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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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Commission File Number 33-37078
FNC BANCORP, INC.
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(Name of small business issuer as specified in its charter)
Georgia 58-1910615
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 South Madison Avenue, Douglas, Georgia 31533
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (912) 384-1100
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act: Common Stock
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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 the past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X] Not Applicable
Issuer's revenues for its most recent fiscal year were $4,151,234.
The aggregate market value of the voting stock held by non-affiliates of
issuer at March 25, 1997 was $3,418,470 based on the average price of known
occasional private sales of its common stock during 1996, although there is
no established trading market.
The number of shares outstanding of issuer's class of common stock at March
25, 1997 was 405,710 shares of common stock.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (Check one): Yes No X
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FNC BANCORP, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 1996
Table of Contents
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Item Page
Number Number
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Part I
1. Description of Business . . . . . . . . . . . . . . 3
2. Description of Property . . . . . . . . . . . . . . 32
3. Legal Proceedings . . . . . . . . . . . . . . . . . 32
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . 32
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . 33
6. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . 33
7. Financial Statements . . . . . . . . . . . . . . . 40
8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . 40
Part III
9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act . . . . . . . . 61
10. Executive Compensation . . . . . . . . . . . . . . 64
11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . 67
12. Certain Relationships and Related Transactions . . 68
13. Exhibits and Reports on Form 8-K . . . . . . . . . 69
Signatures . . . . . . . . . . . . . . . . . . . . 70
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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The Company
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FNC Bancorp, Inc. (the "Company") was incorporated under the laws of
Georgia on September 19, 1990 to serve as a bank holding company for First
National Bank of Coffee County (In Organization) (the "Bank"). A charter for
the Bank was issued by the Office of the Comptroller of the Currency (the
"OCC") and the Bank commenced operations on September 23, 1991.
The Company's offices are located at 420 South Madison Avenue, Douglas,
Georgia and its telephone number is (912)384-1100. The Company maintains its
offices at the office of First National Bank of Coffee County at this
address.
On January 8, 1991, the Company commenced an offering of a minimum of
360,000 and a maximum of 500,000 shares of its Common Stock, $1.00 par value
per share, to the public at a price of $10.00 per share to raise funds to
capitalize and acquire all of the stock of the Bank. The Company completed
its stock offering with the sale of 405,710 shares by December 31, 1991. Of
the proceeds of the stock sold, $3,500,000 was used to acquire all of the
stock of the bank upon its being issued a charter and commencing operations.
The Company received all required federal and state regulatory approvals to
become a bank holding company.
The Company has been organized to facilitate the Bank's ability to serve
its current and future customers' requirements for financial services. The
holding company structure provides flexibility for expansion of the Company's
banking business through the possible acquisition of other financial
institutions and the provision of additional banking-related services which a
traditional commercial bank may not provide under present laws. The holding
company structure also affords additional flexibility in terms of capital
formation and financing opportunities. Nevertheless, the primary activity of
the Company initially is to be ownership and operation of the Bank. While
the Company may seek in the future to acquire additional banks or bank
holding companies or to engage in other activities appropriate for bank
holding companies under appropriate circumstances as permitted by law, the
Company currently has no plans, understandings or agreements concerning any
other activities. The results of operations and financial condition of the
Company for the foreseeable future will be determined primarily by the
results of operations and financial condition of the Bank.
The Bank
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General
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On August 15, 1990, the Organizers of the Company and the Bank filed an
application with the OCC to charter the Bank as a national banking
association under the name "First National Bank of Coffee County" to conduct
business in Douglas, Coffee County, Georgia and the surrounding area. The
Organizers of the Company and the Bank are Robert L. Cation, Milton G.
Clements, William C. Ellis, Jr., Ralph G. Evans, A. Curtis Farrar, Jr.,
Norman E. Fletcher and Timothy J. Palmer. The Bank was authorized to
commence its banking business by the OCC issuing a national bank charter for
the Bank. Operations commenced on September 23, 1991. The OCC had granted
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preliminary approval of the application on December 14, 1990. Final approval
of the application was subject to, among other conditions, capitalization of
the Bank at a minimum of $3,500,000 prior to the Bank opening for business.
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, making real estate loans,
consumer loans, business loans, residential and commercial construction loans
and other investments. In addition to deposits, sources of funds for the
Bank's loans and other investments include amortization and prepayment of
loans, sales of participation in loans, sales of investment securities and
may include in the future, sales of loans. The principal sources of income
for the bank is interest and fees collected on loans and, to a lesser extent,
interest and dividends collected on other investments.
The Bank's earnings depend primarily on its "net interest income," which is
the difference between the interest income it receives from its assets
(primarily its loans and other investments) and the interest expense (or
"cost of funds") which it pays on its liabilities (primarily its deposits).
