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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required) For the fiscal year ended December 31, 1999
OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from to
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Commission file no. 333-1546
FNB BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
South Carolina 57-1033165
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
217 North Granard Street
Gaffney, South Carolina 29341
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(Address of Principal Executive Offices) (Zip Code)
(864) 488-2265
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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. [ ]
The issuer's income for its most recent fiscal year was $171,249. As of
March 15, 2000, 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, 2000 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, 1999
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 25, 2000 is incorporated by reference in this Form 10-KSB in Part III,
Items 9 through 12.
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ITEM 1. DESCRIPTION OF BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements are based
on many assumptions and estimates and are not guarantees of future performance.
Our actual results may differ materially from those projected in any
forward-looking statements, as they will depend on many factors about which we
are unsure, including many factors which are beyond our control. The words
"may," "would," "could," "will," "expect," "anticipate," "believe," "intend,"
"plan," and "estimate," as well as similar expressions, are meant to identify
such forward-looking statements. Potential risks and uncertainties include, but
are not limited to:
- significant increases in competitive pressure in the banking
and financial services industries;
- changes in the interest rate environment which could reduce
anticipated or actual margins;
- changes in political conditions or the legislative or
regulatory environment;
- general economic conditions, either nationally or regionally
and especially in primary service area, becoming less
favorable than expected resulting in, among other things, a
deterioration in credit quality;
- changes occurring in business conditions and inflation;
- changes in technology;
- changes in monetary and tax policies;
- changes in the securities markets; and
- other risks and uncertainties detailed from time to time in
our filings with the Securities and Exchange Commission.
GENERAL
FNB Bancshares, Inc. 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, 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. Our 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."
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Our 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 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, we generally do not attempt to
compete for the banking relationships of large corporations, but we concentrate
our 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, we offer 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
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payments may be structured on a longer amortization basis. Interest rates are
fixed or adjustable. The bank generally charges an origination fee. Management
attempts to reduce credit risk in the commercial real estate portfolio by
emphasizing loans on owner-occupied office and retail buildings where the
loan-to-value ratio, established by independent appraisals, does not exceed 80%.
In addition, the bank typically requires personal guarantees of the principal
owners of the property backed with a review by the bank of the personal
financial statements of the principal owners. The principal economic risk
associated with each category of loans, including real estate loans, is the
creditworthiness of the bank's borrowers. The risks associated with real estate
loans vary with many economic factors, including employment levels and
fluctuations in the value of real estate. The bank competes for real estate
loans with a number of bank competitors which are well established in the
Cherokee County area. Most of these competitors have substantially greater
resources and lending limits than the bank. As a result, the bank occasionally
must charge a lower interest rate to attract borrowers. See "--Competition". The
bank also originates loans for sale into the secondary market. The bank attempts
to limit interest rate risk and credit risk on these loans by locking the
interest rate for each loan with the secondary investor and receiving the
investor's underwriting approval prior to originating the loan.
Commercial Loans. The bank makes loans for commercial purposes in
various lines of businesses. Equipment loans typically are made for a term of
five years or less at fixed or variable rates, with the loan fully amortized
over the term and secured by the financed equipment and with a loan-to-value
ratio of 80% or less. Working capital loans typically have terms not exceeding
one year and are usually secured by accounts receivable, inventory, or personal
guarantees of the principals of the business. For loans secured by accounts
receivable or inventory, principal is typically repaid as the assets securing
the loan are converted into cash, and in other cases principal is typically due
at maturity. The principal economic risk associated with each category of loans,
including commercial loans, is the creditworthiness of the bank's borrowers. The
risks associated with commercial loans vary with many economic factors,
including the economy in the Cherokee County area, especially the tourist
economy. The well-established banks in the Cherokee County area will make
proportionately more loans to medium- to large-sized businesses than the bank.
Many of the bank's commercial loans are made to small- to medium-sized
businesses which may be less able to withstand competitive, economic, and
financial conditions than larger borrowers.
Consumer Loans. The bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. These loans typically carry balances of less than $25,000
and, in the case of non-revolving loans, are amortized over a period not
exceeding 48 months. The revolving loans typically bear interest at a fixed rate
and require monthly payments of interest and a portion of the principal balance.
The underwriting criteria for home equity loans and lines of credit is generally
the same as applied by the bank when making a first mortgage loan, as described
above, and home equity lines of credit typically expire fifteen years or less
after origination. As with the other categories of loans, the principal economic
risk associated with consumer loans is the creditworthiness our 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. We
have established a Board loan committee that must approve any loan over the
President's lending limit. We do not make any loans to directors, officers, or
employees of the bank unless the loan is approved by our board of directors and
is made on terms not more favorable to such
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person than would be available to a person not affiliated with us (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 us), in general we are subject to a
loan-to-one-borrower limit. This limit will increase or decrease as the bank's
capital increases or decreases. Unless we are able to sell participations in our
loans to other financial institutions, we will not be able to meet all of the
lending needs of loan customers requiring aggregate extensions of credit above
these limits.
OTHER BANKING SERVICES
Other bank services include cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
and automatic drafts for various accounts. The bank is associated with a shared
network of automated teller machines that may be used by our customers
throughout South Carolina and other regions. We also offer 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, 1999, 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 our bank and offer
certain services, such as extensive and established branch networks and trust
services, that we either do not expect to provide or do not currently provide.
As a result of these competitive factors, the bank may have to pay higher rates
of interest to attract deposits.
EMPLOYEES
We have 22 full-time employees as of December 31, 1999.
SUPERVISION AND REGULATION
Both the company and the bank are subject to extensive state and
federal banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight of virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summary is qualified by
reference to the statutory and regulatory provisions discussed. Changes in
applicable laws or regulations may have a material effect on our business and
prospects. Beginning with the enactment of the Financial Institution Report
Recovery and Enforcement Act in 1989 and following with the FDIC Improvement Act
in 1991, numerous additional regulatory requirements have been placed on the
National Banking industry in the past several years, and additional changes have
been proposed. Our operations may be affected by legislative changes and the
policies of various regulatory authorities. We cannot predict the effect that
fiscal or monetary policies, economic control, or new federal or state
legislation may have on our business and earnings in the future.
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GRAMM-LEACH-BLILEY ACT
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton on
November 12, 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities.
The Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies.
In fact, it is not possible to predict the full effect that the Act will have on
us. From time to time other changes are proposed to laws affecting the national
banking industry, and these changes could have a material effect on our business
and prospects. We cannot predict the nature or the extent of the effect on our
business and earnings of fiscal or monetary policies, economic controls, or new
federal or state legislation.
FNB BANCSHARES, INC.
Because it owns the outstanding capital stock of the bank, the company
is a bank holding company under the federal Bank Holding Company Act of 1956 and
the South Carolina Banking and Branching Efficiency Act.
The Bank Holding Company Act. Under the Bank Holding Company Act, the
company is subject to periodic examination by the Federal Reserve and required
to file periodic reports of its operations and any additional information that
the Federal Reserve may require. Our activities at the bank and holding company
level are limited to:
- banking and 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 and managing or
controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
- acquiring substantially all the assets of any bank;
- acquiring direct or indirect ownership or control of any
voting shares of any bank if after the 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
- merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with regulations
thereunder, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively
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presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of a 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 or no other person owns a greater
percentage of that class of voting securities immediately after the transaction.
