
and maintain de novo branches or acquire branches from another bank in that
state. South Carolina law does not contain such reciprocal provisions, and
therefore the North Carolina legislation has the effect of prohibiting the Bank
from establishing a de novo branch in North Carolina prior to June 1, 1999. From
time to time, various bills are introduced in the United States Congress with
respect to the regulation of financial institutions. Certain of these proposals,
if adopted, could significantly change the regulation of banks and the financial
services industry. The Bank cannot predict whether any of these proposals will
be adopted or, if adopted, how these proposals would affect the Bank. From time
to time, various bills are introduced in the United States Congress with respect
to the regulation of financial institutions. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry. The Company cannot predict whether any of these proposals
will be adopted or, if adopted, how these proposals would affect the Company.
EFFECT OF GOVERNMENTAL MONETARY POLICIES
The earnings of the Bank is affected by domestic economic conditions
and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve Board's monetary policies have had, and will
likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The monetary
policies of the Federal Reserve Board have major effects upon the levels of bank
loans, investments and deposits through its open market operations in United
States government securities and through its regulation of the discount rate on
borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature or impact of future changes
in monetary and fiscal policies.
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the
Cherokee County area and elsewhere. A number of these competitors are well
established in the Cherokee County area. Most of them have substantially greater
resources and lending limits than the Bank and offer certain services, such as
extensive and established branch networks and trust services, that
10
<PAGE> 12
the Bank either does not expect to provide or does not currently provide. As a
result of these competitive factors, the Bank may have to pay higher rates of
interest to attract deposits.
The Company believes that the community bank focus of the Bank, with
its emphasis on service to small businesses, individuals, and professional
concerns, will give it an advantage in this market.
EMPLOYEES
The Company has sixteen full-time employees as of December 31, 1997.
ITEM 2. DESCRIPTION OF PROPERTY
Gaffney Property. The principal place of business of both the Company
and the Bank and the main office of the Bank is located at the corner of Granard
Street and West Meadow Street in Gaffney, South Carolina. Currently, the Bank
operates the Gaffney office in a modular building. The proposed site of the
Bank's main office is a parcel of land adjacent to the current site located at
217 North Granard Street. The Company plans to construct a permanent banking
facility of 11,000 square feet on the site at an approximate cost of $1,500,000,
including furniture, fixtures, and equipment. Construction of this building is
expected to begin in the first quarter of 1998.
Blacksburg Property. The Bank also operates a Blacksburg office
facility at 207 West Cherokee Street, Blacksburg, South Carolina 29702. The
Blacksburg site is on approximately a one acre of land. The Company plans to
construct a permanent banking facility of 2,500 square feet on the site at an
approximate cost of $250,000 which will be paid out of funds from operations of
the Bank and, to the extent necessary, remaining proceeds of the offering.
Construction of this building is anticipated to begin in the near future.
Currently, the Bank operates the Blacksburg office in a modular building.
The Company believes that these facilities will adequately serve the
Bank's needs for its first several years of operation.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"), of which 616,338 shares were sold in the initial offering. As of
December 31, 1997, the Company had 572 shareholders of record. Trades in the
Common Stock are limited and sporadic, and management is not aware of the prices
of all trades. There is no established trading market in the Common Stock, and
one is not expected to develop in the near future.
11
<PAGE> 13
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available therefor, when, as and
if declared by the Board of Directors. The Company does not plan to declare any
dividends in the immediate future. See "Item 1. Description of Business --
Dividends."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information contained on pages 4 through
14 of the Company's Annual Report to Shareholders for the year ended December
31, 1997 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 3 through
13 of the Company's Annual Report to Shareholders for the year ended December
31, 1997 is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
In response to this Item, the information contained on pages 2 through
4 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 28, 1998 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 4 through
5 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 28, 1998 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on pages 6 through
8 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 28, 1998 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 11 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 28, 1998 is incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
12
<PAGE> 14
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form S-1, File No. 333-1546)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Registration Statement
on Form S-1, File No. 333-1546)
4.1 Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's Common
Stock (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, File No. 333-1546)
10.1 Option Agreement dated October 20, 1995, between James L.
Moss, as seller, and FNB Bancshares, Inc., as purchaser, for
the Blacksburg office property (incorporated by reference to
Exhibit 10.1 of the Registration Statement on Form S-1, File
No. 333-1546)
10.2 Option Agreement dated December 31, 1995, between William K. Brumbach, Jr., Linwood B.
Brumbach, Evelyn B. Sanles and Patricia Brumbach Clary, as sellers, and FNB Bancshares, Inc.,
as purchaser, for the secondary parcel for the Gaffney Office property (incorporated by
reference to Exhibit 10.2 of the Registration Statement on Form S-1, File No. 333-1546)
10.3 Option Agreement dated January 10, 1996, between Wylie L.
Hamrick and Catherine H. Beattie, as sellers, and FNB
Bancshares, Inc., as purchaser, for the primary parcel for the
Gaffney Office property (incorporated by reference to Exhibit
10.3 of the Registration Statement on Form S-1, File No.
333-1546)
10.4 Line of Credit Note dated September 27, 1995, by The Company
to The Bankers Bank (incorporated by reference to Exhibit 10.4
of the Registration Statement on Form S-1, File No. 333-1546)
10.5. Employment Agreement dated January 17, 1996, between the
Company and V. Stephen Moss (incorporated by reference to
Exhibit 10.5 of the Registration Statement on Form S-1, File
No.
333-1546)
10.6. Escrow Agreement dated March 8, 1996, between The Company and
The Bankers Bank (incorporated by reference to Exhibit 10.6 of
the Registration Statement on Form S-1, File No. 333-1546)
10.7 Commitment Letter dated March 27, 1996, from Spartanburg National Bank for a $150,000 line of
credit (incorporated by reference to Exhibit 10.7 of the Registration Statement on Form S-1,
File No. 333-1546)
10.8 Stock Option Plan dated as of March 25, 1997 (incorporated by
reference to Exhibit 10.7 of the Annual Report on Form 10-KSB
filed by the Company for the year ended December 31, 1996)
13 Annual Report to Shareholders for the year ended December 31, 1997
21.1 Subsidiaries of the Company
</TABLE>
13
<PAGE> 15
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1997.
14
<PAGE> 16
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FNB BANCSHARES, INC.
Date: March 27, 1998 By: /s/ V. Stephen Moss
-------------------
V. Stephen Moss
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints V. Stephen Moss, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
Signature Title Date
----
/s/ Richard D. Gardner March 27, 1998
- ------------------------- -----------------------
Richard D. Gardner Director
/s/ Barry Hamrick March 27, 1998
- ------------------------- -----------------------
Barry Hamrick Director
/s/ Haskell D. Mallory March 27, 1998
- ------------------------- -----------------------
Haskell D. Mallory Director
/s/ Bill Mason March 27, 1998
- ------------------------- -----------------------
Bill Mason Director
<PAGE> 17
Signature Title Date
/s/ V. Stephen Moss March 27, 1998
- ------------------------------ ------------------
V. Stephen Moss Director;
President and CEO
/s/ Harold D. Pennington, Jr. March 27, 1998
- ------------------------------ ------------------
Harold D. Pennington, Jr. Director
/s/ Harold D. Pennington, Sr. March 27, 1998
- ------------------------------ ------------------
Harold D. Pennington, Sr. Director
/s/ Heyward W. Porter March 27, 1998
- ------------------------------ ------------------
Heyward W. Porter Director
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form S-1, File No. 333-1546)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Registration Statement
on Form S-1, File No. 333-1546)
4.1 Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's Common
Stock (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, File No. 333-1546)
10.1 Option Agreement dated October 20, 1995, between James L.
Moss, as seller, and FNB Bancshares, Inc., as purchaser, for
the Blacksburg office property (incorporated by reference to
Exhibit 10.1 of the Registration Statement on Form S-1, File
No. 333-1546)
10.2 Option Agreement dated December 31, 1995, between William K. Brumbach, Jr., Linwood B.
Brumbach, Evelyn B. Sanles and Patricia Brumbach Clary, as sellers, and FNB Bancshares, Inc.,
as purchaser, for the secondary parcel for the Gaffney Office property (incorporated by
reference to Exhibit 10.2 of the Registration Statement on Form S-1, File No. 333-1546)
10.3 Option Agreement dated January 10, 1996, between Wylie L.
Hamrick and Catherine H. Beattie, as sellers, and FNB
Bancshares, Inc., as purchaser, for the primary parcel for the
Gaffney Office property (incorporated by reference to Exhibit
10.3 of the Registration Statement on Form S-1, File No.
333-1546)
10.4 Line of Credit Note dated September 27, 1995, by The Company
to The Bankers Bank (incorporated by reference to Exhibit 10.4
of the Registration Statement on Form S-1, File No. 333-1546)
10.5. Employment Agreement dated January 17, 1996, between the
Company and V. Stephen Moss (incorporated by reference to
Exhibit 10.5 of the Registration Statement on Form S-1, File
No.