Net interest income is a function of (i) the difference between rates of
interest earned on interest-earning assets and rates of interest paid on
interest-bearing liabilities (the "interest rate spread" or "net interest
spread") and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. The Bank adheres to an asset and liability
management strategy intended to control the impact of interest rate
fluctuations upon the Bank's earnings and to make the yields on its loan
portfolio and other investments more responsive to its cost of funds, in part
by closely matching the maturities of interest-earnings assets and interest-
bearing liabilities, while still maximizing net interest income.
Nevertheless, the Bank is affected by changes in the levels of interest rates
and other factors beyond its control.
Philosophy and Strategy
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The Bank serves as a community bank in a market dominated by large regional
banks. The philosophy and strategy of the Bank with regard to its initial
operations is to emphasize its local ownership and management and its prompt
and responsive personal service in order to attract customers and acquire a
market share now controlled by other financial institutions in the Bank's
market area. Most of the shares sold in the Company's public offering were
sold in the Coffee County area, and this local ownership has helped to
provide an immediate customer base. The Bank's President and the other
Organizers also have significant contacts in Coffee County, which has
provided additional customers and is expected to continue to do so.
The Bank's strategy is to attract as customers small-to-medium size
manufacturing, retail, professional and industrial businesses as well as
middle-to-upper-income consumers and professionals. These customers
typically provide a higher level of profitability and a lower degree of risk
than do customers of the larger banks and are prime customers of smaller
banks. As more and more small banks are merged out of existence, the
opportunities to fill the void created by these mergers are enhanced for
small de novo banks that have both adequate capital resources and experienced
management. The Bank's President has experience in servicing these types of
customers at other financial institutions and uses that experience to
continue to provide services to these types of customers. See "Item 10.
Directors and Executive Officers of the Registrant." Management of the Bank
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also has an active officer and director call program to describe the
products, services and philosophy of the Bank to both existing and
prospective customers.
Market Area
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The Bank's primary service area ("PSA") is Coffee County, Georgia, and the
Bank is located in Douglas, the county seat and largest city in the county.
The Bank's secondary service area includes the surrounding areas of Atkinson,
Bacon, Ben Hill, Berrien, Irwin, Jeff Davis and Ware Counties. Access to the
area is provided by U.S. Highways 441 and 221 and State Highways 135 and 158,
all intersecting in Douglas. Douglas also has access to four interstate
highway systems, I-10, I-16, I-75, and I-95, all within 100 miles of the
city. The area is comprised of a diversified mix of commercial, retail,
industrial, agricultural and residential areas.
Population in the PSA was approximately 26,894 in 1980 and was estimated at
30,538 in 1989, an increase of almost 13.6% in nine years. The population is
projected to be 32,991 by 1994. The population is well distributed by age
and is slightly more than 52% female. The median age of the population is
29.8 years.
It is estimated that 36.5% of the households in the PSA have an income
level of over $25,000, a figure that is projected to reach 46.4% by 1994. In
addition, it is estimated that 22.2% of the households in the PSA had incomes
over $35,000 and it is estimated that this will increase to 31.6% by 1994.
Aggregate household income has grown from $44,740,000 in 1970 to $123,320,000
in 1980 to $279,990,000 in 1989, and is projected to reach approximately
$391,800,000 by 1994. The median family income is projected to grow from
$10,942 in 1980 to $23,096 by 1994, an increase of over 111% in 14 years.
Continued growth in the population and income level of the PSA, however,
cannot be assured.
The estimates and projections set forth above were taken directly from the
information set forth in an exhibit to the Company's application to the OCC
for authority to organize the Bank. Such exhibit to the OCC application was
included as an exhibit to the Company's Registration Statement filed with the
Securities and Exchange Commission in connection with the Company's public
offering.
Services
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Loan Portfolio. As a full service commercial bank, the Bank offers a wide
range of commercial loans, consumer loans and real estate loans consisting
primarily of short and intermediate-term residential lot loans, residential
construction loans, commercial construction loans, agricultural loans and
permanent residential and commercial real estate loans. Commercial loans
consist of loans made to individual, corporate and partnership borrowers for
a variety of business purposes and includes Small Business Administration
loans. Consumer loans consist primarily of installment loans to individuals
for personal, family and household purposes, including loans for automobiles,
home improvements and investments.
A majority of the Bank's construction loans consists of residential
construction loans. These loans typically involve a higher degree of risk to
the Bank than many other types of loans due to the borrower's greater
sensitivity to the effect that changes in economic conditions may have on the
success of a project. The Bank intends to compensate for the increased risk
in part by charging higher interest rates and fees on these types of loans.
The Bank also offers residential first mortgage loan products with fifteen
year maximum terms. Long-term fixed rate mortgage loans are originated by
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the Bank for a correspondent Bank and are not held in the Bank's loan
portfolio. All construction, acquisition and development loans will be
limited to 80% of the appraised value of the property upon completion and
will be secured by the related real estate and construction property.
The Bank intends to originate variable rate loans and short term fixed rate
consumer loans of five years or less. See "Asset and Liability Management"
below.
