<PAGE> 1
===============================================================================
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, 1998
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.
--------------------
(Name of Small Business Issuer in Its Charter)
South Carolina 57-1033165
-------------------------- ---------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
217 North Granard Street
Gaffney, South Carolina 29341
-------------------------------------- ----------
(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 income for its most recent fiscal year was $127,392. As
of March 15, 1999, 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, 1999 was $4,379,380. This calculation is based upon
an estimate of the fair market value of the Common Stock by the Company's Board
of Directors of $10.00 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
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report to Shareholders for the year ended December 31,
1998 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 27, 1999 is incorporated by reference in this Form 10-KSB in Part
III, Items 9 through 12.
===============================================================================
<PAGE> 2
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
Section 21E of the Securities Exchange Act of 1934. These statements appear in
a number of places in this Report and include all statements that are not
historical statements of fact regarding the intent, belief, or current
expectations of the Company or 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; and (iii) the
Company's growth and operating strategies. Words such as "may," "would,"
"could," "will," "expect," "estimate," "anticipate," "believe," "intend," and
"plans" are intended to identify forward-looking statements. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, many of which are beyond the
Company's control. Actual results may differ materially from those projected in
the forward-looking statements as a result of various factors. Among the key
risks, assumptions, and factors that may affect operating results, performance,
and financial condition are the Company's ability to continue and manage its
growth, fluctuations in its quarterly results, Year 2000 risks and concerns,
competition, and other factors discussed in this Report and in the Company's
filings with the Securities and Exchange Commission, including the "Risk
Factors" section of the Company's Registration Statement on Form S-1
(Registration Number 333-1546).
GENERAL
FNB Bancshares, Inc. (the "Company") was incorporated in South
Carolina on September 27, 1995 for the purpose of operating as a bank holding
company. The Company's wholly owned subsidiary, First National Bank of the
Carolinas (the "Bank"), commenced business on October 18, 1996 and is primarily
engaged in the business of accepting savings and demand deposits and providing
mortgage, consumer, and commercial loans to the general public. The Bank has a
main office in Gaffney and a branch office in Blacksburg, South Carolina. The
Bank is organized as a national banking association under the laws of the
United States, with deposits insured by the FDIC. The Bank is a member of the
Federal Reserve System.
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 at 217 North Granard Street, Gaffney,
South Carolina 29342. 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."
The Bank's primary service area is Cherokee County, South Carolina.
Blacksburg and Gaffney are approximately eight miles from each other and are
the two largest municipalities in Cherokee County. Cherokee County is part of a
five-county metropolitan statistical area covering the "upstate" area of South
Carolina, including Greenville, 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
1
<PAGE> 3
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 50% 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 is successfully filling 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.
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, 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
2
<PAGE> 4
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).
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.
3
<PAGE> 5
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.
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. As of December 31, 1998, there were four
commercial banks (none of which are headquartered in Cherokee County), one
savings bank, and one credit union operating in Cherokee County. 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 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.
EMPLOYEES
The Bank has twenty one full-time employees as of December 31, 1998.
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 FIRREA in 1989
and following with FDICIA in 1991, 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 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 also 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,
4
<PAGE> 6
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 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 Securities Exchange Act of 1934 (the "Exchange Act") (which the Company has
done) or no other person owns 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,
5
<PAGE> 7
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 also 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.
South Carolina Act. As a bank holding company registered under the
South Carolina Act, the Company is subject to regulation by the South Carolina
State Board of Financial Institutions (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. 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 may be 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
6
<PAGE> 8
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.
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. In 1993, the FDIC adopted a rule which
establishes a risk-based deposit insurance premium system for all insured
depository institutions. Under this system, until mid-1995 depository
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 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.
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 nonaffiliated 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 prevailing at the time for comparable
transactions with third parties 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.
7
<PAGE> 9
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 is 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."
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 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 is 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
is 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
8
<PAGE> 10
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 applies. 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 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. As of December 31, 1998, the
Company and the Bank were qualified as "well capitalized." See "Management's
Discussion and Analysis or Plan of Operation -- Capital."
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 increases, and the
permissible activities of the institution decreases, 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.
These capital guidelines can affect the Company in several ways. If
the Company continues to grow at a rapid pace, a premature "squeeze" on capital
could occur making a capital infusion necessary. The requirements could impact
the Company's ability to pay dividends. The Company's present capital levels
are 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.
9
<PAGE> 11
FDICIA requires the federal banking regulators to revise the
risk-based capital standards to provide for explicit consideration of
interest-rate risk, concentration of credit risk, and the risks of
untraditional activities. It is uncertain what effect these regulations, when
implemented, would have on the Company.
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 $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. 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 Company
are 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 are likely to 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.
10
<PAGE> 12
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. The banking
facility is approximately 11,000 square feet and costs approximately
$1,500,000, including furniture, fixtures, and equipment. The Company completed
construction of these facilities in late 1998 and commenced operations from
these new facilities in January 1999.
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 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 issued 616,338 shares of Common Stock in its initial
offering. As of December 31, 1998, the Company had 569 shareholders of record.
Trades in the Common Stock are limited and sporadic, and management is not
aware of the prices of all trades. Since February 1999, the Common Stock has
been quoted on the Nasdaq OTC Bulletin Board under the symbol "FNBC." There is
no established trading market in the Common Stock, and one is not expected to
develop in the near future.
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.
11
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information contained on pages 4 through
17 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 18
through 36 of the Company's Annual Report to Shareholders for the year ended
December 31, 1998 is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 page 8 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 1999 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on page 7 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 1999 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on page 7 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 1999 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on pages 8 through
9 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 27, 1999 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:
<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)
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C>
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, 1998
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- -------------------------
13
<PAGE> 15
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1998.
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 23, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard D. Gardner March 23, 1999
- ---------------------- --------------
Richard D. Gardner Director
/s/ Barry Hamrick March 23, 1999
- ---------------------- --------------
Barry Hamrick Director
/s/ Haskell D. Mallory March 23, 1999
- ---------------------- --------------
Haskell D. Mallory Director
/s/ Bill Mason March 23, 1999
- ---------------------- --------------
Bill Mason Director
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ V. Stephen Moss March 23, 1999
- ----------------------------- --------------
V. Stephen Moss Director;
President and CEO
/s/ Harold D. Pennington, Jr. March 23, 1999
- ----------------------------- --------------
Harold D. Pennington, Jr. Director
/s/ Harold D. Pennington, Sr. March 23, 1999
- ----------------------------- --------------
Harold D. Pennington, Sr. Director
/s/ Heyward W. Porter March 23, 1999
- ----------------------------- --------------
Heyward W. Porter Director
/s/ John W. Hobbs Chief Financial Officer and March 23, 1999
- ----------------------------- Principal Accounting Officer --------------
John W. Hobbs
</TABLE>
<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)
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
13 Annual Report to Shareholders for the year ended December 31, 1998
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 13
FNB BANCSHARES, INC.