The company's common stock is registered under the Securities Exchange Act of
1934. The regulations provide a procedure for challenge of the rebuttable
control presumption.
Under the Bank Holding Company Act, 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 Bank Holding Company Act, 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 these loans may be
repaid from dividends paid from the bank to the company. Our ability to pay
dividends is subject to regulatory restrictions as described below in " First
National Bank of the Carolinas - 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 Bank Holding Company Act,
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's holding
company. Further, federal bank regulatory authorities have additional discretion
to require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition.
South Carolina State Regulation. As a bank holding company registered
under the South Carolina Banking and Branching Efficiency Act, we are subject to
limitations on sale or merger and to regulation by the South Carolina Board of
Financial Institutions. Prior to acquiring the capital stock of a national bank,
we are not required to obtain the approval of the Board, but we must notify them
at least 15 days prior to doing so. We must receive the Board's approval prior
to engaging in the
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acquisition of banking or nonbanking institutions or assets, and we must file
periodic reports with respect to our financial condition and operations,
management, and intercompany relationships between the company and its
subsidiaries.
FIRST NATIONAL BANK OF THE CAROLINAS
The bank operates as a national banking association incorporated under
the laws of the United States and subject to examination by the Office of the
Comptroller of the Currency. Deposits in the bank are insured by the FDIC up to
a maximum amount, which is generally $100,000 per depositor subject to
aggregation rules.
The Office of the Comptroller of the Currency 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 Office of the Comptroller of the Currency requires the bank to
maintain specified capital ratios and imposes limitations on the bank's
aggregate investment in real estate, bank premises, and furniture and fixtures.
The Office of the Comptroller of the Currency also requires the bank to prepare
quarterly reports on the bank's financial condition and to conduct an annual
audit of its financial affairs in compliance with its minimum standards and
procedures.
Under the FDIC Improvement Act, 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, their federal regulatory agency, and their state
supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop
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. The FDIC
Improvement Act 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 the
following:
- internal controls;
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- information systems and audit systems;
- loan documentation;
- credit underwriting;
- interest rate risk exposure; and
- 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 Office of the Comptroller of the Currency or the
Federal Reserve Board to be troubled institutions must give the Office of the
Comptroller of the Currency or the Federal Reserve Board thirty days' prior
notice of the appointment of any senior executive officer or director. Within
the 30 day period, the Office of the Comptroller of the Currency 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 and Savings Association Insurance Fund are
maintained for commercial banks and savings associations 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 Bank Insurance Fund
or Savings Association Insurance Fund 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 semiannual basis. Once the Bank Insurance Fund
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually eliminating premiums for
well-capitalized banks, with a minimum semiannual assessment of $1,000. However,
in 1996 Congress enacted the Deposit Insurance Funds Act of 1996, which
eliminated even this minimum assessment. It also separated the Financial
Corporation assessment to service the interest on its bond obligations. The
amount assessed on individual institutions by the Financial Corporation
assessment is in addition to the amount paid for deposit insurance according to
the risk-related assessment rate schedule. Increases in deposit insurance
premiums or changes in risk classification will increase the bank's cost of
funds, and we may not be able to pass these costs on to our customers.
Transactions With Affiliates and Insiders. The bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which places 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, prohibits 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
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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 Office of the Comptroller of the Currency 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.
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 Office
of the Comptroller of the Currency. In addition, with prior regulatory approval,
the bank will be able to acquire existing banking operations in South Carolina.
Furthermore, federal legislation has recently been passed which permits
interstate branching. The new law permits out-of-state acquisitions by bank
holding companies, interstate branching by banks if allowed by state law, and
interstate merging by banks.
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, or the Office of the
Comptroller of the Currency shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on the bank.
Other Regulations. Interest and other charges collected or contracted
for by the bank are subject to state usury laws and federal laws concerning
interest rates. The bank's loan operations are also subject to 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.
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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. We have not
received any notice indicating that either the company or the bank 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 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.
The FDIC Improvement Act 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
10
<PAGE> 12
the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. Currently, we
qualify as "well capitalized."
Under the FDIC Improvement Act 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 do some or all of
the following:
- submit a capital restoration plan;
- raise additional capital;
- restrict their growth, deposit interest rates, and other
activities;
- improve their management;
- eliminate management fees; or
- 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 us in several ways. If we grow at a
rapid pace, our capital may be depleted too quickly, and a capital infusion from
the holding company may be necessary which could impact our ability to pay
dividends. Our capital levels currently are adequate; however, rapid growth,
poor loan portfolio performance, poor earnings performance, or a combination of
these factors could change our capital position in a relatively short period of
time.
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. The Financial Institution Report Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants 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 20 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, banking agencies'
power to issue cease-and-desist orders were expanded. Such orders may, among
other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or
guarantees against loss. A financial institution
11
<PAGE> 13
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.
Effect of Governmental Monetary Policies. Our earnings are affected by
domestic economic conditions and the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve Bank'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.
ITEM 2. DESCRIPTION OF PROPERTY
Gaffney Property. Our principal place of business 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. We completed construction of these facilities in late 1998 and
commenced operations from these new facilities in January 1999.
Blacksburg Property. We also operate a branch of the bank out of a
Blacksburg office facility at 207 West Cherokee Street, Blacksburg, South
Carolina 29702. The Blacksburg site is on approximately one acre of land. We
plan to construct a permanent banking facility of 2,500 square feet on the site
at an approximate cost of $500,000 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.
We believe that these facilities will adequately serve our needs for
the next 12 months 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.
In response to this Item, the information contained on page 36 of the
company's Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
12
<PAGE> 14
In response to this Item, the information contained on pages 4 through
15 of the company's Annual Report to Shareholders for the year ended December
31, 1999 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 17 through
34 of the company's Annual Report to Shareholders for the year ended December
31, 1999 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 9 of the
company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 6 through
7 of the company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 25, 2000 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 8 of the
company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 9 of the
company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000 is incorporated herein by reference.
13
<PAGE> 15
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)
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)
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C>
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,
1999
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- --------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1999.
15
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FNB BANCSHARES, INC.
Date: March 27, 2000 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 27 , 2000
- ------------------------------ ---------------
Richard D. Gardner Director
/s/ Barry Hamrick March 27, 2000
- ------------------------------ ---------------
Barry Hamrick Director
/s/ Haskell D. Mallory March 27, 2000
- ------------------------------ ---------------
Haskell D. Mallory Director
/s/ Bill Mason March 27, 2000
- ------------------------------ ---------------
Bill Mason Director
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ V. Stephen Moss March 27, 2000
- ------------------------------ ---------------
V. Stephen Moss Director;
President and CEO
/s/ Harold D. Pennington, Jr. March 27, 2000
- ------------------------------ ---------------
Harold D. Pennington, Jr. Director
/s/ Harold D. Pennington, Sr. March 27, 2000
- ------------------------------ ---------------
Harold D. Pennington, Sr. Director
/s/ Heyward W. Porter March 27, 2000
- ------------------------------ ---------------
Heyward W. Porter Director
/s/ John W. Hobbs Chief Financial Officer and March 27, 2000
- ------------------------------ Principal Accounting Officer ---------------
John W. Hobbs
</TABLE>
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
S-1, File No. 333-1546)
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Registration Statement on Form S-1, File No.