The Company's loans before reduction for the allowance for loan losses at
December 31, 1996 totalled $27,345,643, or 64.5% of total earning assets, and
representing approximately 1,496 loans. At December 31, 1996, the Bank held
353 commercial, financial and agricultural loans, 114 real estate
construction loans, 279 real estate mortgage loans and 750 installment loans.
Deposits. The Bank offers a wide range of commercial and consumer deposit
services that are typically available in most banks and savings institutions,
including interest bearing and non-interest bearing checking accounts, money
market checking accounts, negotiable order of withdrawal ("NOW") accounts and
savings and other time deposits of various types ranging from daily money
market accounts to longer-term certificates of deposit. In addition,
retirement accounts such as Individual Retirement Accounts are available.
All depositors are insured by the Federal Deposit Insurance Corporation (the
"FDIC") up to the maximum amount permitted by law. The Bank's depositors
consist of individuals, businesses and their employees within the Bank's
market area, obtained through personal solicitation by the Bank's officers
and directors, direct mail solicitation and advertisement in the local
media. The Bank pays competitive interest rates on deposits and has
a service charge fee schedule competitive with other financial institutions
in the Bank's market area, covering such matters as maintenance fees on
checking accounts, per item processing fees on checking accounts, returned
check charges and other similar fees.
Checking, savings, money market accounts and other time deposits are the
primary sources of the Bank's funds for loans and investments. At December
31, 1996, the Bank had a total of 5,387 deposit accounts consisting of 1,647
demand deposit accounts, 1,979 interest-bearing NOW and savings accounts, 84
money market accounts and 1,677 time accounts. At that date, certificates of
deposits of at least $100,000 represent 11.4% of total deposits, of which all
were held by customers inside the Bank's primary service area.
Other Services. The Bank provides other services such as official bank
checks and money orders, MasterCard and Visa credit cards, safe deposit
boxes, travelers' checks, bank by mail, direct deposit of payroll and social
security checks, U.S. Savings Bonds, wire transfer of funds, a night
depository and ATM access. The Bank also provides an array of personalized
banking services to middle-to upper-income individuals, with emphasis on
knowledge of the individual financial needs and objectives of these customers
and timely response. The Bank seeks to promote long-term relationships with
these types of customers.
Correspondent Banking
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Correspondent banking involves the provision of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. The Bank has correspondent banking relationships with
larger commercial banks for investments, liquidity, federal funds lines, loan
participation, check clearing services and consulting services. These
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include Georgia Bankers Bank (Atlanta, Georgia) First National Bank of
Gainesville, Georgia, Trust Company Bank (Atlanta, Georgia) and CB&T
(Columbus, Georgia).
The Bank sells loan participation to one or more upstream regional
correspondent banks with respect to loans that exceed the Bank's lending
limit.
Asset and Liability Management
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The primary assets of the Bank consists of its loan and investment
portfolios. The Bank's loan portfolio consists primarily of variable rate
loans or fixed rate loans that mature in less than five years. The majority
of the Bank's securities investments consist of obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, other taxable securities and certain obligations of states and
municipalities. The Bank engages in federal funds transactions with its
principal correspondent banks and currently acts primarily as a net seller of
such funds. The sale of federal funds amounts to a short-term loan from the
Bank to another bank. Ultimately, the Bank will strive to maintain a loan
portfolio equal to approximately 75% of assets and an investment portfolio
equal to approximately 16% of the assets, with the remaining 9% of the Bank's
assets consisting of cash, fixed assets and other assets.
Deposit accounts, including transaction accounts, time deposits and
certificates of deposit, represent the majority of the liabilities of the
Bank. The Bank does not seek brokered certificates of deposit or other types
of brokered deposits.
Efforts are made generally to match maturities and rates of the loan and
investment portfolios with those deposits, although exact matching is not
possible. Substantially all of the loans with maturities in excess of one
year are negotiated on a variable interest rate basis or with a demand
repayment provision. By pricing loans on a variable rate structure or by
keeping the maturities of the loan and investment portfolios relatively short
term, the Bank is able to negotiate loan rates or to reinvest securities
proceeds at prevailing market rates, thereby helping maintain a generally
consistent spread over the interest rates paid by the Bank on the deposits
which are used to fund the loan and investment portfolios.
The Bank has established policies and procedures designed to ensure an
acceptable asset/liability mix is monitored on a timely basis, with a report
reflecting the interest-sensitive liabilities being prepared and presented to
the Bank's Board of Directors on a monthly basis. The objective of this
policy is to control interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on the Bank's
earnings.
The Bank has developed an internal lending policy for the Bank, including
appropriate lending limits for each officer of the Bank based upon such
criteria as the experience of the individual officer. Management has
appropriate procedures pertaining to lending and has established a lending
limit above which the approval of the Board of Directors is required.
Additionally, the Bank is subject to certain statutory requirements which
generally provide that the Bank may grant loans and extensions of credit that
are not fully secured to a single borrower up to $525,000 (15% of the Bank's
unimpaired capital and surplus). The Bank also may grant additional loans
and extensions of credit to a single borrower up to $350,000 (10% of the
bank's unimpaired capital and surplus), provided such additional loans and
extensions of credit are fully secured.