333-1546)
10.6. Escrow Agreement dated March 8, 1996, between The Company and
The Bankers Bank (incorporated by reference to Exhibit 10.6 of
the Registration Statement on Form S-1, File No. 333-1546)
10.7 Commitment Letter dated March 27, 1996, from Spartanburg National Bank for a $150,000 line of
credit (incorporated by reference to Exhibit 10.7 of the Registration Statement on Form S-1,
File No. 333-1546)
10.8 Stock Option Plan dated as of March 25, 1997 (incorporated by
reference to Exhibit 10.7 of the Annual Report on Form 10-KSB
filed by the Company for the year ended December 31, 1996)
13 Annual Report to Shareholders for the year ended December 31, 1997
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE> 2
FNB BANCSHARES, INC.
1997 ANNUAL REPORT
<PAGE> 3
FNB BANCSHARES, INC.
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Shareholder's Letter 2
Summary of Selected Financial Data 3
Management's Discussion and Analysis 4-14
Report of Independent Auditors 15
Consolidated Balance Sheets 16
Consolidated Statements of Operations 17
Consolidated Changes in Stockholder's Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-32
Dirctors, Officers and Services 33
Corporate Data 34
</TABLE>
<PAGE> 4
FNB BANCSHARES, INC.
To our Stockholders:
1997 was a good year of growth for First National Bank of the Carolinas as we
have continued to build our financial organization and become an active
participant in the Cherokee County banking community. By being able to make
decisions locally we have been able to quickly respond to the needs of our
customers.
First National Bank has become a good neighbor for our community. Through
contributions and volunteer service of our employees we have been able to assist
over 30 worthwhile community organizations. As we continue to grow, we will
always strive to give back to our community.
Deposit growth for 1997 exceeded our original goals and we were able to continue
attracting low cost deposits, thus keeping our cost of funds low. These stable
funds enable us to continue to make affordable loans which help our local
economy.
We continue to see a strong loan demand as we made over $14,000,000 in new loans
during 1997. At the same time our loan losses were extremely low, reflecting our
commitment to quality loan growth. While we continue to seek additional loan
customers, we stand firm in our commitment to asset quality. A third party
consultant has been contracted to periodically review our loan portfolio.
During 1998 we will seek ways to maximize our sources of revenue. While interest
income on loans will continue to be our most important revenue source, we plan
to initiate some programs to enhance our fee income. This should provide a
steady income source while maximizing the use of our facilities and employees.
Plans are being finalized to begin construction of our new main office facility
in Gaffney. Construction on a new 11,000 square foot two story facility will
begin in the Spring of 1998 and we should be able to move into the new building
by December, 1998. This cannot come soon enough as we are currently limited due
to the size of our current temporary facilities.
We, the directors and employees, at First National Bank of the Carolinas, remain
optimistic about our continued growth and success. We will continue seeking ways
to improve our efficiency and customer service, thus adding value for our
shareholders. We feel that the necessary resources are being put in place which
will enhance our opportunities for long term growth and profitability.
I hope that you will be able to join us for the Annual Shareholders meeting on
Tuesday April 28, 1998 at 5:30 p.m. at the Holiday Inn Express in Gaffney, South
Carolina. We are grateful for your continued support in our success. The
directors and employees of First National Bank of the Carolinas are committed to
building a strong community bank and improving shareholder value.
Bill H. Mason
Chairman of the Board
V. Stephen Moss
President
2
<PAGE> 5
FNB BANCSHARES, INC.
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning FNB
Bancshares, Inc. (the "Company"). The selected financial data has been derived
from the consolidated financial statements which have been audited by Tourville,
Simpson & Henderson, independent accountants. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
<CAPTION>
Years ended December 31, 1997 and 1996 and the 1997 1996 1995
---- ---- ----
period September 27, 1995 to December 31, 1995
(Dollars in thousands, except per share)
<S> <C> <C> <C>
BALANCE SHEET:
Securities held to maturity $ 1,501 $ 344 $ --
Allowance for loan losses 153 20 --
Net loans 14,016 2,024 --
Premises and equipment - net 761 734 4
Total assets 19,920 11,733 75
Non-interest bearing deposits 2,478 1,125 --
Interest bearing deposits 11,083 4,679 --
Total deposits 13,560 5,804 --
Total liabilities 14,211 5,839 102
Total shareholders' equity 5,709 5,894 (27)
RESULTS OF OPERATIONS:
Interest income $ 1,248 $ 206 $ --
Interest expense 396 42 --
--------- ------- ------
Net interest income 852 164 --
Provision for loan losses 138 20 --
--------- ------- ------
Net interest income after provision 714 144 --
Other income 101 6 --
Other expenses 1,072 431 27
Income tax expense (benefit) (72) (84) --
--------- ------- ------
Net income (loss) $ (185) $ (197) $ (27)
========= ======= ======
PER SHARE DATA:
Weighted average common shares outstanding 616,388 616,388 --
Basic earnings (loss) per share $ (.30) $ (.32) $ --
Diluted earnings (loss) per share $ (.30) $ (.32) $ --
</TABLE>
DESCRIPTION OF THE COMPANY'S BUSINESS
The Company was organized as a bank holding company on September 27, 1995. Its
subsidiary, First National Bank of the Carolinas (the "Bank"), commenced
operations on October 18, 1996. FNB Bancshares, Inc. is a South Carolina
corporation which was incorporated primarily to hold all of the capital stock of
First National Bank of the Carolinas. The Bank engages in commercial and retail
banking, emphasizing the needs of small to medium businesses, professional
concerns, and individuals, primarily in Gaffney and Blacksburg, South Carolina
and the surrounding area. The Company currently engages in no other business
other than owning and managing the Bank.
3
<PAGE> 6
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF THE COMPANY'S BUSINESS - CONTINUED
This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of FNB Bancshares, Inc. and
its subsidiary, First National Bank of The Carolinas. This commentary should be
read in conjunction with the consolidated financial statements and the related
notes and the other statistical information in this report.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996:
The comparison of information between 1997 and 1996 is not meaningful since the
Bank was open for business only 2.5 months in 1996.
1996 COMPARED TO 1995:
The Company commenced operations on October 18, 1996. The 1995 expenses were a
result of the start-up of the Company; therefore, comparison of the 1996 to 1995
results is not meaningful.
NET INTEREST INCOME
To a large degree, earnings are dependent on net interest income. It represents
the difference between interest earned on assets and the interest paid on
liabilities. Interest rate spread and net interest margin are two significant
elements in analyzing the Company's net interest income. Interest rate spread is
the difference between the yield on average earning assets and the rate on
average interest bearing liabilities. Net interest margin is net interest income
divided by earning assets.
Net interest income was $852,333 for the year ended December 31, 1997. In 1997,
the significant portion of the $1,247,857 in interest income was attributable to
the $886,790 in income from loans. Interest expense for the year ended December
31, 1997 was $395,524.
Net interest income for the year ended December 31, 1996 was $164,089. The
significant portion of the $205,952 in interest income was the $176,393 in
income from federal funds. Cash from the stock offering was invested in federal
funds until the day the Bank commenced operations. Interest expense was $41,863
for the year ended December 31, 1996.
4
<PAGE> 7
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARATIVE AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth, for the periods indicated, the weighted average
yields earned, the weighted average yields paid, the net interest spread and the
net interest margin on earning assets. The table also indicates the average
monthly balance and the interest income or expense by specific categories.
<TABLE>
<CAPTION>
1997 October 18 - December 31, 1996
---- ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ----- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Taxable Securities $ 1,254 $ 71 5.66% $ 187 $ 2 5.16%
Time deposits with other banks 276 16 5.79%
Federal funds sold 4,982 274 5.50% 6,705 74 5.34%
Loans 8,637 887 10.27% 1,054 28 12.71%
-------- ------ ------- ---- -----
Total earning assets 15,149 1,248 8.24% 7,946 104 6.37%
-------- ------ ------- ----
Cash and due from banks 658 680
Allowance for loan losses (82) (5)
Premises and equipment 798 512
Other assets 443 252
-------- -------
Total assets $ 16,966 $ 9,385
======== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest bearing deposits $ 8,394 371 4.42% $ 2,794 27 4.70%
Securities sold under
agreements to repurchase 597 24 4.02% -- -- --
-------- ------ ------- ----
Total interest-bearing
liabilities 8,991 395 4.39% 2,794 27 4.70%
------ ----
Non-interest bearing deposits 2,224 628
Accrued interest and other
liabilities 137 9
Shareholders' equity 5,614 5,954
-------- -------
Total liabilities and $ 9,385
=======
shareholders' equity
Net interest income/interest
rate spread $ 853 3.85% $ 77 1.67%
====== ===== ==== =====
Net interest margin on
earning assets 5.63% 4.71%
===== =====
</TABLE>
5
<PAGE> 8
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RATE SENSITIVITY
The following table presents the Company's rate sensitivity at each of the time
intervals indicated as of December 31, 1997. The table may not be indicative of
the Company's rate sensitivity position at other points in time.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
Less than 7-12 Over
(Dollars in thousands) 3 months 4-6 months months 1-5 years 5 years Total
-------- ---------- ------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Taxable securities $ 400 $ -- $ 199 $ 902 $ -- $ 1,501
Time deposits with other 600 -- -- -- -- 600
banks
Federal funds sold 1,430 -- -- -- -- 1,430
Loans 5,454 408 519 5,448 2,340 14,169
----------- --------- --------- ---------- ---------- ==========
Total 7,884 408 718 6,350 2,340 17,700
=========== --------- ========= ========== ========== ==========
Interest bearing liabilities
Interest bearing 5,318 2,241 2,789 619 115 11,082
deposits (1)
Securities sold under 424 -- -- -- -- 424
agreements to repurchase ----------- --------- --------- ---------- ---------- ----------
5,742 2,241 2,789 619 115 11,506
Interest sensitivity gap 2,142 (1,833) (2,071) 5,731 2,225 6,194
=========== ========== ========= ========== ========== ==========
Cumulative interest 2,142 309 (1,762) 3,969 6,194 6,194
=========== ========= ========= ========== ========== ==========
sensitivity gap
Gap ratio (2) 12.10 % (10.36%) (11.70)% 32.38% 12.57%
=========== ========= ========= ========== ==========
Cumulative gap ration (2) 12.10 % 1.75% (9.95)% 22.42% 34.99%
=========== ========= ========= ========== ==========
</TABLE>
(1) All savings and transaction accounts are included in the less than three
months category.