333-1546)
4.1 Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's Common
Stock (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, File No. 333-1546)
10.1 Option Agreement dated October 20, 1995, between James L.
Moss, as seller, and FNB Bancshares, Inc., as purchaser, for
the Blacksburg office property (incorporated by reference to
Exhibit 10.1 of the Registration Statement on Form S-1, File
No. 333-1546)
10.2 Option Agreement dated December 31, 1995, between William K.
Brumbach, Jr., Linwood B. Brumbach, Evelyn B. Sanles and
Patricia Brumbach Clary, as sellers, and FNB Bancshares, Inc.,
as purchaser, for the secondary parcel for the Gaffney Office
property (incorporated by reference to Exhibit 10.2 of the
Registration Statement on Form S-1, File No. 333-1546)
10.3 Option Agreement dated January 10, 1996, between Wylie L.
Hamrick and Catherine H. Beattie, as sellers, and FNB
Bancshares, Inc., as purchaser, for the primary parcel for the
Gaffney Office property (incorporated by reference to Exhibit
10.3 of the Registration Statement on Form S-1, File No.
333-1546)
10.4 Line of Credit Note dated September 27, 1995, by The Company
to The Bankers Bank (incorporated by reference to Exhibit 10.4
of the Registration Statement on Form S-1, File No. 333-1546)
10.5. Employment Agreement dated January 17, 1996, between the
Company and V. Stephen Moss (incorporated by reference to
Exhibit 10.5 of the Registration Statement on Form S-1, File
No. 333-1546)
10.6. Escrow Agreement dated March 8, 1996, between The Company and
The Bankers Bank (incorporated by reference to Exhibit 10.6 of
the Registration Statement on Form S-1, File No. 333-1546)
10.7 Commitment Letter dated March 27, 1996, from Spartanburg
National Bank for a $150,000 line of credit (incorporated by
reference to Exhibit 10.7 of the Registration Statement on
Form S-1, File No. 333-1546)
10.8 Stock Option Plan dated as of March 25, 1997 (incorporated by
reference to Exhibit 10.7 of the Annual Report on Form 10-KSB
filed by the Company for the year ended December 31, 1996)
13 Annual Report to Shareholders for the year ended December 31,
1999
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 13
FNB BANCSHARES, INC.
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Shareholders' Letter 2
Summary of Selected Financial Data 3
Management's Discussion and Analysis 4-15
Independent Auditors' Report 17
Consolidated Balance Sheets 18
Consolidated Statements of Income 19
Consolidated Statements of Changes in Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22-34
Directors, Officers and Services 35
Corporate Data 36
</TABLE>
<PAGE> 2
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 & Caskey, 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, 1999, 1998, 1997,
1996 and the period September 27, 1995
to December 31, 1995 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
Securities held to maturity $ 2,349 $ 1,800 $ 1,501 $ 344 $ -
Allowance for loan losses 429 303 153 20 -
Net loans 27,401 19,952 14,016 2,024 -
Premises and equipment - net 2,214 1,804 761 734 4
Total assets 35,196 28,035 19,920 11,733 75
Non-interest bearing deposits 4,565 3,070 2,478 1,125 -
Interest bearing deposits 22,670 18,026 11,082 4,679 -
Total deposits 27,235 21,096 13,560 5,804 -
Total liabilities 29,188 22,199 14,211 5,839 102
Total shareholders' equity 6,008 5,837 5,709 5,894 (27)
RESULTS OF OPERATIONS:
Interest income $ 2,660 $ 2,059 $ 1,248 $ 206 $ -
Interest expense 939 755 396 42 -
--------- --------- --------- --------- ---------
Net interest income 1,721 1,304 852 164 -
Provision for loan losses 140 160 138 20 -
--------- --------- --------- --------- ---------
Net interest income after provision 1,581 1,144 714 144 -
Other income 311 193 101 6 -
Other expenses 1,633 1,207 1,072 431 27
Income tax expense (benefit) 88 3 (72) (84) -
--------- --------- --------- --------- ---------
Net income (loss) $ 171 $ 127 $ (185) $ (197) $ (27)
========= ========= ========= ========= =========
PER SHARE DATA:
Weighted average common shares
outstanding 616,338 616,338 616,338 616,338 -
Basic earnings (loss) per share $ .28 $ .21 $ (.30) $ (.32) $ -
Diluted earnings (loss) per share $ .28 $ .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> 3
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.
1999 TO 1998:
Net income for the year ended December 31, 1999 was $171,249, or $.28 per
share, compared to $127,392, or $.21 per share, for the year ended December 31,
1998. An increase in net interest income of $417,360 over the 1998 amount of
$1,303,808 was the primary reason for the increase in net income from 1998 to
1999. Other income increased $117,269, or 60.5%, to $311,153 for the year ended
December 31, 1999 as compared to a year earlier. Other expenses increased from
$1,207,204 for 1998 to $1,633,137 for 1999.
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. 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.
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 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 $1,303,808 in 1998 to $1,721,168 in 1999,
resulting in an increase of 32.0%. Income from loans increased by 41.0% to
$2,408,140 for 1999, as compared to $1,707,484 for 1998. This increase was
attributable to the growth in the loan portfolio from $20,254,948 in 1998 to
$27,830,158 in 1999. There was also an increase in investment income of
$29,168, an increase of 26.78% over the 1998 amount of $108,917. The net
interest spread and net interest margin were 4.78% and 5.76% in 1999 as
compared to 4.32% and 5.55% in 1998.
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 interest spread and net interest margin were
3.85% and 5.63%, respectively, in 1997.