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The Bank does not, as a matter of course, finance purchases of raw land or
speculative commercial or industrial developments. The Bank generally does
not make loans outside of Coffee County and the surrounding seven county
market area and seeks to obtain a broad diversification of loan customers.
The Bank will request correspondent banks to participate in loans when loan
amounts exceed the Bank's legal limits or internal lending policies. See
"Correspondent Banking" above.
Competition
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Banks generally compete with other financial institutions through the
banking products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services and the degree
of expertise and the personal manner in which services are offered. In the
PSA, other than the Bank, there are three regional banks and three local
banks. These include Suntrust, NationsBank, Coffee County Bank, Southtrust,
Southeastern Bank and Broxton State Bank. The Bank is the newest in its PSA,
and the Bank encounters competition from most of these financial
institutions. There are no longer any savings institutions in the PSA. In
the conduct of certain areas of its banking business, the Bank also competes
with credit unions, consumer finance companies, insurance companies, money
market mutual funds and other financial institutions, some of which are not
subject to the same degree of regulation and restrictions imposed upon the
Bank.
Many of the Bank's competitors have substantially greater resources and
lending limits than the Bank has and offer certain services, such as
international banking services and trust services, that the Bank currently
does not provide. Moreover, many of these competitors have numerous branch
offices and other facilities in the PSA, a competitive advantage that the
Bank initially does not have. Nevertheless, in evaluating the competition in
the PSA, the management and the Board of Directors believe that there will be
sufficient growth in banking activities for all of these institutions,
including the Bank, to be successful, based in part on an average annual
growth of approximately 5.7% in commercial bank deposits in the PSA over the
last five years. Furthermore, management and the Board of Directors believe
that the extensive banking experience and contacts in the PSA of its
President and the other board members will enable the Bank to compete
effectively without offering unusually high interest rates for deposits or
unusually low interest rates for loans. The Bank's relatively small size
permits it to offer more personalized service than its competitors, which is
expected to provide the Bank with a competitive advantage.
Employees
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At December 31, 1996, the Bank employed twenty-three full-time employees
and two part-time employees. The Company has no employees. Holding company
duties are performed by bank employees and where such duties are significant,
related compensation and benefit costs are allocated to and reimbursed by the
holding company. The Bank considers its relationship with its employees to
be good. To the extent possible, the Bank employs persons experienced in the
banking profession and persons who are natives or long time residents of the
Coffee County area.
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Supervision and Regulation
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General
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As a bank holding company, the company is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve")
pursuant to the federal Bank Holding Company Act (the "BHCA") and by the
Georgia Department of Banking and Finance (the "Georgia Department") pursuant
to the Georgia Bank Holding Company Act (the "GBHCA"). The Company also is
required to file certain reports with, and otherwise comply with the rules
and regulations of, the Securities and Exchange Commission (the "Commission")
under the federal securities laws.
The Bank is a national bank and is subject to the supervision of, and will
be regularly examined by, the OCC. In addition, the Bank's deposit accounts
are insured up to applicable limits by the bank insurance fund of the Federal
Deposit Insurance Corporation (the "FDIC") and the Bank, therefore, is
subject to regulation by the FDIC. As a member of the Federal Reserve
System, the Bank also is subject to regulation by the Federal Reserve.
FIRREA was signed into law on August 9, 1989. FIRREA primarily affects the
regulation of savings associations ("thrifts") and savings and loan holding
companies rather than the regulation of national banks and bank holding
companies such as the Bank and the Company. However, FIRREA does contain
certain provisions affecting banks and bank holding companies, including
without limitation, provisions affecting deposit insurance premiums, thrift
acquisitions, liability of commonly controlled depository institutions,
receivership and conservatorship rights and procedures and substantially
increased penalties for violation of banking statutes, regulations and
orders.
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable law
or regulation may have a material effect on the business and prospects of the
Company and the Bank.
Regulation of the Company
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Federal Law
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The Company is a bank holding company within the meaning of the BHCA and
the GBHCA. As a bank holding company, the Company is required to file with
the Federal Reserve an annual report and such additional information as the
Federal Reserve may require pursuant to the BHCA. The Federal Reserve also
may make examinations of the Company and each of its subsidiaries.
The Federal Reserve has adopted capital adequacy guidelines for use in its
examination and regulation of bank holding companies. Prior to January 1,
1991, the guidelines employed two measures of capital: primary capital
(which included, among other things, common stock, perpetual preferred stock,
surplus, undivided profits and loan loss reserves and excluded most
intangible assets) and total capital (primary capital plus certain forms of
subordinated debt and limited life preferred stock). The guidelines called
for a minimum ratio of primary capital to total consolidated assets of 5.5%
and a minimum ratio of total capital to total consolidated assets of 6.0%.
The Federal Reserve issued risk-based capital adequacy guidelines which went
into effect in stages through 1992.