1998 ANNUAL REPORT
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Shareholders' Letter 2
Summary of Selected Financial Data 3
Management's Discussion and Analysis 4-17
Report of Independent Auditors 18
Consolidated Balance Sheets 19
Consolidated Statements of Income 20
Consolidated Changes in Shareholder's Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23-36
Directors, Officers and Services 37
Corporate Data 38
</TABLE>
<PAGE> 2
FNB BANCSHARES, INC.
To our Shareholders:
1998 was a continued year of growth for First National Bank of the Carolinas as
we established ourselves as a viable banking institution in the Cherokee County
community. Our local decision making and commitment to personal service continue
to be the key to our success.
We are pleased to announce that 1998 was a profitable year for First National.
This was accomplished in only our second full year of operations. Net income for
the year was $127,000, even after we increased our provision for loan losses by
$150,000. This compared with a net loss of $185,000 in 1997.
Deposit growth for 1998 remained steady and we were able to continue attracting
low cost deposits, thus keeping our cost of funds low. With these stable funding
sources we are not forced to pay above market rates for deposits, enabling us to
make affordable loans which help our local economy.
Loan demand remained strong in 1998 and we were able to continue growing our
portfolio with quality loans. Charge offs were very low, reflecting our
continued commitment to making quality loans. At the same time we increased our
allowance for loan losses by $150,000 to prevent against any unforeseen losses.
Our loan loss reserve now stands at $303,000, although we have no identifiable
losses in our portfolio. While we continue to aggressively seek good quality
loan customers, we stand firm in our commitment to asset quality. A third party
consultant continues to review our loan portfolio on a quarterly basis.
During 1998 we made a concerted effort to increase fee income. While interest
income on loans continued to be our most important revenue source, we were able
to generate good fee income by aggressively seeking sources of additional
revenues. Fee income increased by 93% to $194,000. We will continue to explore
additional avenues to increase this relatively steady source of income.
A major accomplishment in 1998 was the construction of our new main office
facility in Gaffney which we occupied on January 20, 1999. The 10,500 square
foot two story brick building, was completed on time and under budget. If you
have not had the opportunity to visit the new building, please stop by and visit
with us. I feel that you will be proud of what we have accomplished.
Each of you are aware of the concerns being raised regarding the year 2000, or
Y2K problem. This is explained in detail later in the report to shareholders,
but you can rest assured that we are continuing to test our systems and plan for
any predictable contingencies. We are confident that we will be ready when the
date change rolls around.
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 and people are in place which
will continue to enhance our opportunities for long term growth and
profitability.
We hope that you will be able to join us for the Annual Shareholders meeting on
Tuesday April 27, 1999 at 5:30 p.m. in the lobby of our new main office at 217
North Granard Street 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> 3
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, L.L.P., 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, 1998, 1997 and 1996 and the
period September 27, 1995 to December 31, 1995 1998 1997 1996 1995
-------- --------- --------- -----
(Dollars in thousands, except per share)
<S> <C> <C> <C> <C>
BALANCE SHEET:
Securities held to maturity $ 1,800 $ 1,501 $ 344 $ --
Allowance for loan losses 303 153 20 --
Net loans 19,952 14,016 2,024 --
Premises and equipment - net 1,804 761 734 4
Total assets 28,035 19,920 11,733 75
Non-interest bearing deposits 3,070 2,478 1,125 --
Interest bearing deposits 18,026 11,082 4,679 --
Total deposits 21,096 13,560 5,804 --
Total liabilities 22,199 14,211 5,839 102
Total shareholders' equity 5,837 5,709 5,894 (27)
RESULTS OF OPERATIONS:
Interest income $ 2,059 $ 1,248 $ 206 $ --
Interest expense 755 396 42 --
-------- --------- -------- ----
Net interest income 1,304 852 164 --
Provision for loan losses 160 138 20 --
-------- --------- -------- ----
Net interest income after provision 1,144 714 144 --
Other income 193 101 6 --
Other expenses 1,207 1,072 431 27
Income tax expense (benefit) 3 (72) (84) --
-------- --------- -------- ----
Net income (loss) $ 127 $ (185) $ (197) $(27)
======== ========= ======== ====
PER SHARE DATA:
Weighted average common shares outstanding 616,338 616,338 616,338 --
Basic earnings (loss) per share $ .21 $ (.30) $ (.32) $ --
Diluted earnings (loss) per share $ .21 $ (.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> 4
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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. The Bank commenced
operations in the fourth quarter of 1996. Comparisons of the Company's results
for all of the periods presented, particularly with respect to the banking
operations, should be made with an understanding of the Company's short
operating history. This commentary should be read in conjunction with the
consolidated financial statements and the related notes and the other
statistical information in this report.
1998 TO 1997:
Net income for the year ended December 31, 1998 was $127,392, or $.21 per share,
compared to a net loss of $185,145, or negative $.30 per share, for the year
ended December 31, 1997. The Company was in its first full year of operations in
1997 and the costs associated with opening a new bank affected 1997's
performance. An increase in net interest income of $451,475 over the 1997 amount
of $852,333 was the primary reason for the increase in net income from 1997 to
1998. Comparisons of the Company's results for all of the periods presented,
particularly with respect to the banking operations, should be made with an
understanding of the Company's short operating history. Other income increased
$93,268, or 92.7%, to $193,884 for the year ended December 31, 1998 as compared
to a year earlier. Other expenses increased from $1,072,095 for 1997 to
$1,207,204 for 1998. Expenses associated with building the new corporate
headquarters contributed to this increase. The Company completed construction of
these headquarters, which also includes the Bank's Gaffney office, in late 1998,
and the Company and the Bank moved into these new facilities in January 1999.
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.
NET INTEREST INCOME
To a large degree, earnings are dependent on net interest income. Net interest
income 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 increased from $852,333 in 1997 to $1,303,808 in 1998,
resulting in an increase of 53.0%. Income from loans increased by 92.5% to
$1,707,484 for 1998, as compared to $886,790 for 1997. This increase was
attributable to the growth in the loan portfolio from $14,168,832 in 1997 to
$20,254,948 in 1998. There was also an increase in investment income of $37,943,
an increase of 53.5% over the 1997 amount of $70,974. The net interest spread
and net interest margin were 4.32% and 5.55% in 1998 as compared to 3.85% and
5.63% in 1997.
Net interest income was $852,333 for the year ended December 31, 1997, as
compared to $164,089 for the year ended December 31, 1996. Amounts for 1996
represent the parent company's operations for the year and only 2.5 months of
operations for the Bank. The net increase spread and net interest margin were
3.85% and 5.63%, respectively, in 1997.
4
<PAGE> 5
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - CONTINUED
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.