4
<PAGE> 4
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>
1999 1998
--------------------------------- ----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Taxable securities $ 2,358 $ 138 5.86% $ 1,856 $ 109 5.87%
Time deposits with other banks 17 1 5.88% 503 29 5.78%
Federal funds sold 2,265 113 4.99% 3,904 214 5.48%
Loans (1) 25,261 2,408 9.53% 17,222 1,707 9.91%
------- ------- ------- -------
Total earning assets 29,901 2,660 8.90% 23,485 2,059 8.77%
------- ------- ------- -------
Cash and due from banks 1,405 1,019
Allowance for loan losses (371) (227)
Premises and equipment 2,176 992
Other assets 607 566
------- -------
Total assets $33,718 $25,835
======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest bearing deposits $22,206 915 4.12% $16,368 731 4.47%
Advances from FHLB 25 2 8.00 -- -- --
Securities sold under agreements
to repurchase 538 22 4.09% 613 24 3.92%
------- ------- ------- -------
Total interest-
bearing liabilities 22,769 939 4.12% 16,981 755 4.45%
------- -------
Non-interest bearing deposits 4,797 2,951
Accrued interest and
other liabilities 258 160
Shareholders' equity 5,894 5,743
------- -------
Total liabilities and
shareholders' equity $33,718 $25,835
======= =======
Net interest income/
interest rate spread $ 1,721 4.78% $ 1,304 4.32%
======= ==== ======= ====
Net interest margin on earning assets 5.76% 5.55%
==== ====
</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> 5
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 1999 to 1998 and 1998 to 1997.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1999 compared with 1998 1998 compared with 1997
Variance Due to Variance Due to
(Dollars in thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
--------- ------- ----- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Taxable securities $ 28 $ 1 $ 29 $ 35 $ 3 $ 38
Time deposits with other banks (29) 1 (28) 13 -- 13
Federal funds sold (81) (20) (101) (59) (1) (60)
Loans 766 (65) 701 852 (32) 820
------ ------ ------ ------ ------ ------
Total interest income 684 (83) 601 841 (30) 811
------ ------ ------ ------ ------ ------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits 241 (57) 184 356 4 360
Advances from FHLB 1 -- 2 -- -- --
Securities sold under agreements
to repurchase (3) 1 (2) 1 (1) --
------ ------ ------ ------ ------ ------
Total interest expense 239 (56) 184 357 3 360
------ ------ ------ ------ ------ ------
Net interest income $ 445 $ (27) $ 417 $ 484 $ (33) $ 451
====== ====== ====== ====== ====== ======
</TABLE>
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
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, 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> 6
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, 1999. 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 $ -- $ -- $ 300 $ 2,133 $ -- $ 2,433
Federal funds sold 400 -- -- -- -- 400
Loans 7,910 1,212 576 13,663 4,469 27,830
-------- -------- -------- -------- -------- --------
Total 8,310 1,212 876 15,796 4,469 30,663
-------- -------- -------- -------- -------- --------
Interest bearing liabilities -
Interest bearing deposits(1) 12,296 5,428 3,980 966 -- 22,670
Advances from FHLB 1,000 -- -- -- -- 1,000
Securities sold under
agreements to repurchase 746 -- -- -- -- 746
-------- -------- -------- -------- -------- --------
14,042 5,428 3,980 966 -- 24,416
Interest sensitivity gap $ (5,732) $ (4,216) $ (3,104) $ 14,830 $ 4,469 $ 6,247
======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap $ (5,732) $ (9,948) $(13,052) $ 1,778 $ 6,247 $ 6,247
======== ======== ======== ======== ======== ========
Cumulative gap ratio(2) (18.69)% (32.44)% (42.57)% 5.80% 20.37%
======== ======== ======== ======== ========
</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. Advances from the Federal Home Loan Bank
mature on a daily basis and are reflected in the earliest pricing period.
7
<PAGE> 7
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 1999, the Company
transferred $139,750 from earnings to the reserve for loan losses, increasing
the balance to $429,049 on December 31, 1999 after deducting current year net
charge offs.
Reserve for loan losses was approximately 1.54% and 1.50% of total loans on
December 31, 1999 and 1998, respectively. As the Company continues to mature,
management will evaluate its reserve policy and adjust the policy based on
historical loss experience, changes in economic conditions, growth in the
portfolio and evaluations of specific loans. Management believes the level of
the allowance for loan losses is sufficient to provide for potential losses in
the loan portfolio. However, management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can
be no assurance that 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, 1999 was $311,153, as compared to
$193,884 for the year ended December 31, 1998. The most significant portion of
other income was from NSF/overdraft charges which totaled $140,309, as compared
to $92,586 in the prior year.
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 EXPENSES
Non-interest expenses were $1,633,137 for the year ended December 31, 1999, as
compared to $1,207,204 for the year ended December 31, 1998. This was comprised
of salaries and employee benefits of $790,095, furniture and equipment expense
of $142,891, occupancy expense of $105,272, data processing expense of
$136,866, disposal of fixed assets expense of $45,894, office supplies expense
of $44,665, and other operating expenses of $367,454.
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
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.
8
<PAGE> 8
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
For the year ended December 31, 1999, the Company recorded income tax expense
in the amount of $88,185. This resulted in an effective tax rate of 34%. Net
operating loss carryforwards from prior years were used to reduce the income
tax expense in 1998. For the year ended December 31, 1998, the Company recorded
income tax expense in the amount of $3,096.
CAPITAL RESOURCES
Total capital of the Company was increased by net income in 1999 of $171,249.
Total capital of the Company was increased by net income in 1998 of $127,392.
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 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 $ 4,563,020 $ 6,007,822
Less: intangibles (26,461) (33,107)
-------------- --------------
Total Tier 1 capital 4,536,559 5,974,715
Tier 2 capital:
Allowable allowance for loan losses 351,292 351,354
-------------- --------------
Tier 2 capital additions 351,292 351,354
-------------- --------------
Total capital $ 4,887,851 $ 6,326,069
============== ==============
Risk adjusted assets $ 28,103,350 $ 28,108,384
============== ==============
Total assets $ 35,185,486 $ 35,195,556
============== ==============
Risk-based capital ratios:
Tier 1 capital 16.14% 21.26%
Total capital 17.39 22.51
Tier 1 leverage ratio 12.89 16.98
</TABLE>
9
<PAGE> 9
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. Advances from the Federal
Home Loan Bank were also obtained in 1999 for liquidity purposes. Management
has established policies and procedures governing the length of time to
maturity on loans and investments. 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, 1999 and 1998.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
HELD TO MATURITY
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
U.S. Treasury securities $ - $ 550,619
U.S. Government agencies and corporations 2,349,326 1,249,172
Nonmarketable equity securities 83,700 71,100
----------- ------------
Total securities
$ 2,433,026 $ 1,870,891
=========== ============
</TABLE>
INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELDS
<TABLE>
<CAPTION>
1999
---------------------
Amount Yield
------ -----
<S> <C> <C>
U.S. Treasury and U.S. Government agencies due:
Within one year $ 300,000 5.18%
After one year but within five years 2,049,326 5.51
----------- -----
$ 2,349,326 5.47%
=========== ====
</TABLE>
10
<PAGE> 10
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 is expected
to grow or contract disproportionately in 2000.
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 $27,830,158 and $20,254,948 at December 31, 1999
and 1998, 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 to any particular individuals or industry or group of
related individuals or industries.
The Company's ratio of loans to deposits was 102% and 96% on December 31, 1999
and 1998, 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> 11
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 5,831 $ 5,212
Real estate - construction 404 567
Real estate - mortgage 15,971 9,571
Consumer and other 5,624 4,905
-------- --------
$ 27,830 $ 20,255
======== ========
</TABLE>
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:
The following table summarizes the loan maturity distribution, by type, at
December 31, 1999 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 $ 3,215,022 $ 2,495,591 $ 120,174 $ 5,830,787
Real estate - construction 129,309 274,996 - 404,305
Real estate - mortgage 4,672,878 7,321,797 3,976,854 15,971,529
Consumer and other 1,680,468 3,570,740 372,329 5,623,537
-------------- -------------- -------------- --------------
$ 9,697,677 $ 13,663,124 $ 4,469,357 $ 27,830,158
============== ============== ============== ==============
Predetermined rate,
maturing greater than one year $ 13,663,124 $ 4,469,357 $ 18,132,481
============== ============== ==============
Variable rate or maturing
within one year $ 9,697,677 $ 9,697,677
============== ==============
</TABLE>
RISK ELEMENTS
At December 31, 1999, there were no loans past due 90 days or more and still
accruing interest and ten loans totaling $266,444 in nonaccrual status. 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.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Loans outstanding at the end of year $ 27,830,158 $ 20,254,948
============== ==============
Average amount of loans outstanding $ 25,261,533 $ 17,221,796
============== ==============
Balance, beginning of year $ 303,248 $ 152,614
Total loans charged off (26,905) (9,768)
Recoveries of loans previously charged off 12,956 402
-------------- --------------
Net charge-offs (13,949) (9,366)
-------------- --------------
Provision charged to operations 139,750 160,000
-------------- --------------
Balance, end of year $ 429,049 $ 303,248
============== ==============
Ratios:
Allowance for loan losses to average loans 1.70% 1.76%
Allowance for loan losses to loans, end of year 1.54% 1.50%
</TABLE>
12
<PAGE> 12
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, 1999.