(2) Ratio of gap to total earning assets.
Interest rates paid on deposits and borrowed funds and interest rates earned on
loans and investments have generally followed the fluctuations in market rates
in 1997 and 1996. A rate sensitive asset or liability is one that can be
repriced either up or down in interest rate within a certain time interval. When
a proper balance between rate sensitive assets and rate sensitive liabilities
exists, market interest rate fluctuations should not have a significant impact
on earnings. The larger the imbalance, the greater the interest rate risk
assumed by the Company and the greater the positive or negative impact of
interest rate fluctuations on earnings. The Company seeks to manage its assets
and liabilities in a manner that will limit interest rate risk and stabilize
long-term earning powers. The principal monitoring technique employed by the
Company is the measurement of the Company's interest sensitivity "gap," which is
the positive or negative dollar difference between assets and liabilities that
are subject to interest rate repricing within a given period of time. Interest
rate sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in this time interval helps to
hedge the risk and minimize the impact on net interest income of rising or
falling interest rates.
6
<PAGE> 9
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RATE SENSITIVITY - CONTINUED
The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap position and generally would benefit from
decreasing market rates of interest when it is liability-sensitive. However, the
Company's gap analysis is not a precise indicator of its interest sensitivity
position. The analysis presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example,
rates paid on a substantial portion of core deposits may change contractually
within a relatively short time frame, but those rates are viewed by management
as significantly less interest-sensitive than market-based rates such as those
paid on non-core deposits. Net interest income may be impacted by other
significant factors in a given interest rate environment, including changes in
the volume and mix of earning assets and interest-bearing liabilities.
RATE/VOLUME ANALYSIS
Net interest income can be analyzed in terms of the impact of changing rates and
changing volume. A comparison of 1997 to 1996 is not meaningful because the Bank
was only in operation for 2.5 months in 1996 and therefore the Company has
omitted the table analyzing the changes in net interest income as it would not
be meaningful. All interest income and interest expense is attributable to the
volume of earning assets and interest-bearing liabilities, respectively.
PROVISION FOR LOAN LOSSES
The Company maintains a reserve for loan losses which is funded by charges to
current earnings. This reserve is intended to be an adequate allowance to absorb
losses on loans outstanding and is based on management's continuing review and
evaluation of the Company's loan portfolio. During 1997, the Company transferred
$138,000 from earnings to the reserve for loan losses increasing the balance to
$152,614 on December 31, 1997 after deducting current year net charge offs.
Reserve for loan losses was approximately 1.08% and 1.00% of total loans on
December 31, 1997 and 1996, respectively. As the Company continues to mature,
management will evaluate its reserve policy and adjust the policy based on
historical loss experience, changes in economic conditions, growth in the
portfolio and evaluations of specific loans. Management believes the level of
the allowance for loan losses is sufficient to provide for potential losses in
the loan portfolio. However, management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the loan loss allowance will not
be required.
OTHER INCOME
Other income for the year ended December 31, 1997 was $100,616. The most
significant portion of other income was from service charges and fees on loan
and deposit accounts which totaled $89,734.
Other income was $5,976 in 1996. This was comprised primarily of loan and
deposit fees.
OTHER EXPENSES
Non-interest expenses were $1,072,095 for the year ended December 31, 1997. This
was comprised primarily of salaries of $586,135, furniture, fixtures and
equipment of $80,523, occupancy of $95,653 and other operating expenses of
$309,784.
7
<PAGE> 10
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Non-interest expenses were $431,602 in 1996. This was comprised primarily of
salaries of $238,606, furniture, fixtures and equipment of $11,991, occupancy of
$29,846 and other operating expense of $151,159.
INCOME TAXES
The Company's net loss before income taxes of $257,146 resulted in an income tax
benefit of $72,001 for the year ended December 31, 1997. In 1996, an income tax
benefit of $84,460 was recorded due to the Company's net loss of $281,537.
CAPITAL RESOURCES
Total capital of the Company was reduced by the net loss in 1997 of $185,145. In
1996, capital was reduced by the net loss of $197,077.
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk weights ranging form 0% to 100%. The Federal Reserve guidelines also
contain an exemption from the capital requirements for bank holding companies
with less than $150 million in consolidated assets. Because the Company has less
than $150 million in assets, it is not currently subject to these rules. Under
the risk-based standard, capital is classified into two tiers. Tier 1 capital of
the Company consists of common stockholders' equity, excluding the unrealized
gain (loss) on securities available-for-sale, minus certain intangible assets.
Tier 2 capital consists of general reserve for loan losses subject to certain
limitations. A bank holding company's qualifying capital base for purposes of
its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2
capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total
risk-based capital. The holding company and banking subsidiary are also required
to maintain capital at a minimum level based on total assets, which is known as
the leverage ratio. Only the strongest bank holding companies and banks are
allowed to maintain capital at the minimum requirement. All others are subject
to maintaining ratios 100 to 200 basis points above the minimum.
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
The Bank The Company
<S> <C> <C>
Tier 1 capital:
Common shareholders' equity $ 4,259,710 $ 5,709,181
Less: intangibles (56,148) (69,043)
Less: disallowed deferred tax assets (102,479) (167,319)
--------------- --------------
Total Tier 1 capital 4,101,083 5,472,819
Tier 2 capital:
Allowable allowance for loan losses 152,614 152,614
--------------- --------------
Tier 2 capital additions 152,614 152,614
--------------- --------------
Total capital $ 4,253,697 $ 5,625,433
=============== ==============
Risk adjusted assets $ 14,840,250 $ 14,848,975
=============== ==============
Total assets $ 19,697,215 $ 19,920,308
=============== ==============
Risk-based capital ratios:
Tier 1 capital 27.64% 36.86%
Total capital 28.67% 37.88%
Tier 1 leverage ratio 21.20% 28.09%
</TABLE>
8
<PAGE> 11
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At December 31, 1997 the Company has no outstanding significant commitments for
capital expenditures. However, the Company plans to construct new corporate
headquarters in Gaffney in 1998 which are expected to cost approximately
$1,500,000.
LIQUIDITY
The Company manages its liquidity from both the asset and liability side of the
balance sheet through the coordination of the relative maturities of its assets
and liabilities. Short-term liquidity needs are generally met from cash, due
from banks, federal funds sold and deposit levels. Management has established
policies and procedures governing the length of time to maturity on loans and
investments. The Company maintained a high level of liquidity during 1996 which
was attributable to the growth in deposits and capitalization of the Bank during
the year. Liquidity leveled off to normal levels during 1997. In the opinion of
management, the Company's short-term liquidity needs can be adequately supported
by the Company's deposit base.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and the liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than does the effect of inflation.
While the effect of inflation on a bank is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. Interest rates generally increase as the
rate of inflation increases, but the magnitude of the change in rates may not be
the same. While interest rates have traditionally moved with inflation, the
effect on income is diminished because both interest earned on assets and
interest paid on liabilities vary directly with each other. Also, increases in
the price of goods and services will generally result in increased operating
expenses.
INVESTMENT PORTFOLIO
The following tables summarize the carrying value of investment securities and
weighted average yields of those securities at December 31, 1997 and 1996.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
HELD TO MATURITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
U.S. Treasury securities $ 1,151,331 $ 344,190
U.S. Government agencies and corporations 350,000 -
------------- ------------
$ 1,501,331 $ 344,190
============= ============
</TABLE>
INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
9
<PAGE> 12
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997
----
Amount Yield
------ -----
<S> <C> <C>
U.S. Treasury and U.S. Government agencies due:
Within one year $ 599,241 5.65%
After one year but within five years 902,090 6.08%
------------- ----
$ 1,501,331 5.90%
============= ====
</TABLE>
LOAN PORTFOLIO
CREDIT RISK MANAGEMENT
Credit risk entails both general risk, which is inherent in the process of
lending, and risk that is specific to individual borrowers. The management of
credit risk involves both the process of loan underwriting and loan
administration. The Company manages credit risk through a strategy of making
loans within the Company's primary marketplace and within the Company's limits
of expertise. Although management seeks to avoid concentrations of credit by
loan type or industry through diversification, a substantial portion of the
borrowers' ability to honor the terms of their loans is dependent on the
business and economic conditions in Cherokee County and the surrounding areas
comprising the Company's marketplace. Additionally, since real estate is
considered by the Company as the most desirable nonmonetary collateral, a
significant portion of the Bank's loans are collateralized by real estate. Even
though a substantial portion of the Company's loans are collateralized by real
estate, the cash flow of the borrower or the business enterprise is generally
considered as the primary source of repayment. Generally, the value of real
estate is not considered by the Company as the primary source of repayment for
performing loans. The Company also seeks to limit total exposure to individual
and affiliated borrowers. The Company manages the risk specific to individual
borrowers through the loan underwriting process and through an ongoing analysis
of the borrower's ability to service the debt as well as the value of the
pledged collateral.