AVERAGE BALANCES, INCOME, EXPENSES, AND RATES
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Taxable securities $ 1,856 $ 109 5.87% $ 1,254 $ 71 5.66%
Time deposits with other banks 503 29 5.78% 276 16 5.79%
Federal funds sold 3,904 214 5.48% 4,982 274 5.50%
Loans (1) 17,222 1,707 9.91% 8,637 887 10.27%
------- ------ ------- ------
Total earning assets 23,485 2,059 8.77% 15,149 1,248 8.24%
------ ------
Cash and due from banks 1,019 658
Allowance for loan losses (227) (82)
Premises and equipment 992 798
Other assets 566 443
------- -------
Total assets $25,835 $16,966
======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest bearing deposits $16,368 731 4.47% $ 8,394 371 4.42%
Securities sold under agreements
to repurchase 613 24 3.92% 597 24 4.02%
------- ------ ------- ------
Total interest-
bearing liabilities 16,981 755 4.45% 8,991 395 4.39%
------ ------
Non-interest bearing deposits 2,951 2,224
Accrued interest and
other liabilities 160 137
Shareholders' equity 5,743 5,614
------- -------
Total liabilities and
shareholders' equity $25,835 $16,966
======= =======
Net interest income/
interest rate spread $1,304 4.32% $ 853 3.85%
====== ==== ====== ====
Net interest margin on earning assets 5.55% 5.63%
==== ====
</TABLE>
(1) The effect of loans in non-accrual status and fees collected is not
significant to the computations. All loans and deposits are domestic.
5
<PAGE> 6
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - CONTINUED
The following tables set forth the effect which the varying levels of earning
assets and interest-bearing liabilities and the applicable rates have had on
changes in net interest income from 1997 to 1998.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 compared with 1997
Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total
---------- -------- -----
<S> <C> <C> <C>
EARNING ASSETS
Taxable securities $ 35 $ 3 $ 38
Time deposits with other banks 13 0 13
Federal funds sold (59) (1) (60)
Loans 852 (32) 820
---- ---- ----
Total interest income 841 (30) 811
---- ---- ----
INTEREST-BEARING LIABILITIES
Interest-bearing deposits 356 4 360
Securities sold under agreements to repurchase 1 (1) 0
---- ---- ----
Total interest expense 357 3 360
---- ---- ----
Net interest income $484 $(33) $451
==== ==== ====
</TABLE>
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
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.
The Company monitors and manages the pricing and maturity of its assets and
liabilities in order to diminish the potential adverse impact that changes in
interest rates could have on its net interest income. 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 same time interval helps to hedge the risk and minimize the impact on net
interest income of rising or falling interest rates.
6
<PAGE> 7
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - CONTINUED
The following table presents the Company's rate sensitivity at each of the time
intervals indicated as of December 31, 1998. 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 4-6 7-12 1-5 Over 5
(Dollars in thousands) 3 months months months years years Total
-------- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Taxable securities $ -- $ 351 $ 200 $ 1,320 $ -- $ 1,871
Time deposits with other banks 500 -- -- -- -- 500
Federal funds sold 2,350 -- -- -- -- 2,350
Loans 6,122 1,475 658 8,864 3,136 20,255
------- ------- ------- ------- -------- -------
Total 8,972 1,826 858 10,184 3,136 24,976
------- ------- ------- ------- -------- -------
Interest bearing liabilities -
Interest bearing deposits(1) 10,502 2,170 4,641 712 1 18,026
Securities sold under
agreements to repurchase 869 -- -- -- -- 869
------- ------- ------- ------- -------- -------
11,371 2,170 4,641 712 1 18,895
Interest sensitivity gap $(2,399) $ (344) $(3,783) $ 9,472 $ 3,135 $ 6,081
======= ======= ======= ======= ======== =======
Cumulative interest
sensitivity gap $(2,399) $(2,743) $(6,526) $ 2,946 $ 6,081 $ 6,081
======= ======= ======= ======= ======== =======
Gap ratio(2) (9.61)% (10.98)% (26.13)% 11.80% 24.35%
======= ======= ======= ======= =======
Cumulative gap ratio(2) (9.61)% (20.59)% (46.72)% (34.92)% (10.57)%
======= ======= ======= ======= =======
</TABLE>
(1) All savings and transaction accounts are included in the less than three
months category.
(2) Ratio of gap to total earning assets.
The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at
each scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. Interest-bearing liabilities
with no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements which give the Company the opportunity to vary the
rates paid on those deposits within a thirty-day or shorter period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity date.
7
<PAGE> 8
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - 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. The Company
is liability sensitive over the one month, three month, and one year time
frames. 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. Accordingly,
management believes a liability-sensitive gap position is not as indicative of
the Company's true interest sensitivity as it would be for an organization which
depends to a greater extent on purchased funds to support earning assets. 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.
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 1998, the Company transferred
$160,000 from earnings to the reserve for loan losses increasing the balance to
$303,248 on December 31, 1998 after deducting current year net charge offs.
Reserve for loan losses was approximately 1.50% and 1.08% of total loans on
December 31, 1998 and 1997, 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 judgement 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 chargeoffs 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, 1998 was $193,884, as compared to
$100,616 for the year ended December 31, 1997. The most significant portion of
other income was from service charges, commissions, and fees which totaled
$170,922, as compared to $89,734 in the prior year.
Other income for the year ended December 31, 1997 was $100,616. The most
significant portion of other income was from service charges, commissions and
fees which totaled $89,734.
OTHER EXPENSES
Non-interest expenses were $1,207,204 for the year ended December 31, 1998, as
compared to $1,072,095 for the year ended December 31, 1997. This was comprised
primarily of salaries and employee benefits of $623,635, furniture and equipment
expense of $103,590, occupancy expense of $95,484, and other operating expenses
of $384,495.
Non-interest expenses were $1,072,095 for the year ended December 31, 1997. This
was comprised primarily of salaries and employee benefits of $586,135, furniture
and equipment expense of $80,523, occupancy expense of $95,653, and other
operating expenses of $309,784.
8
<PAGE> 9
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
For the year ended December 31, 1998, the Company recorded income tax expense in
the amount of $3,096. Net operating loss carryforwards from prior years were
used to reduce the current year expense. 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.
CAPITAL RESOURCES
Total capital of the Company was increased by net income in 1998 of $127,392.
Total capital of the Company was reduced by the net loss in 1997 of $185,145.
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%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital of the Company consists of common
shareholders' equity, excluding the unrealized gain (loss) on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of
the allowance 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 average 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 $ 4,389,399 $ 5,836,573
Less: intangibles (40,921) (51,493)
Less: disallowed deferred tax assets (168,984) (233,074)
----------- -----------
Total Tier 1 capital 4,179,494 5,552,006
Tier 2 capital:
Allowable allowance for loan losses 270,883 272,913
----------- -----------
Tier 2 capital additions 270,883 272,913
----------- -----------
Total capital $ 4,450,377 $ 5,824,919
=========== ===========
Risk adjusted assets $21,638,329 $21,751,232
=========== ===========
Total assets $27,977,837 $28,035,079
=========== ===========
Risk-based capital ratios:
Tier 1 capital 19.32% 25.53%
Total capital 20.57 26.78
Tier 1 leverage ratio 13.96 18.59
</TABLE>
The Company was in the process of completing the construction of its new
corporate headquarters at December 31, 1998. The total cost is expected to be
approximately $1,500,000. No other material commitments for capital expenditures
existed at December 31, 1998.