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Under the Federal Reserve's risk-based standards, an entity's assets and
off-balance sheet activities are categorized into one of four risk
categories, with either a 0%, 20%, 50% or 100% amount of capital to be held
against those assets. In addition, the guidelines divide capital instruments
into Tier 1 (core) capital and Tier 2 (supplemental) capital. The risk-based
capital adequacy guidelines require that: (i) Tier 2 capital may not exceed
100% of Tier 1 capital, although certain Tier 2 capital elements are subject
to additional limitations; (ii) assets and off balance sheet items be
weighted according to risk; and (iii) the total capital to risk-weighted
assets ratio be 7.25% by the end of 1990, and 8% by the end of 1992. The
risk-based guidelines apply on a consolidated basis to only those bank
holding companies with consolidated assets of $150 million or more. For bank
holding companies, like the Company, with less than $150 million in
consolidated assets, the risk-based guidelines generally are applied on a
bank-only basis.
If the capital of a bank holding company falls below minimum required
levels, the bank holding company may be denied approval to acquire or
establish additional banks or non-bank businesses, as discussed below. Bank
holding companies may be compelled by bank regulatory authorities to invest
additional capital in the event a subsidiary bank experiences either
significant loan losses or rapid growth of loans or deposits. In addition,
the company may be required to provide additional capital to any additional
banks it acquires as a condition to obtaining the approvals and consents of
regulatory authorities in connection with such acquisitions.
Bank holding companies are required by the BHCA to obtain approval from the
Federal Reserve prior to acquiring, directly or indirectly, ownership or
control of more than 5% of the outstanding shares of any class of voting
stock of any bank or bank holding company. Bank holding companies and their
subsidiaries also are prohibited from acquiring any voting shares of, or
interest in, any banks located outside of the state in which the operations
of the bank holding company's subsidiaries are located unless the acquisition
is authorized specifically by the statutes of the state in which the target
is located. Several southeastern states, including Georgia, have enacted
reciprocal legislation that authorizes interstate acquisitions of banking
organizations by bank holding companies within the southeastern United
States, subject to certain conditions and restrictions. As a result of this
legislation, the company may become a candidate for acquisition by, or may
itself seek to acquire, banking organizations located in those states that
have enacted reciprocal legislation. (See, however, certain restrictions on
acquisitions imposed by the GBHCA discussed below). Additionally, under the
BHCA, as amended pursuant to FIRREA and as implemented by a recent amendment
to the Federal Reserve regulations, a bank holding company may acquire a
savings association, as defined in FIRREA, in any state without regard to
whether the bank holding company can operate a bank in that state.
The BHCA also prohibits bank holding companies, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks or other permissible subsidiaries. The Federal Reserve is
authorized to approve, among other things, the ownership of shares by a bank
holding company in any company the activities of which the Federal Reserve
has determined to be so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. Notice to and review
by the Federal Reserve of such activities would be necessary before the
Company could engage in such activities. The Federal Reserve is empowered to
differentiate between activities that are initiated de novo by a bank holding
company or a subsidiary and activities commenced by acquisition of a going
concern.
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The Federal Reserve has been granted enforcement powers over bank holding
companies and nonbanking subsidiaries to forestall activities that represent
unsafe or unsound practices or constitute violations of law. These powers
may be exercised through the issuance of cease-and-desist orders or other
actions. The Federal Reserve also is empowered to assess civil money
penalties against companies or individuals who violate the BHCA or orders or
regulations thereunder, to order termination of non-banking activities of
non-banking subsidiaries of bank holding companies and to order termination
of ownership and control of a non-banking subsidiary by a bank holding
company. Certain violations may also result in criminal penalties.
The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
The Bank and the Company is "affiliated" within the meaning of the Federal
Reserve Act. Certain provisions of the Federal Reserve Act establish
standards for the terms of, limit the amount of and establish collateral
requirements with respect to any loans or extensions of credit to, and
investments in, affiliates by the Bank as well as set arms-length criteria
for such transactions and for certain other transactions (including payment
by the Bank for services and under any contract) between the Bank and its
affiliates. In addition, related provisions of the Federal Reserve Act and
the Federal Reserve regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions
of credit to officers, directors and principal shareholders of the Bank, the
Company and any subsidiary of the Company, and to related interests of such
persons.
Under Section 106(b) of the Bank Holding Company Act Amendments of 1970 (12
U.S.C. 1972), the Bank is prohibited from extending credit, selling or
leasing property or furnishing any service to any customer on the condition
or requirement that the customer (i) obtain any additional property, service
or credit from the Company, the Bank or any other subsidiary of the Company,
(ii) refrain from obtaining any property, credit or service from any
competitor of the Company, the Bank or any subsidiary of the Company or (iii)
furnish any credit, property or service to the Company, the Bank or any
subsidiary of the Company.