The Bank's loan officers and loan administration staff are charged with
monitoring the Company's loan portfolio and identifying changes in the economy
or in a borrower's circumstances which may affect the ability to repay the debt
or the value of the pledged collateral. In order to assess and monitor the
degree of risk in the Company's loan portfolio, several credit risk
identification and monitoring processes are utilized. The Bank uses an outside
consultant to perform loan reviews on a quarterly basis.
LENDING ACTIVITIES
The Company extends credit primarily to consumers and small businesses in
Cherokee County and, to a limited extent, customers in surrounding areas.
The Company's service area is mixed in nature. The corporate office is located
in Gaffney, South Carolina. The economy of Cherokee County is a regional
business center whose economy contains elements of medium and light
manufacturing, higher education, regional health care, and distribution
facilities. Outside the incorporated city limits of Gaffney, the economy
includes manufacturing, agriculture, timber, and recreational activities. No
particular category or segment of the economies previously described are
expected to grow or contract disproportionately in 1998.
Management is of the opinion that the loan portfolio is adequately diversified.
There are no significant concentrations of loans in any particular individuals
or industry or group of related individuals or industries.
10
<PAGE> 13
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total loans outstanding were $14,168,832 and $2,043,972 at December 31, 1997 and
1996, respectively. The loan demand remains strong in the Company's market area,
supported in part, by customers moving from larger financial institutions after
recent mergers.
The Company's ratio of loans to deposits was 104% and 35% on December 31, 1997
and 1996, respectively. The loan to deposit ratio is used to monitor a financial
institution's potential profitability and efficiency of asset distribution and
utilization. Generally, a higher loan to deposit ratio is indicative of higher
interest income since loans yield a higher return than alternative investment
vehicles. Management has concentrated on maintaining quality in the loan
portfolio while continuing to increase the deposit base.
LOAN PORTFOLIO COMPOSITION
The following table summarizes the composition of the loan portfolio at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(Dollars in thousands)
Commercial, financial and agricultural $ 3,227 $ 887
Real estate - construction 207 --
Real estate - mortgage 6,725 523
Consumer and other 4,010 634
--------- ---------
$ 14,169 $ 2,044
========= =========
</TABLE>
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:
The following table summarizes the loan maturity distribution, by type, at
December 31, 1997 and related interest rate characteristics:
<TABLE>
<CAPTION>
One year One to After
or less five years five years Total
------------ ------------ ----------- -----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 1,110,422 $ 1,853,669 $ 263,470 $ 3,227,561
Real estate - construction 7,000 199,531 -- 206,531
Real estate - mortgage 1,829,933 2,144,203 2,750,585 6,724,721
Consumer and other 1,040,512 2,200,156 769,351 4,010,019
------------- ------------ ------------ -------------
$ 3,987,867 $ 6,397,559 $ 3,783,406 $14,168,832
============= ------------ ============ ==========
Predetermined rate, maturing greater than one $ 5,447,322 $ 2,339,579 $ 7,786,901
============ ============ =============
year
Variable rate or maturing within one year $ 6,381,931 $ 6,381,931
============= =============
</TABLE>
RISK ELEMENTS
At December 31, 1997, there were no loans past due 90 days or more and still
accruing interest and one loan of $2,993 in non-accrual status. There were no
nonaccrual loans or loans 90 days or more past due at December 31, 1996.
11
<PAGE> 14
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans outstanding at the end of year $ 14,168,832 $ 2,043,972
============== =============
Average amount of loans outstanding $ 8,637,132 $ 1,053,745
============== =============
Balance, beginning of year $ 20,000 $ --
-------------- -------------
Total loans charged off 5,386 --
Recoveries of loans previously charged off -- --
-------------- -------------
Net charge-offs 5,386 --
-------------- -------------
Provision charged to operations 138,000 20,000
-------------- -------------
Balance, end of year $ 152,614 $ 20,000
============== =============
Ratios:
Allowance for loan losses to average loans 1.77% 1.90%
Allowance for loan losses to loans, end of year 1.08% .98%
</TABLE>
Management has allocated the majority of its allowance for loan losses to real
estate and commercial loans at December 31, 1997.
The allowance for loan losses is maintained at a level determined by management
to be adequate to provide for probable losses inherent in the loan portfolio
including commitments to extend credit. The allowance is maintained through the
provision for loan losses which is a charge to operations. The potential for
loss in the portfolio reflects the risks and uncertainties inherent in the
extension of credit.
The Bank's provision and allowance for loan losses is subjective in nature and
relies on judgments and assumptions about future economic conditions and other
factors affecting borrowers. Management is not aware of any trends, material
risks or uncertainties affecting the loan portfolio nor is management aware of
any information about any significant borrowers which causes serious doubts as
to the ability of the borrower to comply with the loan repayment terms. However,
it should be noted that no assurances can be made that future charges to the
allowance for loan losses or provisions for loan losses may not be significant
to a particular accounting period.
Impaired loans are measured based on the present value of discounted expected
cash flows. When it is determined that a loan is impaired, a direct charge to
bad debt expense is made for the difference between the net present value of
expected future cash flows based on the contractual rate and discount rate and
the Bank's recorded investment in the related loan. The corresponding entry is
to a related valuation account. Interest is discontinued on impaired loans when
management determines that a borrower may be unable to meet payments as they
become due.
At December 31, 1997, management reviewed its loan portfolio and determined that
no impairment on loans existed that would have a material effect on the
Company's consolidated financial statements.
AVERAGE DAILY DEPOSITS
Average deposits were $10,618,491 during 1997, the first full year of the Bank's
operations. Certificates of deposit over $100,000 totaled $2,141,145 at December
31, 1997. Of this total, scheduled maturities of three months or less were
$722,660; over three months through six months were $575,667; over six through
twelve months were $741,824; and over twelve months $100,994.
12
<PAGE> 15
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the Bank's deposits for the year ended December
31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
Percent of
Amount Deposits Amount Percent of
--------- ----------- --------- ----------
Deposits
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 2,478 18.28% $ 1,125 19.38%
Interest bearing transaction accounts 2,532 18.67% 1,234 21.26%
Savings 1,358 10.01% 534 9.49%
Certificates of Deposit 7,192 53.04% 2,894 49.87%
--------- ------ -------- ------
$ 13,560 100.00% $ 5,804 100.00%
========= ====== ======== ======
</TABLE>
Core deposits, which excludes certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits were $11,418,723 and
$5,005,600 at December 31, 1997 and 1996, respectively.
SHORT-TERM BORROWINGS
At December 31, 1997 the Company had short term borrowings which consisted of
securities sold under agreements to repurchase of $424,413. The Company entered
into a repurchase agreement with a local electric cooperative which generally
matures on a one day basis. The maximum amount outstanding at any month-end for
the repurchase agreement was $937,123 at December 31, 1997. The average interest
rate paid on the repurchase agreement was 3.96% at December 31, 1997.
RETURN ON EQUITY AND ASSETS
The following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), equity to assets ratio (average equity divided by average total
assets), for the period indicated. Since its inception, the Company has not paid
cash dividends. Average balances in these computations are based on those
presented in the table on page 5.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Return on average assets (1.09)% (2.10)%
Return on average equity (3.30)% (3.31)%
Equity assets ratio 33.09% 63.44)%
</TABLE>
ACCOUNTING AND FINANCIAL REPORTING ISSUES
In June 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income." SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is the change in equity of a
business during a period from transactions and other events and circumstances
from nonowner sources and excludes investments by owners and distributions to
owners. Comprehensive income consists of two components, net income and other
comprehensive income. Other comprehensive income includes, among other things,
the change in the unrealized gain or loss on securities available for sale.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
13
<PAGE> 16
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years that
begin after December 15, 1995. SFAS 123 recommends that companies account for
stock compensation on a fair value based method which requires compensation cost
to be measured at the grant date based on the value of the award and to be
recognized over the service period. As an alternative, companies may continue to
record compensation cost based on the excess, if any, of the quoted market price
of the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. However, if a company elects this
method, it must include in the financial statements certain disclosures which
reflect pro forma amounts as if the fair value method had been used.
Accordingly, this disclosure was made in the consolidated financial statements.
FORWARD LOOKING AND TREND INFORMATION
The Company plans to build new corporate headquarters in Gaffney in 1998. While
no commitments have been made at December 31, 1997 the cost of such building is
expected to be approximately $1,500,000.