9
<PAGE> 10
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 and 1998. 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, 1998 and 1997.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
HELD TO MATURITY
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
U.S. Treasury securities $ 550,619 $1,151,331
U.S. Government agencies and corporations 1,249,172 350,000
Nonmarketable equity securities 71,100 --
---------- ----------
Total securities
$1,870,891 $1,501,331
========== ==========
</TABLE>
INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELDS
<TABLE>
<CAPTION>
1998
---------------------
Amount Yield
<S> <C> <C>
U.S. Treasury and U.S. Government agencies due:
Within one year $ 550,619 6.13%
After one year but within five years 1,249,172 5.49
---------- ----
$1,799,791 5.68%
========== ====
</TABLE>
10
<PAGE> 11
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Company'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 Company 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 economy previously described are expected
to grow or contract disproportionately in 1999.
There are no significant concentrations of loans in the Company's loan portfolio
to any particular individuals or industry or group of related individuals or
industries.
Total loans outstanding were $20,254,948 and $14,168,832 at December 31, 1998
and 1997, 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. There are no significant concentrations of loans in the
Company's loan portfolio in any particular individuals or industry or group of
related individuals or industries.
The Company's ratio of loans to deposits was 96% and 104% on December 31, 1998
and 1997, 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.
11
<PAGE> 12
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO - CONTINUED
LOAN PORTFOLIO COMPOSITION
The following table summarizes the composition of the loan portfolio at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
(Dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 5,212 $ 3,227
Real estate - construction 567 207
Real estate - mortgage 9,571 6,725
Consumer and other 4,905 4,010
------- -------
$20,255 $14,169
======= =======
</TABLE>
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:
The following table summarizes the loan maturity distribution, by type, at
December 31, 1998 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 $2,392,556 $ 2,465,462 $ 354,375 $ 5,212,393
Real estate - construction 290,892 270,168 5,660 566,720
Real estate - mortgage 1,959,954 4,184,270 3,427,238 9,571,462
Consumer and other 909,211 3,300,622 694,540 4,904,373
---------- ----------- ---------- -----------
$5,552,613 $10,220,522 $4,481,813 $20,254,948
========== =========== ========== ===========
Predetermined rate,
maturing greater than one year $ 8,864,460 $3,136,329 $12,000,789
=========== ========== ===========
Variable rate or maturing
within one year $8,254,159 $ 8,254,159
========== ===========
</TABLE>
RISK ELEMENTS
At December 31, 1998, there were no loans past due 90 days or more and still
accruing interest and three loans totaling $22,911 in nonaccrual status. 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 nonaccrual status.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Loans outstanding at the end of year $20,254,948 $14,168,832
=========== ===========
Average amount of loans outstanding $17,221,796 $ 8,637,132
=========== ===========
Balance, beginning of year $ 152,614 $ 20,000
----------- -----------
Total loans charged off 9,768 5,386
Recoveries of loans previously charged off 402 --
----------- -----------
Net charge-offs 9,366 5,386
----------- -----------
Provision charged to operations 160,000 138,000
----------- -----------
Balance, end of year $ 303,248 $ 152,614
=========== ===========
Ratios:
Allowance for loan losses to average loans 1.76% 1.77%
Allowance for loan losses to loans, end of year 1.50% 1.08%
</TABLE>
12
<PAGE> 13
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO - CONTINUED
Management has allocated the majority of its allowance for loan losses to real
estate and commercial loans at December 31, 1998.
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, 1998, management reviewed its loan portfolio and determined that
no impairment on loans existed that it believes would have a material effect on
the Company's consolidated financial statements.
AVERAGE DAILY DEPOSITS
Average deposits were $19,319,869 and $10,618,491 during 1998 and 1997,
respectively. Certificates of deposit over $100,000 totaled $2,988,725 and
$2,141,145 at December 31, 1998 and 1997, respectively. Of this total, scheduled
maturities of three months or less were $1,309,181 at December 31, 1998; over
three months through six months were $379,916 at December 31, 1998; over six
months through twelve months were $1,299,628 at December 31, 1998; and none over
twelve months at December 31,1998.
The following table summarizes the Bank's deposits for the years ended December
31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
(Dollars in thousands) Percent Percent
Amount of Deposits Amount of Deposits
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 3,070 14.55% $ 2,478 18.28%
Interest bearing transaction accounts 3,281 15.55% 2,532 18.67%
Savings 3,116 14.77% 1,358 10.01%
Certificates of deposit 11,629 55.13% 7,192 53.04%
------- ------ ------- ------
$21,096 100.00% $13,560 100.00%
======= ====== ======= ======
</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 $18,107,111 and
$11,418,723 at December 31, 1998 and 1997, respectively.
13
<PAGE> 14
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SHORT-TERM BORROWINGS
At December 31, 1998 and 1997 the Company had short term borrowings which
consisted of securities sold under agreements to repurchase of $869,269 and
$424,413, respectively. 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
$1,089,170 and $937,123 during 1998 and 1997, respectively. The average interest
rate paid on the repurchase agreement was 4.00% during 1998.
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>
1998 1997
------- -------
<S> <C> <C>
Return on average assets .49% (1.09)%
Return on average equity 2.21% (3.30)%
Equity to assets ratio 22.23% 33.09%
</TABLE>
ACCOUNTING AND FINANCIAL REPORTING ISSUES
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-5. SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. Initial application of this
SOP is to be reported as the cumulative effect of a change in accounting
principle.
This SOP is effective for fiscal years beginning after December 15, 1998. The
Company has certain organizational costs relating to the formation of the Bank
that fall under the scope of this statement. The Company adopted SOP 98-5 as of
January 1, 1999.
In June 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair values. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Company generally does not
purchase derivative instruments or enter into hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999.
THE YEAR 2000
Issues. Some computers, software, and other equipment include programming codes
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches and are commonly referred to as the "Year 2000 Problem".
14
<PAGE> 15
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE YEAR 2000 - CONTINUED
Assessment. The Year 2000 Problem could affect computers, software, and other
equipment that the Company uses. Accordingly, the Company has developed a plan
that provides for, among other things, the replacement or modification of
existing information systems as necessary. Because the primary hardware and
software systems are presently certified by their vendors as Year 2000
compliant, the Company has not incurred any significant costs to date relating
to software modifications or new installations for the other systems. Most
systems are made compliant through periodic software upgrades provided by the
various vendors as part of the license agreements. However, while the Company
does not expect the cost of these efforts to be material to its financial
position or any year's operating results, there can be no assurance to this
effect.
Internal Infrastructure. The Company utilizes an outsourced data processing
system, Fiserv, for most of its accounting functions. The Company's primary
systems and those of Fiserv, have been tested by proxy with the software
provider, who has tested in environments with like software and hardware systems
as the Company. Banking regulators have approved this type of testing as a valid
means of testing. The Company has received confirmation of Fiserv's testing
results. Based on this review, the Company does not believe that the data
processing system has any material Year 2000 issues. The Company believes that
it has also identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business. Management has completed
upgrading and is in the process of testing the systems that it has determined
are not prepared for the Year 2000. Management believes that the testing of its
systems should be completed by March 31, 1999. Management has spent
approximately $40,000 to get all of its systems Year 2000 compliant. The Company
does not believe that any additional cost related to these efforts will be
material to its business, financial condition, or operating results.