As a bank holding company, the Company is required to give the Federal
Reserve prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of the
Company's consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption if it determines that the proposal constitutes an
unsafe or unsound practice, would violate any law, regulation, Federal
Reserve order or directive or any condition imposed by, or written agreement
with, the Federal Reserve.
In November 1985, the Federal Reserve adopted its Policy Statement on Cash
Dividends Not Fully Covered by Earnings. The Policy Statement sets forth
various guidelines that the Federal Reserve believes that a bank holding
company should follow in establishing its dividend policy. In general, the
Federal Reserve stated that bank holding companies should not pay dividends
except out of current earnings and unless the prospective rate of earnings
<PAGE> 12
retention by the holding company appears consistent with its capital needs,
asset quality and overall financial condition.
The activities of the Company also are restricted by the provisions of the
Glass-Steagall Act of 1933 (the "Act"). The Act prohibits the Company from
owning subsidiaries engaged principally in the issue, flotation,
underwriting, public sale or distribution of securities. The interpretation,
scope and application of the provisions of the Act currently are being
reviewed by regulators and legislators. The outcome of the current
examination and appraisal of the provisions in the Act and the effect of such
outcome on the ability of bank holding companies to engage in securities-
related activities cannot be predicted.
Georgia Law
-----------
The Company also is a bank holding company within the meaning of the GBHCA,
which provides that, without the prior approval of the Georgia Department, it
is unlawful (i) for any bank holding company to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank, (ii)
for any bank holding company or subsidiary thereof, other than a bank, to
acquire all or substantially all of the assets of a bank or (iii) for any
bank holding company to merge or consolidate with any other bank holding
company. It also is unlawful for any company to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank in
Georgia unless such bank has been in existence and continuously operating as
a bank for a period of five years or more prior to the date of application to
the Georgia Department for approval of such acquisition. One bank holding
companies, such as the Company, are prohibited from acquiring another bank
until their initial bank subsidiary has been incorporated for a period of two
years. The effect of these provisions is to negate the possibility that the
Company or the Bank will be acquired by another company for a minimum of five
years and to prohibit the Company from acquiring another bank for a period of
two years.
In addition, the Georgia Department has established a minimum level of
capital to total assets of 5%, with certain adjustments, on a consolidated
basis for bank holding companies. The capital guidelines assume adequate
liquidity and a moderate degree of risk in loan and investment portfolios
as well as any off balance sheet activities. In assessing compliance with
the guidelines, therefore the Georgia Department reviews the relationship of
on and off balance sheet risks to capital and requires those institutions
with high or inordinate level of risk to adhere to higher capital standards.
Bank holding companies whose operations involve, or are exposed to high or
inordinate degrees of risk are expected to hold additional capital to
compensate for such risks. In addition, bank holding companies engaging in
significant nonbanking activities typically require higher capital ratios
than do banks alone.
The BHC Act, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"), which became effective on September 29, 1995, repealed the
prior statutory restrictions on interstate acquisitions of banks by bank
holding companies, and a bank holding company located in Georgia may now
acquire a bank located in any other state, and any bank holding company
located outside Georgia may lawfully acquire a Georgia-based bank, regardless
of state law to the contrary, in either case subject to certain deposit-
percentage, aging requirements, and other restrictions. The Interstate
Banking Act also provides that, after June 1, 1997, national and state
chartered banks may branch interstate through acquisitions of banks in other
states. By adopting legislation prior to that date, a state has the ability
either to "opt in" (which Georgia has done) and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit
interstate branching altogether.
<PAGE> 13
Regulation of the Bank
----------------------
As a national banking association, the Bank is subject to supervision,
examination and regulation by the OCC under the National Bank Act. It also
is a member of the Federal Reserve System and subject to regulation by the
Federal Reserve under the Federal Reserve Act. The deposits of the Bank are
insured by the FDIC to the full extent provided by law and, therefore, the
Bank pays insurance assessments to, and is subject to regulation and
examination by the FDIC.
The FDIC currently insures the deposits of each member bank to a maximum of
$100,000 per depositor. For this protection, the Bank will pay a semi-annual
statutory assessment and will be subject to the rules and regulations of the
FDIC. The FDIC has the authority to prevent the continuance or development
of unsound and unsafe banking practices. The FDIC is also authorized, among
other things, to approve conversions, mergers, consolidations and assumption
of deposit liability transactions between insured banks and uninsured banks
or institutions, and to prevent capital or surplus diminution in such
transactions where the resulting, continuing, or assumed bank is an insured
nonmember state bank. The FDIC premium rate is set by the Financial
Institutions Reform Recovery and Enforcement Act ("FIRREA") which was signed
into law on August 9, 1989. FIRREA primarily affects the regulation of
savings associations and savings and loan holding companies rather than the
regulation of commercial banks and bank holding companies. However, FIRREA
does contain certain provisions affecting banks and bank holding companies,
including without limitation, provisions affecting deposit insurance
premiums, thrift acquisitions, liability of commonly controlled depository
institutions, receivership and conservatorship rights and procedures and
substantially increased penalties for violation of banking statutes,
regulations and orders.