In the 1994 legislative session, South Carolina amended its bank holding act to
allow nationwide interstate banking beginning in 1996. The Interstate Banking
Act, passed by Congress in 1994, allows unrestricted interstate bank mergers,
unrestricted interstate acquisition of banks by bank holding companies, and
interstate de novo branching by banks if allowed by state law. In 1997,
legislation was passed in North Carolina which provides that until June 1, 1999,
an out-of-state bank, such as the Bank, could establish and maintain a de novo
branch in North Carolina or acquire and maintain an existing branch from another
bank only if the laws of the home state of the out-of-state bank contain
reciprocal provisions permitting North Carolina banks to establish and maintain
de novo branches or acquire branches from another bank in that state. South
Carolina law does not contain such reciprocal provisions, and therefore the
North Carolina legislation has the effect of prohibiting the Bank from
establishing a de novo branch in North Carolina prior to June 1, 1999. From time
to time, various bills are introduced in the United States Congress with respect
to the regulation of financial institutions. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry. The Bank cannot predict whether any of these proposals will
be adopted or, if adopted, how these proposals would affect the Bank.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve this issue. The Year 2000 problem is
a result of computer programs being written using two digits rather than four to
define the applicable year. The Company uses a third party service bureau to
process its significant banking applications including all loan, deposit, and
general ledger activity. Any of the third party provider's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major system failure or
miscalculations. The Company presently believes that, based on written and oral
statements from the third party provider, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if the third party provider does not make the
necessary modifications and conversions on a timely basis, the Year 2000 problem
may have a material impact on the operations of the Company. The Company cannot
predict with any certainty the costs the Company will incur to respond to any
Year 2000 issues. Further, the business of many of the Company's customers may
be negatively affected by the Year 2000 issue, and any financial difficulties
incurred by the Company's customers in solving Year 2000 issues could negatively
affect such customer's ability to repay any loans which the Bank may have
extended. Therefore, even if the Company and the bank do no incur significant
direct costs in connection with responding to the year 2000 issue, there can be
no assurance that the failure or delay of the Bank's customers or other third
parties in addressing the Year 2000 issue or the costs involved in such process
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
14
<PAGE> 17
TOURVILLE, SIMPSON & HENDERSON
CERTIFIED PUBLIC ACCOUNTANTS
POST OFFICE BOX 8567
1615 PICKENS STREET
COLUMBIA, S. C. 29202
TELEPHONE: (803) 252-3000
FAX: (803) 254-0211
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FNB Bancshares, Inc.
Gaffney, South Carolina
We have audited the accompanying consolidated balance sheets of FNB Bancshares,
Inc., and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1997 and 1996 and for the period
September 27, 1995 to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FNB
Bancshares, Inc., and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1997 and 1996 and for the period September 27, 1995 to December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Tourville, Simpson & Henderson
February 11, 1998
Columbia, South Carolina
15
<PAGE> 18
FNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks $ 1,007,433 $ 342,680
Federal funds sold 1,430,000 7,930,000
------------- --------------
2,437,433 8,272,680
Securities held to maturity (estimated market value of 1997 -- 1,501,331 344,190
$1,506,203; 1996 - $344,083)
Time deposits with other banks 600,000 --
Loans receivable 14,168,832 2,043,972
Less allowance for loan losses (152,614) (20,000)
------------- --------------
Loans, net 14,016,218 2,023,972
Premises and equipment, net 760,843 734,443
Accrued interest receivable 122,499 11,180
Other assets 481,984 346,436
------------- --------------
Total assets $ 19,920,308 $ 11,732,901
============= ==============
LIABILITIES
Deposits:
Non-interest bearing transaction accounts $ 2,478,018 $ 1,125,050
Interest bearing transaction accounts 2,532,105 1,234,402
Savings 1,358,378 550,717
Time deposits $100,000 and over 2,141,145 798,765
Other time deposits 5,050,222 2,095,431
------------- --------------
13,559,868 5,804,365
Securities sold under agreements to repurchase 424,413 --
Accrued interest payable 72,832 20,213
Other liabilities 154,014 13,997
------------- --------------
Total liabilities 14,211,127 5,838,575
------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value: 10,000,000 shares authorized -- --
and unissued
Common stock, $.01 par value; 10,000,000 shares authorized; 6,163 6,163
606,338 shares issued and outstanding in 1997 and 1996
Capital surplus 6,112,318 6,112,318
Retained earnings (deficit) (409,300) (224,155)
------------- --------------
Total stockholders' equity 5,709,181 5,894,326
------------- --------------
$ 19,920,308 $ 11,732,901
============= ==============
Total liabilities and stockholders' equity
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE> 19
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 886,790 $ 27,526 $ --
Investment securities, taxable 70,974 2,033 --
Federal funds sold 273,854 176,393 --
Time deposits with other banks 16,239 -- --
----------- ---------- --------
1,247,857 205,952 --
----------- ---------- --------
INTEREST EXPENSE
Time deposits $100,000 and over 90,839 5,645 --
Other deposits 281,029 21,357 --
Securities sold under agreements to 23,656 -- --
repurchase
Short term borrowings -- 14,861 --
----------- ---------- --------
395,524 41,863 --
----------- ---------- --------
NET INTEREST INCOME 852,333 164,089 --
Provision for loan losses 138,000 20,000 --
----------- ---------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 714,333 144,089 --
----------- ---------- --------
OTHER INCOME
Service charges on deposit accounts 10,882 583 --
Other service charges, commissions
and fees 89,734 5,393 --
----------- ---------- --------
100,616 5,976 --
----------- ---------- --------
OTHER EXPENSE
Salaries and employee benefits 586,135 238,606 19,715
Occupancy expense 95,653 29,846
Furniture and equipment 80,523 11,991
Other operating expense 309,784 151,159 7,363
----------- ---------- --------
1,072,095 431,602 27,078
----------- ---------- --------
INCOME (LOSS) BEFORE INCOME TAXES (257,146) (281,537) (27,078)
Income tax expense (benefit) (72,001) (84,460) --
----------- ---------- --------
NET INCOME (LOSS) $ (185,145) $ (197,077) $(27,078)
=========== ========== ========
BASIC EARNINGS (LOSS) PER SHARE $ (.30) $ (.32) $ --
DILUTED EARNINGS (LOSS) PER SHARE $ (.30) $ (.32) $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE> 20
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------------------------------
Retained
Capital Earnings
Shares Amount Surplus (Deficit) Total
------ ------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
Common stock issued 10 $ 1 $ 99 $ $ 100
Net income (loss) (27,078) (27,078)
-------- ------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1995 10 $ 1 $ 99 $ (27,078) $ (26,978)
Common stock issued 616,328 6,162 6,157,118 6,163,280
Cost of common stock issuance (44,899) (44,899)
Net income (loss) (197,077) (197,077)
-------- ------- ------------ ---------- ------------
BALANCE DECEMBER 31, 1996 616,338 6,163 6,112,318 (224,155) 5,894,326
Net income (loss) (185,145) (185,145)
======== ======= ============ ========== ============
BALANCE, DECEMBER 31,1997 616,338 $ 6,163 $ 6,112,318 $ (409,300) $ 5,709,181
======== ======= ============ ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 21
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (185,145) $ (197,077) $ (27,078)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for loan losses 138,000 20,000 --
Depreciation 85,551 12,703 --
Accretion and premium amortization (4,737) (2,033) --
Deferred income taxes (76,041) (89,247) --
Increase in interest receivable (111,319) (11,180) --
Increase in interest payable 52,619 20,213 --
Increase in other assets (59,507) (204,981) (52,208)
Increase in other liabilities 140,017 11,886 2,110
-------------- ------------- ----------
Net cash used by operating activities (20,562) (439,716) (77,176)
-------------- ------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (2,102,404) (342,156) --
Maturities of securities held to maturity 950,000 -- --
Purchases of time deposits with other banks (600,000) -- --
Net increase in loans made to customers (12,130,246) (2,043,972) --
Purchases of premises and equipment (111,951) (743,120) (4,026)
-------------- ------------- ----------
Net cash used by investing activities (13,994,601) (3,129,248) (4,026)
-------------- ------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, interest 3,458,332 2,910,169 --
bearing transaction accounts and savings accounts
Net increase in time deposits 4,297,171 2,894,196 --
Increase in securities sold under agreements to repurchase 424,413 --
Net increase (decrease) in short-term borrowings -- (100,000) 100,000
Costs of stock issuance -- (44,899) --
Sale of common stock -- 6,163,280 100
-------------- ------------- ----------
Net cash provided by financing activities 8,179,916 11,822,746 100,000
-------------- ------------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,835,247) 8,253,782 18,898
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,272,680 18,898 --
-------------- ------------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,437,433 $ 8,272,680 $ 18,898
============== ============= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 22
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CONSOLIDATION - FNB Bancshares, Inc., a bank holding company
(the Company), and its subsidiary, First National Bank of the Carolinas (the
Bank), provide banking services to domestic markets principally in Cherokee
County, South Carolina. The Bank commenced operations on October 18, 1996. The
consolidated financial statements include the accounts of the parent company and
its wholly-owned subsidiary after elimination of all significant intercompany
balances and transactions.