Systems Other Than Information Technology Systems. In addition to computers and
related systems, the operation of the Company's office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems, and
other devices, may be affected by the Year 2000 Problem. The Company has
completed its assessment of the potential effect of, and the costs of
remediating, the Year 2000 Problem on this equipment. The Company estimates that
its total cost of completing any required modifications, upgrades, or
replacements of these internal systems will not have a material effect on its
business, financial condition, or operating results.
Suppliers and Other Third Parties. The Company has been gathering information
from and has initiated communications with its suppliers and other third parties
to identify and, to the extent possible, resolve issues involving the Year 2000
Problem. However, the Company has limited or no control over the actions of its
suppliers and others. Therefore, while the Company expects that it will be able
to resolve any significant Year 2000 Problem with its own system, it cannot
guarantee that its suppliers or others will resolve any or all Year 2000
Problems with their systems before the occurrence of a material disruption to
its business. Any failure of these suppliers or others to resolve the Year 2000
Problems with their systems in a timely manner could have a material adverse
effect on the Company's business, financial condition, or operating results.
Customers. The Company believes that the largest Year 2000 Problem exposure to
most companies is the preparedness of the customers of the companies. Management
is addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an increase in loan defaults. The amount of potential
loss from this issue is not quantifiable. Management is attempting to reduce
this exposure by educating its customers. The Company has implemented a
comprehensive Year 2000 credit review policy for all existing loans that exceed
$100,000 as well as an underwriting policy for all new loan requests. At
present, the Company's review indicates that the Company's exposure to credit
risks associated with Year 2000 is considered to be low. The Company's credit
review procedures will continue to include these policies throughout 1999.
15
<PAGE> 16
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE YEAR 2000 - CONTINUED
Most Likely Consequences of Year 2000 Problems. The Company expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business, financial condition, or operating results. However, the Company
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting it have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, the Company cannot accurately predict how many
failures related to the Year 2000 Problem will occur with its suppliers,
customers, or other third parties or the severity, duration, or financial
consequences of such failures.
As a result, the Company expects that it could possibly suffer the following
consequences:
- - A number of operational inconveniences and inefficiencies for the
Company, its service providers, or its customers that may divert the
Company's time and attention and financial and human resources from its
ordinary business activities; and
- - System malfunctions that may require significant efforts by the Company
or its service providers or customers to prevent or alleviate material
business disruptions.
Contingency Plans. The Company has developed contingency plans to be implemented
as part of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. The Company's Board of Directors approved the contingency
plans on October 27, 1998. Depending on the systems affected, these plans
include (a) accelerated replacement of affected equipment or software; (b) short
term use of backup equipment and software; (c) increased work hours for the
Company's personnel or use of contract personnel to correct, on an accelerated
schedule, any Year 2000 Problems which arise; and (d) other similar approaches.
If the Company is required to implement any of these contingency plans, these
plans could have a material adverse effect on its business, financial condition,
or operating results.
FORWARD LOOKING INFORMATION
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include all statements that are not
historical statements of fact regarding the intent, belief, or current
expectations of the Company or 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; and (iii) the Company's
growth and operating strategies. Words such as "may," "would," "could," "will,"
"expect," "estimate," "anticipate," "believe," "intend," and "plans" are
intended to identify forward-looking statements. Investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, many of which are beyond the Company's control.
Actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among the key risks, assumptions, and
factors that may affect operating results, performance, and financial condition
are the Company's ability to continue and manage its growth, fluctuations in its
quarterly results, Year 2000 risks and concerns, competition, and other factors
discussed in this Annual Report and in the Company's filings with the Securities
and Exchange Commission, including the "Risk Factors" section of the Company's
Registration Statement on Form S-1 (Registration Number 333-1546).
16
<PAGE> 17
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION - CONTINUED
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.
In February 1998, the Supreme Court ruled that federal credit unions must limit
their membership to employees of the companies that sponsor the credit union.
Banking leaders throughout the country have argued that credit unions have an
unfair competitive advantage because they do not pay income taxes and are not
subject to the same level of regulatory oversight. The Supreme Court ruling
applies only to federal credit unions. State-chartered credit unions were not
directly affected by the ruling. The lower courts will determine whether current
members who are not employed by the credit union sponsor will be forced to close
their accounts. Management does not expect the ruling to have an immediate
effect on the financial position or results of operations of the Company.
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.
17
<PAGE> 18
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, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
Tourville, Simpson & Henderson, L.L.P.
March 3, 1999
Columbia, South Carolina
18
<PAGE> 19
FNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 1,017,765 $ 1,007,433
Federal funds sold 2,350,000 1,430,000
----------- -----------
3,367,765 2,437,433
Securities:
Securities held to maturity (estimated market value of
$1,803,397 in 1998 and $1,506,203 in 1997) 1,799,791 1,501,331
Nonmarketable equity securities 71,100 --
----------- -----------
1,870,891 1,501,331
Time deposits with other banks 500,000 600,000
Loans receivable 20,254,948 14,168,832
Less allowance for loan losses (303,248) (152,614)
----------- -----------
Loans, net 19,951,700 14,016,218
Premises and equipment, net 1,803,557 760,843
Accrued interest receivable 127,576 122,499
Other assets 413,590 481,984
----------- -----------
Total assets $28,035,079 $19,920,308
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing transaction accounts $ 3,070,299 $ 2,478,018
Interest bearing transaction accounts 3,281,387 2,532,105
Savings 3,115,763 1,358,378
Time deposits $100,000 and over 2,988,725 2,141,145
Other time deposits 8,639,662 5,050,222
----------- -----------
21,095,836 13,559,868
Securities sold under agreements to repurchase 869,269 424,413
Accrued interest payable 47,799 72,832
Other liabilities 185,602 154,014
----------- -----------
Total liabilities 22,198,506 14,211,127
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000
shares authorized and unissued -- --
Common stock, $.01 par value; 10,000,000
shares authorized; 616,338 shares issued and
outstanding in 1998 and 1997 6,163 6,163
Capital surplus 6,112,318 6,112,318
Retained earnings (deficit) (281,908) (409,300)
----------- -----------
Total shareholders' equity 5,836,573 5,709,181
----------- -----------
Total liabilities and shareholders' equity $28,035,079 $19,920,308
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 20
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $1,707,484 $ 886,790 $ 27,526
Investment securities, taxable 108,917 70,974 2,033
Federal funds sold 213,852 273,854 176,393
Time deposits with other banks 29,071 16,239 --
---------- ---------- ---------
2,059,324 1,247,857 205,952
---------- ---------- ---------
INTEREST EXPENSE
Time deposits $100,000 and over 161,021 90,839 5,645
Other deposits 570,226 281,029 21,357
Securities sold under agreements to repurchase 24,269 23,656 --
Short term borrowings -- -- 14,861
---------- ---------- ---------
755,516 395,524 41,863
---------- ---------- ---------