In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991
(Act) was enacted. The Act affects all federally insured banks, savings
banks and thrifts. The Act contains a $70 billion recapitalization of the
Bank Insurance Fund (BIF) by significantly increasing the amount that the
FDIC can borrow from the Treasury. The FDIC must assess premiums that are
sufficient to give the BIF reserves of $1.25 for each $100 of insured
deposits. Additional significant provisions of the Act include: requiring
prompt corrective action by regulators if minimum capital standards are not
met; establishing early intervention procedures for "significantly"
undercapitalized (to be defined by the FDIC) institutions; limiting FDIC
reimbursement of uninsured deposits when large banks fail; requiring an
annual regulatory examination; and imposing new auditing and accounting
requirements, effective for fiscal years beginning on or after January 1,
1993, including management and auditor reporting on internal controls over
financial reporting and on compliance with laws and regulations.
Effective for fiscal years beginning on or after January 1, 1993, the Act
requires FDIC-insured depository institutions with assets in excess of $150
million to file an "annual report" with the federal regulatory agencies that
will be available for public inspection. This requirement can be satisfied
for subsidiaries of a bank holding company by an audit of the consolidated
financial statements of the holding company. In addition, the Act requires
that the annual report must include an auditor's report on management's
assertions regarding the effectiveness of internal controls pertaining to
financial reporting and on agreed upon procedures concerning compliance with
specific laws and regulations designated by federal regulatory agencies. The
management and auditor reporting requirements may be satisfied at the holding
company level, depending upon various criteria for asset levels and CAMEL
ratings of the individual subsidiaries. However, all FDIC-insured depository
<PAGE> 14
institutions over $9 billion will require the additional management and
auditor reports.
Federal and Georgia laws regulate many aspects of the Bank's operations,
including branch offices, remote facilities, lending limits, borrowing,
permitted investments, declaration of dividends, mergers and acquisitions,
electronic funds transfers, deposits reserve requirements and interest rates
payable on deposits and chargeable on loans. The Bank is subject to
applicable Georgia laws that do not conflict with, or are not preempted by,
federal banking laws, including Georgia laws limiting the maximum allowable
rates of interest on loans and extensions of credit to customers of the Bank.
Similar to the Federal Reserve's former capital requirements applicable to
the Company, prior to January 1, 1991, the OCC required Banks to maintain
minimum primary capital equal to 5.5% of total assets and total capital equal
to 6% of total assets, each as defined and adjusted pursuant to the OCC's
regulations. Also like the Federal Reserve, the OCC has issued risk-based
capital rules requiring (i) at least 50% of a national bank's total capital
to consist of common and certain other equity capital; (ii) assets and off
balance sheet items to be weighted according to risk; (iii) Tier 1 capital to
equal or exceed 4% of total assets (see below); and (iv) the total capital to
risk-weighted assets ratio to be 7.25% by the end of 1990 and 8% by the end
of 1992. The OCC recently announced that its requirement that Tier 1 capital
equal 4% of a bank's total assets will apply only to those banks that receive
the highest regulatory rating from the OCC based upon the OCC's routine
examination process. Banks receiving lower regulatory ratings will be
required to maintain Tier 1 capital in an amount that is at least 100 to 200
basis points higher than 4% of total assets.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of
the deficiency by assessment upon the bank's shareholders. To the extent
necessary, if any such assessment is not paid by any shareholder after
notice, the OCC is authorized to sell the stock of such shareholder to
satisfy the deficiency. National banks also are subject to legal limitations
on the amount of dividends they can pay. The prior approval of the OCC is
required if the total of all dividends declared by a national bank in any
calendar year will exceed such bank's net profits (as defined by statute) for
that year combined with its retained net profits for the preceding two years,
less any required transfers to surplus or to a fund for the retirement of any
preferred stock. Other rules that are administered by the OCC and that are
applicable to national banks relate to issuance of securities, establishment
of branches, limitations on credit to subsidiaries and other aspects of the
business and activities of such subsidiaries. The OCC has broad authority to
prohibit national banks from engaging in unsafe or unsound banking practices
and periodically examines national banks to determine their compliance with
applicable law and regulations. National banks also must make periodic
reports of their condition to the OCC.
Certain federal legislation, including the Depository Institutions
Deregulation and Monetary Control Act of 1980 and the Garn-St. Germain
Depository Institutions Act of 1982, has had a significant impact upon
competition among financial institutions. In particular, banking laws and
regulations enacted since 1980 have increased substantially the ability of
savings institutions to compete with commercial banks for deposits.
<PAGE> 15
Prompt Corrective Action
------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions
in the three undercapitalized categories, the severity of which will depend
upon the capital category in which the institution is placed. Generally,
subject to a narrow exception, FDICIA requires the banking regulator to
appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking regulators have specified by
regulation the relevant capital level for each category.