PRE-OPERATING EXPENSES AND ORGANIZATIONAL COSTS - A summary of the assets
acquired and use of funds up through the date the Bank commenced operations are
as follows:
<TABLE>
<S> <C>
Common stock subscription proceeds, $ 6,118,481
net of $44,899 expenses of offering
Pre-opening interest income 101,952
Pre-opening expenses (247,760)
Deferred organization costs (92,603)
Purchase of premises and equipment (361,876)
Acquisition of Bank (4,775,845)
=============
Remaining cash and cash equivalents $ 742,349
=============
</TABLE>
The pre-operating income and expenses through the date the Bank commenced
operations are reflected in the accompanying statement of income for the year
ended December 31, 1996 and for the period September 27, 1995 to December 31,
1995. Deferred organization costs for attorney fees, consultants and filing fees
were capitalized and are being amortized over a five year period. Such amount
less accumulated amortization is included in other assets.
MANAGEMENT'S ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans, including
valuation allowances for impaired loans and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties. Management must also make estimates in determining the
estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
SECURITIES HELD TO MATURITY - Investment securities are stated at cost, adjusted
for amortization of premium and accretion of discount computed by the
straight-line method. The Company has the ability and management has the intent
to hold investment securities to maturity. Reductions in market value considered
by management to be other than temporary are reported as a realized loss and a
reduction in the cost basis of the security.
20
<PAGE> 23
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LOANS - Loans are stated at their unpaid principle balance. Interest income is
computed using the simple interest method and is recorded in the period earned.
When serious doubt exists as to the collectibility of a loan or when a loan
becomes 90 days past due as to principal or interest, interest income is
generally discontinued unless the estimated net realizable value of collateral
exceeds the principal balance and accrued interest. When interest accruals are
discontinued, income earned but not collected is reversed.
Impaired loans are measured based on the present value of discounted expected
cash flows. When it is determined that a loan is impaired, a direct charge to
bad debt expense is made for the difference between the net present value of
expected future cash flows based on the contractual rate and discount rate and
the Bank's recorded investment in the related loan. The corresponding entry is
to a related valuation account. Interest is discontinued on impaired loans when
management determines that a borrower may be unable to meet payments as they
become due.
ALLOWANCE FOR LOAN LOSSES - An allowance for possible loan losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. The allowance is based upon a continuing
review of past loan loss experience, current and future economic conditions
which may affect the borrowers' ability to pay and the underlying collateral
value of the loans. Loans which are deemed to be uncollectible are charged off
and deducted from the allowance. The provision for possible loan losses and
recoveries of loans previously charged off are added to the allowance.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method, based on the following estimated useful lives: buildings -
20 years; furniture and equipment - 5 to 10 years. The cost of assets sold or
otherwise disposed of, and the related allowance for depreciation is eliminated
from the accounts and the resulting gains or losses are reflected in the income
statement when incurred. Maintenance and repairs are charged to current expense.
The costs of major renewals and improvements are capitalized.
FEDERAL RESERVE BANK STOCK - Other assets includes the cost of the Company's
investment in the stock of the Federal Reserve Bank. The stock has no quoted
market value and no ready market exists. Investment in Federal Reserve Bank
stock is required by law of every national bank.
INCOME AND EXPENSE RECOGNITION - The accrual method of accounting is used for
all significant categories of income and expense. Other miscellaneous fees are
reported when received.
INCOME TAXES - Income taxes are the sum of amounts currently payable to taxing
authorities and the net changes in income taxes payable or refundable in future
years. Income taxes deferred to future years are determined utilizing a
liability approach. This method gives consideration to the future tax
consequences associated with differences between financial accounting and tax
bases of certain assets and liabilities which are principally the allowance for
loan losses, depreciable premises and equipment and the net operating loss.
21
<PAGE> 24
PER-SHARE AMOUNTS - Basic earnings per share is computed by dividing net income
by the weighted-average number of shares outstanding for the period excluding
the affects of any dilutive potential common shares. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Company's stock
option plan are reflected in diluted earnings per share by the application of
the treasury stock method. See Note P.
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows in the financial
statements, the Company considers certain highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents include amounts due from banks and federal funds sold. Generally,
federal funds are sold for one day periods.
22
<PAGE> 25
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
During 1997 and 1996, interest paid on deposits and short-term borrowings
totaled $342,905 and $21,650, respectively. Cash paid for income taxes was
$4,700 in 1997.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company has entered into off-balance-sheet financial instruments consisting
of commitments to extend credit and letters of credit. These financial
instruments are recorded in the financial statements when they become payable by
the customer.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of loans
receivable, investment securities, federal funds sold and amounts due from
banks. Management is not aware of any concentrations of loans to classes of
borrowers or industries that would be similarly affected by economic conditions.
Although the Bank's loan portfolio is diversified, a substantial portion of its
borrower's ability to honor the terms of their loans is dependent on business
and economic conditions in Cherokee County and surrounding areas. Management
does not believe credit risk is associated with obligations of the United
States, its agencies or corporations. The Bank places its deposits and
correspondent accounts with and sells federal funds to high credit quality
financial institutions. Management believes credit risk associated with these
financial instruments is not significant.
RECLASSIFICATIONS - Certain captions and amounts in the financial statements of
1996 and 1995 were reclassified to conform with the 1997 presentation.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share",
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 simplifies the standards for computing earnings per share (EPS)
and makes them comparable to international EPS standards. It also requires the
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. A discussion on the
reconciliation of basic and diluted EPS is included in Note P.
As required by SFAS 128, all prior-period EPS data presented has been restated
to conform with the provisions of the statement.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-based
Compensation," effective for transactions entered into in fiscal years that
begin after December 15, 1995. SFAS 123 recommends that companies account for
stock compensation on a fair value based method which requires compensation cost
to be measured at the grant date based on the value of the award and to be
recognized over the service period. As an alternative, companies may continue to
record compensation cost based on the excess, if any, of the quoted market price
of the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock (APB Opinion No. 25). However, if a
company elects this method, it must include in the financial statements certain
disclosures which reflect pro forma amounts as if the fair value method had been
used. As permitted by SFAS 123, the Company has elected to account for stock
options under APB Opinion No. 25 with pro forma amounts disclosed in the
financial statements. The pro forma disclosures for the Company include the
effects of all awards granted (See Note M).
NOTE C - CASH AND DUE FROM BANKS
The Company is required by regulation to maintain average reserve balances with
the Federal Reserve Bank computed as a percentage of deposits. These
requirements were satisfied by vault cash and cash on hand.
23
<PAGE> 26
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES
The amortized costs and estimated market values of securities held to maturity
at December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997: Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 1,151,331 $ 3,133 $ 230 $ 1,154,234
U.S. Government agencies and corporations 350,000 1,969 -- 351,969
------------ ------- ----- -----------
$ 1,501,331 $ 5,102 $ 230 $ 1,506,203
============ ======= ===== ===========
AS OF DECEMBER 31, 1996:
U.S. Treasuries $ 344,190 $ $ 107 $ 344,083
============ ======= ===== ===========
</TABLE>
The following is a summary of maturities of securities held to maturity as of
December 31, 1997. The amortized cost and estimated fair values are based on the
contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair
Value
----------- ------------
<S> <C> <C>
Due within one year $ 599,241 $ 599,124
Due within one to five years 902,090 907,079
----------- ------------
$ 1,501,331 $ 1,506,203
=========== ============
</TABLE>
At December 31, 1997, investment securities with a book value of $752,422 and a
market value of $755,422 were pledged as collateral to secure public deposits
and for other purposes as required and permitted by law. There were no
investment securities pledged at December 31, 1996.
NOTE E - LOANS
Major classifications of loans receivable as of December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Commercial and industrial $ 3,227,562 $ 886,758
Real estate - construction 206,531 --
Real estate - other 6,724,721 523,005
Installment and consumer credit lines 4,010,018 634,209
------------- ------------
Total gross loans $ 14,168,832 $ 2,043,972
============= ============
</TABLE>
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding principal and interest are expected to be collected. Loans are not
considered impaired if a minimal delay occurs and all amounts due including
accrued interest at the contractual interest rate for the period of delay are
expected to be collected. At December 31, 1997, management has determined that
no impairment of loans existed that would have a material effect on the
Company's financial statements.
24
<PAGE> 27
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS - CONTINUED
The accrual of interest is discontinued on impaired loans when management
anticipates that a borrower may be unable to meet the obligations of the note.
Accrued interest through the date interest is discontinued is reversed.
Subsequent interest earned is recognized only to the point that cash payments
are received. All payments are applied to principal if the ultimate amount of
principal is not expected to be collected.
Transactions in the allowance for loan losses for the years ended December 31,
1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Balance, beginning of period $ 20,000 $ --
Provision charged to operations 138,000 20,000
Recoveries on loans previously charged off -- --
Loans charged off 5,386 --
========== ========
Balance, end of year $ 152,614 $ 20,000
========== ========
</TABLE>
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. A commitment involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company's exposure to credit
loss in the event of non-performance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Letters of credit are conditional
commitments issued to guarantee a customer's performance to a third party and
have essentially the same credit risk as other lending facilities.
The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Commitments to extend credit $ 2,552,114 $ 1,619,000
</TABLE>
Management is not aware of any significant concentrations of loans to classes of
borrowers or industries that would be affected similarly by economic conditions.
Although the Bank's loan portfolio is diversified, a substantial portion of its
borrowers' ability to honor the terms of their loans is dependent on the
economic conditions in Cherokee County and surrounding areas.