NET INTEREST INCOME 1,303,808 852,333 164,089
Provision for loan losses 160,000 138,000 20,000
---------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,143,808 714,333 144,089
---------- ---------- ---------
OTHER INCOME
Service charges on deposit accounts 22,962 10,882 583
Other service charges, commissions and fees 170,922 89,734 5,393
---------- ---------- ---------
193,884 100,616 5,976
---------- ---------- ---------
OTHER EXPENSE
Salaries and employee benefits 623,635 586,135 238,606
Occupancy expense 95,484 95,653 29,846
Furniture and equipment 103,590 80,523 11,991
Other operating expense 384,495 309,784 151,159
---------- ---------- ---------
1,207,204 1,072,095 431,602
---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 130,488 (257,146) (281,537)
Income tax expense (benefit) 3,096 (72,001) (84,460)
---------- ---------- ---------
NET INCOME (LOSS) $ 127,392 $ (185,145) $(197,077)
========== ========== =========
BASIC EARNINGS (LOSS) PER SHARE $ .21 $ (.30) $ (.32)
DILUTED EARNINGS (LOSS) PER SHARE $ .21 $ (.30) $ (.32)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 21
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Retained
--------------------------------- Capital Earnings
Shares Amount Surplus (Deficit) Total
------ ------ -------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 10 $ 1 $ 99 $ (27,078) $ (26,978)
Common stock issued 616,328 6,162 6,157,118 6,163,280
Costs 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
Net income 127,392 127,392
------- ------ ---------- --------- ----------
BALANCE, DECEMBER 31, 1998 616,338 $6,163 $6,112,318 $(281,908) $5,836,573
======= ====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 22
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 127,392 $ (185,145) $ (197,077)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Provision for loan losses 160,000 138,000 20,000
Depreciation 92,902 85,551 12,703
Accretion and premium amortization 165 (4,737) (2,033)
Deferred income taxes (3,695) (76,041) (89,247)
Increase in interest receivable (5,077) (111,319) (11,180)
Increase (decrease) in interest payable (25,033) 52,619 20,213
(Increase) decrease in other assets 72,089 (59,507) (204,981)
Increase in other liabilities 31,588 140,017 11,886
----------- ------------ -----------
Net cash provided (used) by operating activities 450,331 (20,562) (439,716)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held to maturity (2,469,725) (2,102,404) (342,156)
Maturities of securities held to maturity 2,100,000 950,000 --
Purchases of time deposits with other banks (1,000,000) (600,000) --
Maturities of time deposits with other banks 1,100,000 -- --
Net increase in loans made to customers (6,095,482) (12,130,246) (2,043,972)
Purchases of premises and equipment (1,135,616) (111,951) (743,120)
----------- ------------ -----------
Net cash used by investing activities (7,500,823) (13,994,601) (3,129,248)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest
bearing transaction accounts and savings accounts 3,098,948 3,458,332 2,910,169
Net increase in time deposits 4,437,020 4,297,171 2,894,196
Increase in securities sold under agreements to repurchase 444,856 424,413 --
Net decrease in short-term borrowings -- -- (100,000)
Costs of stock issuance -- -- (44,899)
Sale of common stock -- -- 6,163,280
----------- ------------ -----------
Net cash provided by financing activities 7,980,824 8,179,916 11,822,746
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 930,332 (5,835,247) 8,253,782
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,437,433 8,272,680 18,898
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,367,765 $ 2,437,433 $ 8,272,680
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 780,549 $ 342,905 $ 21,650
Cash paid during the year for taxes $ 261,200 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
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 - 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. 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.
NONMARKETABLE EQUITY SECURITIES - Nonmarketable equity securities include the
cost of the Company's investment in the stock of the Federal Home Loan Bank. The
stock has no quoted market value and no ready market exists. Investment in
Federal Loan Bank stock is a condition of borrowing from the Federal Home Loan
Bank, and the stock is pledged to secure the borrowings. There were no
borrowings at December 31, 1998. At December 31, 1998, the investment in Federal
Home Loan Bank stock was $71,100.
LOANS - Loans are stated at their unpaid principal 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.
23
<PAGE> 24
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 -
40 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.
RETIREMENT PLAN - The Company adopted a contributory 401(K) plan in 1998 which
covers substantially all employees. Under the plan, participants are permitted
to make discretionary contributions up to 15% of annual compensation. At its
discretion, the Company can make matching contributions of $.25 per $1.00 up to
6% of the participants' annual compensation. Expenses charged to earnings in
1998 for the plan were $4,096.
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.
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 Q.
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.
24
<PAGE> 25
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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
1997 and 1996 were reclassified to conform with the 1998 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 Q.
As required by SFAS 128, all prior-period EPS data presented has been restated
to conform with the provisions of the statement.
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.
NOTE D - INVESTMENT SECURITIES
The amortized costs and estimated market values of securities held to maturity
at December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------ ------ ----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
U.S. Treasuries $ 550,619 $4,412 $ -- $ 555,031
U.S. Government agencies and corporations 1,249,172 1,100 1,906 1,248,366
---------- ------ ------ ----------
$1,799,791 $5,512 $1,906 $1,803,397
========== ====== ====== ==========
AS OF DECEMBER 31, 1997:
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
========== ====== ====== ==========
</TABLE>
25
<PAGE> 26
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES - CONTINUED
The following is a summary of maturities of securities held to maturity as of
December 31, 1998. 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>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due within one year $ 550,619 $ 555,031
Due within one to five years 1,320,272 1,319,466
---------- ----------
$1,870,891 $1,874,497
========== ==========
</TABLE>
At December 31, 1998 and 1997 investment securities with a book value of
$1,799,791 and $752,422, respectively and a market value of $1,803,397 and
$755,422, respectively were pledged as collateral to secure public deposits and
for other purposes as required and permitted by law.
NOTE E - LOANS
Major classifications of loans receivable as of December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commercial, financial and agricultural $ 5,212,393 $ 3,227,562
Real estate - construction 566,720 206,531
Real estate - other 9,571,462 6,724,721
Consumer and other 4,904,373 4,010,018
----------- -----------
Total gross loans $20,254,948 $14,168,832
=========== ===========
</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, 1998, management has determined that
no impairment of loans existed that would have a material effect on the
Company's financial statements.
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,
1998, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Balance, beginning of year $152,614 $ 20,000 --
Provision charged to operations 160,000 138,000 20,000
Recoveries on loans previously charged off 402 -- --
Loans charged off 9,768 5,386 --
-------- -------- -------
Balance, end of year $303,248 $152,614 $20,000
======== ======== =======
</TABLE>
26
<PAGE> 27
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS - CONTINUED
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, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Commitments to extend credit $ 3,930,657 $ 2,552,114
</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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Land $ 245,492 $ 245,492
Building and land improvements 297,927 297,927
Furniture and equipment 380,578 315,678
Construction in progress $ 1,070,610 --
----------- ---------
1,994,607 859,097
Less, accumulated depreciation (191,050) (98,254)
----------- ---------
Premises and equipment, net $ 1,803,557 $ 760,843
=========== =========
</TABLE>
During 1998, the Company capitalized approximately $13,586 of interest on the
construction of the corporate headquarters.