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, 1999, 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 $26,979,658 and $19,319,869 during 1999 and 1998,
respectively. Certificates of deposit over $100,000 totaled $3,334,148 and
$2,988,725 at December 31, 1999 and 1998, respectively. Of this total, scheduled
maturities of three months or less were $858,240 at December 31, 1999; over
three months through six months were $1,687,543 at December 31, 1999; over six
months through twelve months were $788,365 at December 31, 1999; and none over
twelve months at December 31,1998.
The following table summarizes the Bank's deposits for the years ended December
31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------------------------- ----------------------------
(Dollars in thousands) Percent Percent
Amount of Deposits Amount of Deposits
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 4,565 16.76% $ 3,070 14.55%
Interest bearing transaction accounts 4,363 16.02% 3,281 15.55%
Savings 4,136 15.19% 3,116 14.77%
Certificates of deposit 14,171 52.03% 11,629 55.13%
-------- -------- -------- --------
$ 27,235 100.00% $ 21,096 100.00%
======== ====== ======== ======
</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 $23,900,816 and
$18,107,111 at December 31, 1999 and 1998, respectively.
13
<PAGE> 13
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank totaled $1,000,000 at December 31,
1999. The advance was obtained primarily to meet possible liquidity needs
associated with Year 2000. The advance matures on a daily basis and averaged
$24,658 during 1999.
SHORT-TERM BORROWINGS
At December 31, 1999 and 1998 the Company had short term borrowings which
consisted of securities sold under agreements to repurchase of $746,181 and
$869,269, 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
$764,154 and $1,089,170 during 1999 and 1998, respectively. The average interest
rate paid on the repurchase agreement was 4.00% during 1998 and 1999.
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 five.
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Return on average assets .51% .49%
Return on average equity 2.91% 2.21%
Equity to assets ratio 17.48% 22.23%
</TABLE>
ACCOUNTING AND FINANCIAL REPORTING ISSUES
In February 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits". SFAS 132 amends SFAS 87, 88, and
106 and revises employer's disclosures about pensions and other post-retirement
benefit plans. It does not change the measurement or recognition of those plans.
At December 31, 1999, the Company was not affected by this Statement.
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
was effective for fiscal years beginning after June 15, 1999, but was amended by
SFAS 137.
The Company was not affected by Financial Accounting Standards Board Statements
134, 135 or 136.
In 1999, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." As stated, this Statement delays the effective date for the
implementation of SFAS 133.
This Statement is effective for fiscal years beginning after June 15, 2000.
14
<PAGE> 14
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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; (iii) the Company's
growth and operating strategies; and (iv) the quality of the Company's loan
portfolio. 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).
On November 4, 1999, the U.S. Senate and House of Representatives each passed
the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton in
November 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new "financial holding company" under
the Bank Holding Company Act, which will permit holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities. The Act is intended to grant to
community banks certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis. Nevertheless, the Act may have the result
of increasing the amount of competition that the Bank faces from larger
institutions and other types of companies. In fact, it is not possible to
predict the full effect that the Act will have on the Bank.
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Bank cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect the
Bank.
15
<PAGE> 15
FNB BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE YEAR 2000
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts were concerned that on
January 1, 2000, some computers would not be able to interpret the new year
properly, causing computer malfunctions. Although this did not happen, some
experts remain concerned that computer malfunctions may occur on other key dates
during 2000, such as October 10, 2000.
In accordance with bank regulatory guidelines, we developed and executed a plan
to ensure that our computer and telecommunication systems do not have these Year
2000 problems. We rely on third party vendors to supply our computer and
telecommunication systems and other office equipment, and to process our data
and account information. Because we commenced operations in 1996, we had the
ability to choose vendors which we believed to be ready for the Year 2000. Our
Year 2000 plan extends to all of our vendors, including our vendors for core
data processing system, ATM hardware, account origination software, telephone
systems, and suppliers of office equipment, such as copy and fax machines. Under
our plan, we reviewed the test results, assurances, and warranties of all of
these vendors, and we believe that all these systems are Year 2000 compliant.
Our technology and processing vendors work with many other financial
institutions, all of which, like us, are required by their bank regulators to be
Year 2000 compliant. Because our systems are substantially similar to those used
in many other banks, we believe that the scrutiny imposed by our regulators and
the banking industry in general have significantly reduced the Year 2000 related
risks we might otherwise have faced.
We incurred approximately $40,000 in expenses in 1999 to implement our Year 2000
plan. Under our plan, we will continue to monitor the situation throughout 2000.
We are executing this plan under the supervision of our chief financial officer,
with oversight from our board of directors.
Our agreements with each of our primary vendors include contractual assurances
and warranties regarding Year 2000 compliance. Some of these warranties are
limited by disclaimers of liability which specifically exclude special,
incidental, indirect, and consequential damages. These limitations could limit
our ability to obtain recourse against a vendor who is not Year 2000 compliant
by excluding damages for things such as lost profits and customer lawsuits.
We have also evaluated our worst case scenario and developed contingency plans
in case Year 2000 issues do arise. In the worst case, our systems would be down
for a period of time and we would be required to complete all transactions and
keep all records manually. We will have all required forms and procedures in
place for manual processing, and believe we can do this for at least a week
without serious disruption of our business. We do not believe we will encounter
any issues that cannot be resolved within this period. Any affected systems
which cannot be fixed will be replaced with alternatives, although this is
unlikely to be necessary.
The Year 2000 issue may also negatively affect the business of our customers,
but to date we are not aware of any material Year 2000 issues affecting them. We
include Year 2000 readiness in our lending criteria to minimize risk. However,
this will not eliminate the issue, and any financial difficulties our customers'
experience caused by Year 2000 issues could impair their ability to repay loans
to the bank.
We did not have any significant Year 2000 problems on January 1, 2000, and we do
not expect to experience any significant Year 2000 problems. We also believe
that we will be able to continue to operate the business if one or more of our
vendors experience unanticipated Year 2000 problems.
16
<PAGE> 16
TOURVILLE, SIMPSON & CASKEY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
POST OFFICE BOX 1769
COLUMBIA, SOUTH CAROLINA 29202
TELEPHONE (803) 252-3000
FAX (803) 252-2226
WILLIAM E. TOURVILLE, CPA MEMBER AICPA SEC AND
HARRIET S. SIMPSON, CPA, CISA, CCP PRIVATE COMPANIES
R. JASON CASKEY, CPA PRACTICE SECTIONS
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, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and
1998, and the consolidated results of their operations and cash flows for
the years ended December 31, 1999, 1998 and 1997 in confomity with
generally accepted accounting principles.
Tourville, Simpson & Caskey, L.L.P.