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 245,492 $ 245,492
Building and land improvements 297,927 192,709
Furniture and equipment 315,678 308,945
---------- ----------
859,097 747,146
Less, accumulated depreciation (98,254) (12,703)
---------- ----------
Premises and equipment, net $ 760,843 $ 734,443
========== ==========
</TABLE>
25
<PAGE> 28
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<C> <C>
1998 $ 4,479,390
1999 and thereafter 2,711,977
-----------
$ 7,191,367
===========
</TABLE>
NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1997, the Bank had arrangements to sell securities under
agreements to repurchase from a local electric cooperative. Under the terms of
the arrangement, the Bank may borrow at mutually agreed-upon rates for one to
seven day periods. Either party may cancel the arrangement without penalty.
Information concerning securities sold under agreements to repurchase for the
year ended December 31, 1997 is summarized as follows:
<TABLE>
<S> <C>
Average balance during the year $ 597,327
Average interest rate during the year 3.96%
Maximum month-end balance during the year $ 937,123
</TABLE>
As of December 31, 1997, the amortized cost and market value of the securities
underlying the agreements were $652,457 and $655,297, respectively.
NOTE I - RELATED PARTY TRANSACTIONS
Certain parties (principally certain directors and executive officers of the
Company, their immediate families and business interests) were loan customers of
and had other transactions in the normal course of business with the Company.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility. As of December 31, 1997 the Company had related party loans
totaling $44,719. There were no related party loans as of December 31, 1996.
NOTE J - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
The ability of FNB Bancshares, Inc. to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. However, certain
restrictions exist regarding the ability of the subsidiary to transfer funds to
FNB Bancshares, Inc. in the form of cash dividends, loans or advances. The
approval of the Office of the Comptroller of the Currency is required to pay
dividends in excess of the Bank's net profits (as defined) for the current year
plus retained net profits (as defined) for the preceding two years, less any
required transfers to surplus. As of December 31, 1997 and 1996, the Bank had
not posted a profit.
26
<PAGE> 29
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Currently payable
Federal $ 3,823 $ --
State 217 4,787
--------- ---------
Currently payable income tax expense 4,040 4,787
--------- ---------
Deferred income taxes
Federal (64,599) (71,362)
State (11,442) (17,885)
--------- ---------
Deferred income tax expense (benefit) (76,041) (89,247)
--------- ---------
Total income tax expense (benefit) $ (72,001) $ (84,460)
========= =========
</TABLE>
The Company's deferred tax accounts as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Deferred tax assets $ 177,651 $ 93,091
Deferred tax liabilities $ 12,363 $ 3,844
Valuation allowance $ 0 $ 0
</TABLE>
Deferred income taxes result from timing differences in the recognition of
certain items of income and expense for tax and financial reporting purposes.
The principal sources of these differences and the related deferred tax effects
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accelerated depreciation $ 8,519 $ 3,844
Provision for loan losses (33,201) (2,384)
Amortization of organizational costs 14,147 (58,064)
Net operating loss carry-forward (64,476) (32,643)
Other (1,030) --
--------- ---------
Total deferred tax expense (benefit) $ (76,041) $ (89,247)
========= =========
</TABLE>
The Company has a net operating loss carry-forward for income tax purposes of
$297,895 and $83,115 as of December 31, 1997 and 1996, respectively, which
expires in various years through 2011 and 2012, respectively.
A reconciliation between the income tax expense (benefit) and the amount
computed by applying the federal statutory rate of 34% to income before income
taxes is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Tax expense at statutory rate $ (87,430) $ (95,723)
Surtax exemption 28,598 24,162
State income tax, net of federal income tax benefit (11,299) (14,726)
Other, net (1,870) 1,827
--------- ---------
$ (72,001) (84,460)
========= =========
</TABLE>
Deferred tax assets represent the future tax benefit of future deductible
differences and, if it is more likely than not that a tax asset will not be
realized, a valuation allowance is required to reduce the recorded deferred tax
assets to net realizable value. Management has determined that it is more likely
than not that the entire deferred tax asset at December 31, 1997 will be
realized and, accordingly, has not established a valuation allowance.
27
<PAGE> 30
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - OTHER EXPENSES
Other expenses for the years ended December 31, 1997 and 1996 and for the period
September 27, 1995 to December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Amortization of organizational costs $ 18,276 $ 3,046 $ --
Data processing and correspondent bank 31,741 3,159 --
Stationery, printing and postage 46,578 36,416 --
Advertising and promotion 15,519 23,990 --
Legal and accounting 46,504 2,726 --
Telephone 23,485 10,148 --
Courier 17,913 352 --
Other 109,768 71,322 7,363
---------- ---------- -------
$ 309,784 $ 151,159 $ 7,363
========== ========== =======
</TABLE>
NOTE M - STOCK-BASED COMPENSATION
On April 22, 1997, the stockholders approved an Incentive Stock Option Plan
(Stock Plan) which provides for the granting of options to purchase up to 92,451
shares of the Company's common stock to directors, officers, or employees of the
Company. The per-share exercise price of incentive stock options granted under
the Stock Plan may not be less than the fair market value of a share on the date
of grant, nor can the exercise date of any incentive stock options granted be
less than one year from the date of the grant. The per-share exercise price of
stock options granted is determined by a committee appointed by the Board of
Directors. The expiration date of any option may not be greater than ten years
from the date of grant. Options that expire unexercised or are canceled become
available for issuance.
As discussed in Note B, the Company will apply APB Opinion No. 25 and related
interpretations in accounting for the stock options. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
stock options been determined based on the fair value at the grant dates
consistent with the method of FASB Statement 123, the Company's net income
(loss) and earnings (losses) per share for the years ended December 31, 1997 and
1996 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Net income (loss):
As reported $ (185,145) $ (197,077)
Pro forma (228,021) (206,458)
Net income (loss) per share:
As reported $ (.30) $ (.32)
Pro forma (.37) (.33)
</TABLE>
In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions: dividend yield of 0 percent;
expected volatility of 0 percent; risk-free interest rate of 6.41 percent; and
an expected life of 10 years.
As of December 31, 1996, options were granted to purchase up to 50,817 shares of
the Company's common stock for $10 per share. The options were subject to the
approval of the Stock Plan by the stockholders on April 22, 1997. As of December
31, 1997 and 1996, none of the options had been exercised and at December 31,
1996 no options were exercisable. At December 31, 1997, options totaling 9,113
were excercisable. As of December 31, 1997, 5,000 options had been canceled and
at December 31, 1996, none had been canceled. The weighted-average remaining
contractual life was 10.8 years and 9.8 years at December 31, 1997 and 1996,
respectively. The fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1996 was $4.68 per share.
28
<PAGE> 31
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. The following methods and assumptions were used to estimate the fair
value of significant financial instruments:
Cash and Due from Banks - The carrying amount is a reasonable estimate of fair
value.
Federal Funds Sold - Federal funds sold are for a term of one day, and the
carrying amount approximates the fair value.
Investment Securities - The fair values of marketable securities held to
maturity are based on quoted market prices or dealer quotes.
Time deposits with other banks - The carrying amount is a reasonable estimate of
fair value.
Loans - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk and credit
card receivables, fair values are based on the carrying amounts. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to the borrowers with
similar credit ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market accounts
is the amount payable on demand at the reporting date. The fair values of time
deposits are estimated using a discounted cash flow calculation that applies
current interest rates to a schedule of aggregated expected maturities.
Securities Sold Under Agreements to Repurchase - The carrying amount is a
reasonable estimate of fair value because these instruments typically have terms
of one day.
Accrued Interest Receivable and Payable - The carrying value of these
instruments is a reasonable estimate of fair value.
Off-Balance Sheet Financial Instruments - The carrying amount for loan
commitments and letters of credit, which are off-balance sheet financial
instruments, approximates the fair value since the obligations are typically
issued on a short-term or floating rate basis.
29
<PAGE> 32
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The carrying values and estimated fair values of the Company's financial
instruments for the years ending December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 1,007,433 $ 1,007,433 $ 342,680 $ 342,680
Federal funds sold 1,430,000 1,430,000 7,930,000 7,930,000
Securities held-to-maturity 1,501,331 1,506,203 344,190 344,083
Time deposits with other banks 600,000 600,000 -- --
Loans 14,168,832 14,190,779 2,043,972 2,046,417
Allowance for loan losses (152,614) (152,614) (20,000) (20,000)
Accrued interest receivable 122,499 122,499 11,180 11,180
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing $ 6,368,501 $ 6,368,501 $ 2,910,169 $ 2,910,169
transaction, and savings accounts
Time deposits 7,191,367 7,209,244 2,894,196 2,897,018
Securities sold under agreements 424,413 424,413 -- --
to repurchase
Accrued interest payable 72,832 72,832 20,213 20,213
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit $ 2,552,114 $ 2,552,114 $ 1,619,000 $ 1,619,000
</TABLE>
NOTE O - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may, from time to time, become a
party to legal claims and disputes. At December 31, 1997, management and legal
counsel are not aware of any pending or threatened litigation or unasserted
claims or assessments that could result in losses, if any, that would be
material to the financial statements.