NOTE G - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1999 $ 10,915,504
2000 and thereafter 712,883
------------
$ 11,628,387
============
</TABLE>
27
<PAGE> 28
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1998, 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, 1998 is summarized as follows:
<TABLE>
<S> <C>
Average balance during the year $ 612,632
Average interest rate during the year 4.0%
Maximum month-end balance during the year $ 1,089,170
</TABLE>
As of December 31, 1998, the amortized cost and market value of the securities
underlying the agreements were $1,099,791 and $1,102,381, 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, 1998 and 1997 the Company had
related party loans totaling $36,517, and $44,719, respectively. During 1998,
$94,300 of new loans were made to related parties and repayments totaled
$102,502.
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. The undivided profits of the Bank were negative
at December 31, 1998 and 1997.
NOTE K - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Currently payable
Federal $ -- $ 3,823
State -- 217
-------------- --------------
Currently payable income tax expense -- 4,040
-------------- --------------
Deferred income taxes
Federal (2,811) (64,599)
State 5,907 (11,442)
-------------- --------------
Deferred income tax expense (benefit) 3,096 (76,041)
-------------- --------------
Total income tax expense (benefit) $ 3,096 $ (72,001)
============== ==============
</TABLE>
28
<PAGE> 29
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - INCOME TAXES - CONTINUED
The Company's deferred tax accounts as of December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Deferred tax assets $ 187,632 $ 177,651 $ 93,091
Deferred tax liabilities $ 18,649 $ 12,363 $ 3,844
Valuation allowance $ 0 $ 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>
1998 1997
-------- --------
<S> <C> <C>
Accelerated depreciation $ 6,286 $ 8,519
Provision for loan losses (64,735) (33,201)
Amortization of organizational costs 2,790 14,147
Net operating loss carryforward 50,840 (64,476)
Other 1,124 (1,030)
-------- --------
Total deferred tax expense (benefit) $ (3,695) $(76,041)
======== ========
</TABLE>
The Company has a net operating loss carryforward for income tax purposes of
$78,735 and $297,895 as of December 31, 1998 and 1997, respectively, which
expires in various years through 2012 and 2013, 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>
1998 1997
-------- --------
<S> <C> <C>
Tax expense at statutory rate $ 44,366 $(87,430)
Surtax exemption (10,226) 3,893
Increase in net deferred tax asset attributable
to applicable estimated federal tax rate (37,359) 24,705
State income tax, net of federal income tax benefit 5,907 (11,299)
Other, net 408 (1,870)
-------- --------
$ 3,096 $(72,001)
======== ========
</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, 1998 will be
realized and, accordingly, has not established a valuation allowance.
NOTE L - OTHER EXPENSES
Other expenses for the years ended December 31, 1998, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Amortization of organizational costs $ 17,850 $ 18,276 $ 3,046
Data processing and correspondent bank 92,522 31,741 3,159
Stationery, printing and postage 50,038 46,578 36,416
Advertising and promotion 14,149 15,519 23,990
Legal and accounting 27,530 46,504 2,726
Telephone 22,729 23,485 10,148
Courier 16,975 17,913 352
Other 142,702 109,768 71,322
--------- --------- ---------
$ 384,495 $ 309,784 $ 151,159
========= ========= =========
</TABLE>
29
<PAGE> 30
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK-BASED COMPENSATION
On April 22, 1997, the shareholders approved an Incentive Stock Option Plan
(Stock Plan) which provides for the granting of options to purchase up to
92,450 shares of the Company's common stock to directors, officers, or
employees of the Company. On April 28, 1998, the shareholders amended the Stock
Plan whereby up to 152,450 shares could be granted. 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.
At December 31, 1998 there were 49,604 options available for grant.
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, 1998, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 127,392 $ (185,145) $ (197,077)
Pro forma 82,909 (228,021) (206,458)
Basic earnings (loss) per share:
As reported $ .21 $ (.30) $ (.32)
Pro forma .13 (.37) (.33)
Diluted earnings (loss) per share:
As reported $ .21 $ (.30) $ (.32)
Pro forma .13 (.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 used for grants in 1998 and
1996: dividend yield of 0 percent; expected volatility of 0 percent; risk-free
interest rates of 4.62% and 6.40% for 1998 and 1996, respectively; and an
expected life of 10 years for both years. No options were granted in 1997.
The weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1998 and 1996 is $3.67, and $4.68,
respectively.
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 45,566 $ 10.00 50,566 $ 10.00 -- --
Granted 57,280 10.00 -- - 50,566 $ 10.00
Exercised -- -- -- - -- --
Canceled -- -- (5,000) 10.00 -- --
------- ------ ------
Outstanding at end
of year 102,846 10.00 45,566 10.00 50,566 10.00
======= ====== ======
</TABLE>
30
<PAGE> 31
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK-BASED COMPENSATION - CONTINUED
Options exercisable at December 31, 1998, 1997 and 1996 were 18,226, 9,113 and
0, respectively.
At December 31, 1998 the outstanding stock options had a weighted average
remaining life of 9.02 years and a remaining life of 7.82 years for those stock
options that were exercisable. All stock options that have been issued by the
Company have an exercisable price of $10.00.
NOTE N - UNUSED LINES OF CREDIT
As of December 31, 1998, the Bank had unused lines of credit to purchase
federal funds from unrelated banks totaling $1,500,000. These lines of credit
are available on a one to fourteen day basis for general corporate purposes.
NOTE O - 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 judgements 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.
31
<PAGE> 32
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 1,017,765 $ 1,017,765 $ 1,007,433 $ 1,007,433
Federal funds sold 2,350,000 2,350,000 1,430,000 1,430,000
Securities held-to-maturity 1,870,891 1,874,497 1,501,331 1,506,203
Time deposits with other banks 500,000 500,000 600,000 600,000
Loans 20,254,948 20,335,093 14,168,832 14,190,779
Allowance for loan losses (303,248) (303,248) (152,614) (152,614)
Accrued interest receivable 127,576 127,576 122,499 122,499
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing
transaction, and savings accounts $ 9,467,449 $ 9,467,449 $ 6,368,501 $ 6,368,501
Time deposits 11,628,387 11,614,361 7,191,367 7,209,244
Securities sold under agreements
to repurchase 869,269 869,269 424,413 424,413
Accrued interest payable 47,799 47,799 72,832 72,832
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit $ 3,930,657 $ 3,930,657 $ 2,552,114 $ 2,552,114
</TABLE>
NOTE P - 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, 1998, 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 completed the construction of its corporate office in Gaffney in
January 1999. The cost of construction was approximately $1,500,000. No other
material commitments existed at December 31, 1998.
NOTE Q - 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 net 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.
32
<PAGE> 33
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - EARNINGS PER SHARE - CONTINUED
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 102,846 and
45,566 shares of common stock at $10 per share were outstanding at December 31,
1998 and 1997, respectively. The stock options were not included in the
computation of diluted EPS for December 31, 1997 because they would have
resulted in an antidilutive per share amount since the Company had a net loss
in that year.
NOTE R - 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 judgements 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 shareholders'
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
average assets, which is known as the leverage ratio. Banks are to maintain
capital at the minimum requirement of 3%.