February 25, 2000
Columbia, South Carolina
17
<PAGE> 17
FNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 1,512,403 $ 1,017,765
Federal funds sold 400,000 2,350,000
-------------- --------------
1,912,403 3,367,765
Securities:
Securities held to maturity (estimated market value of
$2,318,372 in 1999 and $1,803,397 in 1998) 2,349,326 1,799,791
Nonmarketable equity securities 83,700 71,100
-------------- --------------
2,433,026 1,870,891
Time deposits with other banks -- 500,000
Loans receivable 27,830,158 20,254,948
Less allowance for loan losses (429,049) (303,248)
-------------- --------------
Loans, net 27,401,109 19,951,700
Premises and equipment, net 2,213,812 1,803,557
Accrued interest receivable 207,676 127,576
Other assets 1,027,530 413,590
-------------- --------------
Total assets $ 35,195,556 $ 28,035,079
============== ==============
LIABILITIES
Deposits:
Non-interest bearing transaction accounts $ 4,565,052 $ 3,070,299
Interest bearing transaction accounts 4,362,742 3,281,387
Savings 4,136,103 3,115,763
Time deposits $100,000 and over 3,334,148 2,988,725
Other time deposits 10,836,919 8,639,662
-------------- --------------
27,234,964 21,095,836
Advances from the Federal Home Loan Bank 1,000,000 --
Securities sold under agreements to repurchase 746,181 869,269
Accrued interest payable 49,745 47,799
Other liabilities 156,844 185,602
-------------- --------------
Total liabilities 29,187,734 22,198,506
-------------- --------------
Commitments and Contingencies (Notes D and P)
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 1999 and 1998 6,163 6,163
Capital surplus 6,112,318 6,112,318
Retained earnings (deficit) (110,659) (281,908)
-------------- --------------
Total shareholders' equity 6,007,822 5,836,573
-------------- --------------
Total liabilities and shareholders' equity $ 35,195,556 $ 28,035,079
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 18
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,408,140 $ 1,707,484 $ 886,790
Investment securities, taxable 138,085 108,917 70,974
Federal funds sold 112,666 213,852 273,854
Time deposits with other banks 1,000 29,071 16,239
------------ ------------ ------------
2,659,891 2,059,324 1,247,857
------------ ------------ ------------
INTEREST EXPENSE
Time deposits $100,000 and over 177,710 161,021 90,839
Other deposits 737,792 570,226 281,029
Advances from the Federal Home Loan Bank 1,709 -- --
Securities sold under agreements to repurchase 21,512 24,269 23,656
------------ ------------ ------------
938,723 755,516 395,524
------------ ------------ ------------
NET INTEREST INCOME 1,721,168 1,303,808 852,333
Provision for loan losses 139,750 160,000 138,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,581,418 1,143,808 714,333
------------ ------------ ------------
OTHER INCOME
Service charges on deposit accounts 32,878 22,962 10,882
NSF and overdraft fees 140,309 92,586 45,292
Mortgage origination fees 75,697 30,546 4,490
Other service charges, commissions and fees 62,269 47,790 39,952
------------ ------------ ------------
311,153 193,884 100,616
------------ ------------ ------------
OTHER EXPENSE
Salaries and employee benefits 790,095 623,635 586,135
Occupancy expense 105,272 95,484 95,653
Furniture and equipment 142,891 103,590 80,523
Disposal of assets 45,894 -- --
Office supplies 44,665 32,256 32,779
Data processing 136,866 74,510 19,630
Other operating expense 367,454 277,729 257,375
------------ ------------ ------------
1,633,137 1,207,204 1,072,095
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 259,434 130,488 (257,146)
Income tax expense (benefit) 88,185 3,096 (72,001)
------------ ------------ ------------
NET INCOME (LOSS) $ 171,249 $ 127,392 $ (185,145)
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ .28 $ .21 $ (.30)
DILUTED EARNINGS (LOSS) PER SHARE $ .28 $ .21 $ (.30)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 19
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Retained
Common Stock Capital Earnings
Shares Amount Surplus (Deficit) Total
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Net income 171,249 171,249
------------ ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1999 616,338 $ 6,163 $ 6,112,318 $ (110,659) $ 6,007,822
============ ============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 20
FNB BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 171,249 $ 127,392 $ (185,145)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Provision for loan losses 139,750 160,000 138,000
Depreciation 172,684 92,902 85,551
Accretion and premium amortization 467 165 (4,737)
Writedown on disposal of assets 45,894 -- --
Deferred income taxes (11,343) (3,695) (76,041)
Increase in interest receivable (80,100) (5,077) (111,319)
Increase (decrease) in interest payable 1,946 (25,033) 52,619
(Increase) decrease in other assets (32,636) 72,089 (59,507)
Increase (decrease) in other liabilities (28,758) 31,588 140,017
------------ ------------ ------------
Net cash provided (used) by operating activities 379,153 450,331 (20,562)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held to maturity (1,912,602) (2,469,725) (2,102,404)
Maturities of securities held to maturity 1,350,000 2,100,000 950,000
Purchases of time deposits with other banks -- (1,000,000) (600,000)
Maturities of time deposits with other banks 500,000 1,100,000 --
Net increase in loans made to customers (8,159,120) (6,095,482) (12,130,246)
Purchases of premises and equipment (628,833) (1,135,616) (111,951)
------------ ------------ ------------
Net cash used by investing activities (8,850,555) (7,500,823) (13,994,601)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest
bearing transaction accounts and savings accounts 3,596,448 3,098,948 3,458,332
Net increase in time deposits 2,542,680 4,437,020 4,297,171
Increase (decrease) in securities sold under
agreements to repurchase (123,088) 444,856 424,413
Advances from the FHLB 1,000,000 -- --
------------ ------------ ------------
Net cash provided by financing activities 7,016,040 7,980,824 8,179,916
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,455,362) 930,332 (5,835,247)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,367,765 2,437,433 8,272,680
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,912,403 $ 3,367,765 $ 2,437,433
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 936,777 $ 780,549 $ 342,905
Cash paid during the year for taxes $ 88,141 -- --
SUPPLEMENTAL NONCASH INVESTING ACTIVITIES:
Loans transferred to repossessed assets $ 569,961 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 21
EXHIBIT 13
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.
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.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Bank 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. By policy, time deposits are limited to amounts insured
by the FDIC. Management believes credit risk associated with these financial
instruments is not significant.
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 was a $1,000,000
outstanding advance at December 31, 1999. At December 31, 1999 and 1998, the
investment in Federal Home Loan Bank stock was $83,700 and $71,100,
respectively.
FORECLOSED ASSETS - Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.
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.
22
<PAGE> 22
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
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.
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. The investment in Federal
Reserve Bank Stock was $132,450 and $126,450 at December 31, 1999 and 1998,
respectively.
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
1999 and 1998 for the plan were $5,727 and $4,096, respectively.
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.
23
<PAGE> 23
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.
RECLASSIFICATIONS - Certain captions and amounts in the financial statements of
1998 and 1997 were reclassified to conform with the 1999 presentation.