The Company plans to construct a corporate office in Gaffney in 1998. While no
commitments have been made at December 31, 1997, the Company estimates the cost
of construction to be approximately $1,500,000.
NOTE P - EARNINGS PER SHARE
As discussed in Note B, the FASB issued SFAS 128, "Earnings Per Share", in
February 1997. SFAS 128 replaces the presentation of primary earnings per share
(EPS) with a presentation of basic EPS. It requires the presentation of basic
and diluted EPS on the face of the income statement for all entities with a
complex capital structure. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The reconciliation of the numerators and denominators used to calculate basic
and diluted earnings per share have not been presented since both calculations
result in the same per share calculation. Options to purchase 45,817 and 50,817
shares of common stock at $10 per share were outstanding at December 31, 1997
and 1996, respectively, but were not included in the computations of diluted EPS
because they would have resulted in an antidilutive per share amount since the
Company had a net loss for both years.
30
<PAGE> 33
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier I and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier I capital consists of common stockholders' equity,
excluding the unrealized gain or loss on securities available for sale, minus
certain intangible assets. Tier 2 capital consists of the allowance for loan
losses subject to certain limitations. Total regulatory minimum requirements are
4% for Tier 1 and 8% for total risk-based capital.
The Bank is also required to maintain a capital at a minimum level based on
total assets, which is known as the leverage ratio. Banks are to maintain
capital at the minimum requirement of 3%.
As of December 31, 1997, the most recent notification from the Bank's primary
regulator categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events that
management believes have changed the Bank's category.
The following table summarizes the capital amounts and ratios of the Bank and
the regulatory minimum requirements at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Total capital (to risk weighted assets) $ 4,254 28.67% $ 1,187 8.00% $ 1,484 10.00%
Tier 1 capital (to risk weighted assets) 4,101 27.64 594 4.00 890 6.00
Tier 1 capital (to average assets) 4,101 21.20 776 4.00 970 5.00
DECEMBER 31, 1996
Total capital (to risk weighted assets) 4,565 107.44 340 8.00 425 10.00
Tier 1 capital (to risk weighted assets) 4,545 106.97 170 4.00 255 6.00
Tier 1 capital (to average assets) 4,545 40.83 347 4.00 434 5.00
</TABLE>
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies of less than
$150,000,000 in consolidated assets.
31
<PAGE> 34
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - FNB BANCSHARES, INC. (PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,374,170 $ 1,386,973
Investment in banking subsidiary 4,259,710 4,447,986
Other assets 75,301 59,467
----------- ------------
Total assets $ 5,709,181 $ 5,894,426
=========== ============
Other liabilities $ -- $ 100
Stockholders' equity 5,709,181 5,894,326
----------- ------------
Total liabilities and stockholders'
equity $ 5,709,181 $ 5,894,426
=========== ============
</TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income
Interest income $ 15,611 $ 108,530 $ --
Expenses (11,263) (14,862) (27,087)
----------- ----------- -----------
Income before income taxes and equity in undistributed
earnings (losses) of banking subsidiary 4,348 93,668 (27,078)
Income tax expense (benefit) 1,217 (37,114) --
Equity in undistributed earnings (losses) of banking
subsidiary (188,276) (327,859) --
----------- ----------- -----------
Net income (loss) $ (185,145) $ (197,077) $ (27,078)
=========== =========== ===========
</TABLE>
32
<PAGE> 35
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - FNB BANCSHARES, INC. (PARENT COMPANY ONLY) - CONTINUED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (185,145) $ (197,077) $ (27,078)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Increase in other assets (15,834) (3,233) (56,234)
Increase (decrease) in other liabilities (100) (102,010) 102,110
Equity in undistributed (earnings) losses of banking
subsidiary 188,276 327,859 --
----------- ----------- -----------
Net cash provided (used) by operating activities (12,803) 25,539 18,798
----------- ----------- -----------
Financing activities
Sale of common stock -- 6,163,280 100
Purchase of bank stock -- (4,775,845) --
Cost of stock issuance -- (44,899) --
----------- ----------- -----------
Net cash provided by financing activities -- 1,342,536 100
----------- ----------- -----------
Net increase in cash (12,803) 1,368,075 18,898
Cash, beginning 1,386,973 18,898 --
----------- ----------- -----------
Cash, ending $ 1,374,170 $ 1,386,973 $ 18,898
=========== =========== ===========
</TABLE>
NOTE S - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB released SFAS 130, "Reporting Comprehensive Income." SFAS
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is the change in equity of a business during a
period from transactions and other events and circumstances from nonowner
sources and excludes investments by owners and distributions to owners.
Comprehensive income consists of two components, net income and other
comprehensive income. Other comprehensive income includes, among other things,
the change in the unrealized gain or loss on securities available for sale.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
33
<PAGE> 36
FNB BANCSHARES, INC.
BOARD OF DIRECTORS
Dr. Richard D. Gardner V. Stephen Moss
Barry L. Hamrick Harold D. Pennington, Jr.
Haskell D. Mallory Harold D. Pennington, Sr.
Bill H. Mason Heyward W. Porter
SENIOR OFFICERS
V. Stephen Moss, President
Thomas W. Hale, Chief Credit Officer
John W. Hobbs, Chief Financial Officer
OFFICERS
Danny Ham, Vice President, Consumer Banking Manager
ss.
SERVICES
<TABLE>
<S> <C> <C>
All Day Banking Commercial Loans Personal Checking
American Express Travelers Checks Direct Deposits Personal Lines of Credit
ATM Service Discount Brokerage Service Personal Loans
Bank By Mail Drive-In Service Regular Savings
Bond Coupon Redemption Individual Retirement Accounts Safe Deposit Boxes
Business Checking Interest Checking Senior Checking
Cashiers Checks Letters of Credit Treasury, Tax & Loan Deposits
Certificate of Deposit Money Market Accounts U.S. Savings Bonds
Christmas Clubs Night Depository Visa and Master Card
Collection Items Overdraft Protection Wire Transfers
</TABLE>
34
<PAGE> 37
FNB BANCSHARES, INC.
CORPORATE DATA
ANNUAL MEETING:
The Annual Meeting of Shareholders of FNB Bancshares, Inc. will be held at 5:30
p.m. on April 28, 1998 at Holiday Inn Express, 100 Ellis Ferry Avenue, Gaffney,
South Carolina.
CORPORATE OFFICE: GENERAL COUNSEL:
303 N. Granard Street Nelson Mullins Riley & Scarborough
Gaffney, South Carolina 29341 First Union Plaza, Suite 1400
Phone (864) 488-2265 999 Peachtree Street, NE
Fax (864) 488-0041 Atlanta, Georgia, 30309
STOCK TRANSFER DEPARTMENT: INDEPENDENT AUDITORS:
First Citizens Bank Tourville, Simpson & Henderson
P.O. Box 29 P.O. Box 8567
Columbia, South Carolina 29202 Columbia, S.C. 29202
STOCK INFORMATION:
The Common Stock of FNB Bancshares, Inc. is not listed on any exchange, nor is
there a recognized or established market. There were approximately 572
shareholders of record on December 31, 1997.
The ability of FNB Bancshares, Inc. to pay cash dividends is dependent upon
receiving cash in the form of dividends from First National Bank of the
Carolinas. However, certain restrictions exist regarding the ability of the Bank
to transfer funds to FNB Bancshares in the form of cash dividends. All of the
bank's dividends to the Company are subject to the prior approval of the Office
of the Comptroller of the Currency and are payable only from the undivided
profits of the Bank.
FORM 10-K
The Company will furnish upon request, free of charge, copies of the Annual
Report and the Company's Report to the Securities and Exchange Commission (Form
10-K) by contacting John Hobbs, Chief Financial Officer, FNB Bancshares, Inc.,
P.O. Box 1539, Gaffney, South Carolina 29342.
This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT furnished
pursuant to Part 350 of the Federal Deposit Insurance Corporations Rules and
Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR ACCURACY OR
RELEVANCE BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
35
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
First National Bank of the Carolinas
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001009162
<NAME> FNB BANCSHARES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,007,433
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,430,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 1,501,331
<INVESTMENTS-MARKET> 1,506,203
<LOANS> 14,168,832
<ALLOWANCE> (152,614)
<TOTAL-ASSETS> 19,920,308
<DEPOSITS> 13,559,868
<SHORT-TERM> 0
<LIABILITIES-OTHER> 154,014
<LONG-TERM> 0
0
0
<COMMON> 6,163
<OTHER-SE> 5,703,018
<TOTAL-LIABILITIES-AND-EQUITY> 19,920,308
<INTEREST-LOAN> 886,790
<INTEREST-INVEST> 70,974
<INTEREST-OTHER> 290,093
<INTEREST-TOTAL> 1,247,857
<INTEREST-DEPOSIT> 371,868
<INTEREST-EXPENSE> 395,524
<INTEREST-INCOME-NET> 852,333
<LOAN-LOSSES> 138,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,072,095
<INCOME-PRETAX> (257,146)
<INCOME-PRE-EXTRAORDINARY> (257,146)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185,145)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
<YIELD-ACTUAL> 8.24
<LOANS-NON> 2,993
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,000
<CHARGE-OFFS> 5,386
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 152,614
<ALLOWANCE-DOMESTIC> 152,614
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