As of December 31, 1998, 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, 1998 and 1997.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Total capital (to risk weighted assets) $4,450 20.57% $1,731 8.00% $2,164 10.00%
Tier 1 capital (to risk weighted assets) 4,179 19.32 866 4.00 1,298 6.00
Tier 1 capital (to average assets) 4,179 13.96 1,197 4.00 1,497 5.00
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
</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.
33
<PAGE> 34
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - FNB BANCSHARES, INC. (PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,372,700 $ 1,374,170
Investment in banking subsidiary 4,389,400 4,259,710
Other assets 74,473 75,301
----------- -----------
Total assets $ 5,836,573 $ 5,709,181
=========== ===========
Shareholders' equity
Common stock 6,163 6,163
Capital surplus 6,112,318 6,112,318
Retained earnings (deficit) (281,908) (409,300)
----------- -----------
Total liabilities and shareholders' equity $ 5,836,573 $ 5,709,181
=========== ===========
</TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income
Interest income $ -- $ 15,611 $ 108,530
Expenses (3,650) (11,263) (14,862)
--------- --------- ---------
Income before income taxes and equity in
undistributed earnings (losses) of banking subsidiary (3,650) 4,348 93,668
Income tax expense (benefit) 1,352 1,217 (37,114)
Equity in undistributed earnings (losses)
of banking subsidiary 129,690 (188,276) (327,859)
--------- --------- ---------
Net income (loss) $ 127,392 $(185,145) $(197,077)
========= ========= =========
</TABLE>
34
<PAGE> 35
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - FNB BANCSHARES, INC. (PARENT COMPANY ONLY) - CONTINUED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 127,392 $ (185,145) $ (197,077)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
(Increase) decrease in other assets 828 (15,834) (3,233)
Increase (decrease) in other liabilities -- (100) (102,010)
Equity in undistributed (earnings) losses of
banking subsidiary (129,690) 188,276 327,859
----------- ----------- -----------
Net cash provided (used) by operating activities (1,470) (12,803) 25,539
----------- ----------- -----------
Financing activities:
Sale of common stock -- -- 6,163,280
Purchase of bank stock -- -- (4,775,845)
Cost of stock issuance -- -- (44,899)
----------- ----------- -----------
Net cash provided by financing activities -- -- 1,342,536
----------- ----------- -----------
Net increase in cash (1,470) (12,803) 1,368,075
Cash, beginning 1,374,170 1,386,973 18,898
----------- ----------- -----------
Cash, ending $ 1,372,700 $ 1,374,170 $ 1,386,973
=========== =========== ===========
</TABLE>
NOTE T - THE YEAR 2000
Some computers, software, and other equipment include programming codes in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches and are commonly referred to as the "Year 2000 Problem."
The Year 2000 Problem could affect computers, software, and other equipment
that the Company uses. Accordingly, the Company has completed its review of its
internal computer programs and systems to determine whether they will be Year
2000 compliant. The Company believes that its computer systems will be Year
2000 compliant in a timely manner. Because the primary hardware and software
systems are presently certified by their vendors as Year 2000 compliant, the
Company has not incurred any significant costs to date relating to software
modifications or new installations for the other systems. Most systems are made
compliant through periodic software upgrades provided by the various vendors as
part of the license agreements. However, while the Company does not expect the
cost of these efforts to be material to its financial position or any year's
operating results, there can be no assurance to this effect.
35
<PAGE> 36
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - THE YEAR 2000 - CONTINUED
The Company utilizes an outsourced data processing system for most of its
accounting functions. The Company's primary systems and those of Fiserv, have
been tested by proxy with the software provider, who has tested in environments
with like software and hardware systems as the Company. Banking regulators have
approved this type of testing as a valid means of testing. The Company has
received results and the results are available for review. The testing process
did not reveal any problems relating to the Year 2000. The Company believes
that it has identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business. Management has completed
upgrading and is in the process of testing the systems that it has determined
are not prepared for the Year 2000. Management believes that the testing of its
systems should be completed by March 31, 1999. Management has spent
approximately $40,000 to get all of its systems Year 2000 compliant. The
Company does not believe that the cost related to these efforts will be
material to its business, financial condition, or operating results.
In addition to computers and related systems, the operation of the Company's
office and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, and other devices, may be affected by the Year 2000
Problem. The Company has completed its assessment of the potential effect of,
and the costs of remediating, the Year 2000 Problem on this equipment. The
Company estimates that its total cost of completing any required modifications,
upgrades, or replacements of these internal systems will not have a material
effect on its business, financial condition, or operating results.
36
<PAGE> 37
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
Mike Grubbs, Vice President, Consumer Banker
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
Certificates of Deposit Money Market Accounts U.S. Savings Bonds
Christmas Clubs Night Depository Visa and Master Card
Collection Items Overdraft Protection Wire Transfers
</TABLE>
37
<PAGE> 38
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 27, 1999 at our offices at 217 North Granard Street, Gaffney,
South Carolina.
<TABLE>
<S> <C>
CORPORATE OFFICE: GENERAL COUNSEL:
217 N. Granard Street Nelson Mullins Riley & Scarborough, L.L.P.
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, L.L.P.
P.O. Box 29 P.O. Box 8567
Columbia, South Carolina 29202 Columbia, S.C. 29202
</TABLE>
STOCK INFORMATION:
The Common Stock of FNB Bancshares, Inc. is not listed on any exchange.
However, the stock is traded on the over-the-counter bulletin board. The
Company's stock trades under the symbol "FNBC" on the Nasdaq OTC Bulletin
Board. Trading and quotations of the common stock have been limited and
sporadic. Management is not aware of the prices at which all shares of stock
have been traded. The only trades of which the Company is aware is at $10.00
per share. As of December 31, 1998, there were 569 shareholders of record.
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 OFFICE OF THE COMPTROLLER OF THE CURRENCY.
38
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
First National Bank of the Carolinas
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FOR THE FINANCIAL
STATEMENTS OF FNB BANCSHARES, INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,017,765
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,350,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 1,799,791
<INVESTMENTS-MARKET> 1,803,397
<LOANS> 20,254,948
<ALLOWANCE> 303,248
<TOTAL-ASSETS> 28,035,079
<DEPOSITS> 21,095,836
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,102,670
<LONG-TERM> 0
0
0
<COMMON> 6,163
<OTHER-SE> (5,830,410)
<TOTAL-LIABILITIES-AND-EQUITY> 28,035,079
<INTEREST-LOAN> 1,707,484
<INTEREST-INVEST> 351,840
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,059,324
<INTEREST-DEPOSIT> 731,247
<INTEREST-EXPENSE> 755,516
<INTEREST-INCOME-NET> 1,303,808
<LOAN-LOSSES> 160,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,207,204
<INCOME-PRETAX> (130,488)
<INCOME-PRE-EXTRAORDINARY> (127,392)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127,392)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
<YIELD-ACTUAL> 8.77
<LOANS-NON> 22,911
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 152,614
<CHARGE-OFFS> 9,768
<RECOVERIES> 402
<ALLOWANCE-CLOSE> 303,248
<ALLOWANCE-DOMESTIC> 2,800
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 300,448
</TABLE>