NOTE B - 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 C - INVESTMENT SECURITIES
The amortized costs and estimated market values of securities held to maturity
at December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
U.S. Government agencies and corporations $2,349,326 $ -- $ 30,954 $2,318,372
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
The following is a summary of maturities of securities held to maturity as of
December 31, 1999. 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 $ 300,000 $ 297,000
Due within one to five years 2,049,326 2,021,372
---------- ----------
$2,349,326 $2,318,372
========== ==========
</TABLE>
At December 31, 1999 and 1998 investment securities with a book value of
$2,349,326 and $1,799,791, respectively, and a market value of $2,318,372 and
$1,803,397, respectively, were pledged as collateral to secure public deposits
and for other purposes as required and permitted by law.
24
<PAGE> 24
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LOANS
Major classifications of loans receivable as of December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commercial, financial and agricultural $ 5,830,787 $ 5,212,393
Real estate - construction 404,305 566,720
Real estate - other 15,971,529 9,571,462
Consumer and other 5,623,537 4,904,373
----------- -----------
Total gross loans $27,830,158 $20,254,948
=========== ===========
</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, 1999, 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,
1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 303,248 $ 152,614 $ 20,000
Provision charged to operations 139,750 160,000 138,000
Recoveries on loans previously charged off 12,956 402 --
Loans charged off (26,905) (9,768) (5,386)
--------- --------- ---------
Balance, end of year $ 429,049 $ 303,248 $ 152,614
========= ========= =========
</TABLE>
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. A commitment involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company's exposure to credit
loss in the event of non-performance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Letters of credit are conditional
commitments issued to guarantee a customer's performance to a third party and
have essentially the same credit risk as other lending facilities.
25
<PAGE> 25
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LOANS - CONTINUED
The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Commitments to extend credit $ 3,365,542 $ 3,930,657
</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 E - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land $ 245,492 $ 245,492
Building and land improvements 1,709,998 297,927
Furniture and equipment 615,801 380,578
Construction in progress -- 1,070,610
----------- -----------
2,571,291 1,994,607
Less, accumulated depreciation (357,479) (191,050)
----------- -----------
Premises and equipment, net $ 2,213,812 $ 1,803,557
=========== ===========
</TABLE>
NOTE F - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2000 $13,204,724
2001 895,857
2002 4,839
2003 65,647
-----------
$14,171,067
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consisted of a $1,000,000 variable rate
advance bearing an interest rate of 4.55%. The advance is scheduled to mature on
December 21, 2000.
As collateral, the Company has pledged first mortgage loans on one to four
family residential loans totaling $2,615,013 at December 31, 1999. In addition,
the Company's Federal Home Loan Bank stock is pledged to secure the borrowings.
26
<PAGE> 26
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1999 and 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 years ended December 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Average balance during the year $ 538,136 $ 612,632
Average interest rate during the year 4.0% 4.0%
Maximum month-end balance during the year $ 764,154 $1,089,170
</TABLE>
As of December 31, 1999 and 1998, the amortized costs and market values of the
securities underlying the agreements were $1,499,470 and $1,099,791 and
$1,476,357 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, 1999 and 1998 the Company had related
party loans totaling $99,443, and $36,517, respectively. During 1999, $261,322
of new loans were made to related parties and repayments totaled $198,396.
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, 1999 and 1998.
NOTE K - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Currently payable
Federal $ 94,687 $ -- $ 3,823
State 5,167 -- 217
-------- -------- --------
Currently payable income tax expense 99,854 -- 4,040
-------- -------- --------
Deferred income taxes
Federal (13,684) (2,811) (64,599)
State 2,015 5,907 (11,442)
-------- -------- --------
Deferred income tax expense (benefit) (11,669) 3,096 (76,041)
-------- -------- --------
Total income tax expense (benefit) $ 88,185 $ 3,096 $(72,001)
======== ======== ========
</TABLE>
27
<PAGE> 27
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - INCOME TAXES - CONTINUED
The gross amounts of deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $146,720 $100,320
Organization costs 33,286 51,623
Accumulated depreciation 320 -
Net operating loss carryforward - 35,689
-------- --------
Total deferred tax assets 180,326 187,632
Deferred tax liabilities -
Accumulated depreciation - 18,649
-------- --------
Net deferred tax assets $180,326 $168,983
======== ========
</TABLE>
As of December 31, 1999 the Company has utilized all of its net operating loss
carryforward.
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, 1999 will be
realized and, accordingly, has not established a valuation allowance.
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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax expense at statutory rate $ 88,208 $ 44,366 $ (87,430)
Surtax exemption (1,702) (10,226) 28,598
State income tax, net of federal income tax benefit 5,425 5,907 (11,299)
Other, net (3,746) (36,951) (1,870)
--------- --------- ---------
$ 88,185 $ 3,096 $ (72,001)
========= ========= =========
</TABLE>
NOTE L - OTHER EXPENSES
Other expenses for the years ended December 31, 1999, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Amortization of organizational costs $ 14,460 $ 17,850 $ 18,276
Correspondent bank fees 26,087 18,012 12,111
Printing and postage 27,650 17,782 13,799
Advertising and promotion 22,085 14,149 15,519
Legal and accounting 33,000 27,530 46,504
Telephone 25,053 22,729 23,485
ATM surcharges 24,095 9,459 1,989
Courier 18,695 16,975 17,913
Other 176,329 133,243 107,779
--------- --------- ---------
$ 367,454 $ 277,729 $ 257,375
========= ========= =========
</TABLE>
28
<PAGE> 28
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK-BASED COMPENSATION
The Company has an Incentive Stock Option Plan (Stock Plan) which provides for
the granting of options to purchase up to 152,450 shares of the Company's
common stock to directors, officers, or employees of the Company. The per-share
exercise price of incentive stock options granted under the Stock Plan may not
be less than the fair market value of a share on the date of grant, nor can the
exercise date of any incentive stock options granted be less than one year from
the date of the grant. The per-share exercise price of stock options granted is
determined by a committee appointed by the Board of Directors. The expiration
date of any option may not be greater than ten years from the date of grant.
Options that expire unexercised or are canceled become available for issuance.
At December 31, 1999 there were 41,319 options available for grant.
The Company applies 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, 1999, 1998 and 1997 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported $171,249 $ 127,392 $(185,145)
Pro forma 167,839 82,909 (228,021)
Basic earnings (loss) per share:
As reported $ .28 $ .21 $ (.30)
Pro forma .27 .13 (.37)
Diluted earnings (loss) per share:
As reported $ .28 $ .21 $ (.30)
Pro forma .27 .13 (.37)
</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 1999 and
1998: dividend yield of 0 percent; expected volatility of 0 percent; risk-free
interest rates of 5.56% and 4.62% for 1999 and 1998, 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 1999 and 1998 is $4.21, and $3.67,
respectively.
A summary of the status of the Company's stock option plan as of December 31,
1999, 1998 and 1997 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------------------ ---------- ----------------- ----------- -----------------
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 102,846 $ 10.00 45,566 $ 10.00 50,566 $ 10.00
Granted 8,285 10.00 57,280 10.00 - -
Exercised - - - - - -
Canceled - - - - (5,000) 10.00
--------- ---------- -----------
Outstanding at end
of year 111,131 10.00 102,846 10.00 45,566 10.00
========= ========== ===========
</TABLE>
29
<PAGE> 29
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK-BASED COMPENSATION - CONTINUED
Options exercisable at December 31, 1999, 1998 and 1997 were 38,795, 18,226,
and 9,113, respectively.
At December 31, 1999 the outstanding stock options had a weighted average
remaining life of 8.13 years and a remaining life of 7.52 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, 1999, 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 judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. The following methods and assumptions were used to estimate the fair
value of significant financial instruments:
Cash and Due from Banks - The carrying amount is a reasonable estimate of fair
value.
Federal Funds Sold - Federal funds sold are for a term of one day, and the
carrying amount approximates the fair value.
Investment Securities - The fair values of marketable securities held to
maturity are based on quoted market prices or dealer quotes.
Time Deposits with other Banks - The carrying amount is a reasonable estimate
of fair value.
Loans - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk and credit
card receivables, fair values are based on the carrying amounts. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to the borrowers with
similar credit ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market
accounts is the amount payable on demand at the reporting date. The fair values
of time deposits are estimated using a discounted cash flow calculation that
applies current interest rates to a schedule of aggregated expected maturities.
Advances from the Federal Home Loan Bank - The carrying amounts of variable
rate borrowings are reasonable estimates of fair value because they can be
repriced frequently. The fair values of fixed rate borrowings are estimated
using a discounted cash flow calculation that applies the Company's current
borrowing rate from the FHLB.
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.
30
<PAGE> 30
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 1,512,403 $ 1,512,403 $ 1,017,765 $ 1,017,765
Federal funds sold 400,000 400,000 2,350,000 2,350,000
Securities held-to-maturity 2,433,026 2,402,072 1,870,891 1,874,497
Time deposits with other banks -- -- 500,000 500,000
Loans 27,830,158 27,943,854 20,254,948 20,335,093
Allowance for loan losses (429,049) (429,049) (303,248) (303,248)
Accrued interest receivable 207,676 207,676 127,576 127,576
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing
transaction, and savings accounts $ 13,063,897 $ 13,063,897 $ 9,467,449 $ 9,467,449
Time deposits 14,171,067 14,123,135 11,628,387 11,614,361
Advances from the FHLB 1,000,000 1,000,000 -- --
Securities sold under agreements
to repurchase 746,181 746,181 869,269 869,269
Accrued interest payable 49,745 49,745 47,799 47,799
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit $ 3,365,542 $ 3,365,542 $ 3,930,657 $ 3,930,657
</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, 1999, 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.
NOTE Q - EARNINGS PER SHARE
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.
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 111,131 and
102,846 shares of common stock at $10 per share were outstanding at December
31, 1999 and 1998, 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.
31
<PAGE> 31
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier I and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier I capital consists of common 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, 1999, 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, 1999 and 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Total capital
(to risk weighted assets) $4,887,851 17.39% $2,248,268 8.00% $2,810,335 10.00%
Tier 1 capital
(to risk weighted assets) 4,536,559 16.14 1,124,134 4.00 1,686,201 6.00
Tier 1 capital
(to average assets) 4,536,559 12.89 1,441,769 4.00 1,802,212 5.00
DECEMBER 31, 1998
Total capital
(to risk weighted assets) $4,450,377 20.57% $1,731,066 8.00% $2,163,833 10.00%
Tier 1 capital
(to risk weighted assets) 4,179,494 19.32 865,533 4.00 1,298,299 6.00
Tier 1 capital
(to average assets) 4,179,494 13.96 1,197,244 4.00 1,496,555 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.
32
<PAGE> 32
FNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - FNB BANCSHARES, INC. (PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,435,988 $ 1,372,700
Investment in banking subsidiary 4,563,020 4,389,400
Other assets 10,069 74,473
-------------- --------------
Total assets $ 6,009,077 $ 5,836,573
============== ==============
Other liabilities $ 1,255 $ -
Shareholders' equity
Common stock 6,163 6,163
Capital surplus 6,112,318 6,112,318
Retained earnings (deficit) (110,659) (281,908)
-------------- --------------
Total liabilities and shareholders' equity $ 6,009,077 $ 5,836,573
============== ==============
</TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income
Interest income $ -- $ -- $ 15,611
Expenses (3,625) (3,650) (11,263)
--------- --------- ---------
Income before income taxes and equity in
undistributed earnings (losses) of banking subsidiary (3,625) (3,650) 4,348
Income tax expense (benefit) 1,254 1,352 1,217
Equity in undistributed earnings (losses)
of banking subsidiary 173,620 129,690 (188,276)
--------- --------- ---------
Net income (loss) $ 171,249 $ 127,392 $(185,145)
========= ========= =========
</TABLE>
33
<PAGE> 33
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, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 171,249 $ 127,392 $ (185,145)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
(Increase) decrease in other assets 64,404 828 (15,834)
Increase (decrease) in other liabilities 1,255 -- (100)
Equity in undistributed (earnings) losses of
banking subsidiary (173,620) (129,690) 188,276
--------- --------- ---------
Net cash provided (used) by operating activities 63,288 (1,470) (12,803)
--------- --------- ---------
Net increase in cash 63,288 (1,470) (12,803)
Cash, beginning 1,372,700 1,374,170 1,386,973
--------- --------- ---------
Cash, ending $1,435,988 $1,372,700 $1,374,170
========== ========== ==========
</TABLE>
34
<PAGE> 34
FNB BANCSHARES, INC.
BOARD OF DIRECTORS
<TABLE>
<S> <C>
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
</TABLE>
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>
35
<PAGE> 35
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 25, 2000 at our offices at 217 North Granard Street, Gaffney,
South Carolina.
<TABLE>
<CAPTION>
CORPORATE OFFICE: GENERAL COUNSEL:
<S> <C>
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 & Caskey, L.L.P.
P.O. Box 29 P.O. Box 1769
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 were at $10.00 per share. As of December
31, 1999, there were 557 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 the Company in the form of cash dividends. All of the
Bank's dividends to the Company 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.
36
<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 FROM THE
FINANCIAL STATEMENTS OF FNB BANCSHARES, INC. FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,512,403
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,349,326
<INVESTMENTS-MARKET> 2,318,372
<LOANS> 27,830,158
<ALLOWANCE> 429,049
<TOTAL-ASSETS> 35,195,556
<DEPOSITS> 27,234,964
<SHORT-TERM> 746,181
<LIABILITIES-OTHER> 206,589
<LONG-TERM> 0
0
0
<COMMON> 6,163
<OTHER-SE> 6,001,659
<TOTAL-LIABILITIES-AND-EQUITY> 35,195,556
<INTEREST-LOAN> 2,408,140
<INTEREST-INVEST> 138,085
<INTEREST-OTHER> 113,666
<INTEREST-TOTAL> 2,659,891
<INTEREST-DEPOSIT> 915,502
<INTEREST-EXPENSE> 938,723
<INTEREST-INCOME-NET> 1,721,168
<LOAN-LOSSES> 139,750
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,633,137
<INCOME-PRETAX> 259,434
<INCOME-PRE-EXTRAORDINARY> 259,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 171,249
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 5.76
<LOANS-NON> 266,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 411,347
<ALLOWANCE-OPEN> 303,248
<CHARGE-OFFS> 26,905
<RECOVERIES> 12,956
<ALLOWANCE-CLOSE> 429,049
<ALLOWANCE-DOMESTIC> 429,049
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