Under the final agency rules implementing the prompt corrective action
provisions an institution that (i) has a Total Risk-Based Capital Ratio of
10% or greater, a Tier 1 Risk-Based Capital Ratio of 6% or greater, and a
Leverage Ratio of 5% or greater and (ii) is not subject to any written
agreement, order, capital directive, or prompt corrective action directive
issued by the appropriate federal banking regulator is deemed to be well
capitalized. An institution with a Total Risk-Based Capital Ratio of 8% or
greater, a Tier 1 Risk-Based Capital Ratio of 4% or greater, an a Leverage
Ratio of 4% or greater is considered to be adequately capitalized. A
depository institution that has a Total Risk-Based Capital Ratio of less than
8%, a Tier 1 Risk-Based Capital Ratio of less than 4%, or a Leverage Ratio of
less than 4% is considered to be undercapitalized. A depository institution
that has a Total Risk-Based Capital Ratio of less than 6%, a Tier 1 Risk-
Based Capital Ratio of less than 3%, or a Leverage Ratio of less than 3%, is
considered to be significantly undercapitalized, and an institution that has
a tangible equity capital to assets ratio equal to or less than 2% is deemed
to be critically undercapitalized. For purposes of the regulation, the term
"tangible equity" includes core capital elements counted as Tier 1 Capital
for purposes of the risk-based capital standards, plus the amount of
outstanding cumulative perpetual preferred stock (including related surplus),
minus all intangible assets with certain exceptions. A depository
institution may be deemed to be in a capitalized category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking
regulator. Under FDICIA, a bank holding company must guarantee that a
subsidiary depository institution meets its capital restoration plan, subject
to certain limitations. The obligation of a controlling holding company
under FDICIA to fund a capital restoration plan is limited to the lesser of
5% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. An undercapitalized institution is also
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or
with the approval of the FDIC. In addition, the appropriate federal banking
regulator is given authority with respect to any undercapitalized depository
institution to take any of the actions it is required to or may take with
respect to a significantly undercapitalized institution as described below if
it determines "that those actions are necessary to carry out the purpose" of
FDICIA.
<PAGE> 16
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the
appropriate federal banking regulator must require the institution to take
one or more of the following actions: (i) sell enough shares, including
voting shares, to become adequately capitalized; (ii) merge with (or be sold
to) another institution (or holding company), but only if grounds exist for
appointing a conservator or receiver; (iii) restrict certain transactions
with banking affiliates as if the "sister bank" exception to the requirements
of Section 23A of the Federal Reserve Act did not exist; (iv) otherwise
restrict transactions with bank or non-bank affiliates; (v) restrict interest
rates that the institution pays on deposits to "prevailing rates" in the
institution's "region;" (vi) restrict asset growth or reduce total assets;
(vii) alter, reduce, or terminate activities; (viii) hold a new election of
directors; (ix) dismiss any director or senior executive officer who held
office for more than 180 days immediately before the institution became
undercapitalized, provided that in requiring dismissal of a director or
senior officer, the regulator must comply with certain procedural
requirements, including the opportunity for an appeal in which the director
or officer will have the burden of proving his or her value to the
institution; (x) employ "qualified" senior executive officers; (ix) cease
accepting deposits from correspondent depository institutions; (xii) divest
certain nondepository affiliates which pose a danger to the institution; or
(xiii) be divested by a parent holding company. In addition, without the
prior approval of the appropriate federal banking regulator, a significantly
undercapitalized institution may not pay any bonus to any senior executive
officer or increase the rate of compensation for such officer.
At December 31, 1996, the Company's bank subsidiary had the requisite
capital levels to qualify as well capitalized.
FDIC Insurance Assessments
--------------------------
Pursuant to FDICIA, the FDIC adopted a new risk-based assessment system for
insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The new system, which went into effect on January 1, 1994,
assigns an institution to one of three capital categories: (i) well
capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These
three categories are substantially similar to the prompt corrective action
categories described above, with the "undercapitalized" category including
institutions that are undercapitalized, significantly undercapitalized, and
critically undercapitalized for prompt corrective action purposes. An
institution is also assigned by the FDIC to one of three supervisory
subgroups within each capital group. An institution's insurance assessment
rate is then determined based on the capital category and supervisory
category to which it is assigned. Under the final risk-based assessment
system, there are nine assessment risk classifications (i.e., combinations of
capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates for members of both the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF") for the first
half of 1995 ranged from 23 basis points (0.23% of deposits) for an
institution in the highest category (i.e., "well capitalized" and "healthy")
to 31 basis points (0.31% of deposits) for an institution in the lowest
category (i.e., "undercapitalized" and "substantial supervisory concern").
These rates were established for both funds to achieve a designated ratio of
reserves to insured deposits (i.e., 1.25%) within a specified period of time.
<PAGE> 17
Once the designated ratio for the BIF was reached in May 1995, the FDIC was
authorized to reduce the minimum assessment rate below the 23 basis points
and to set future assessment rates at such levels that would maintain the
fund's reserve ratio at the designated level. In August 1995, the FDIC
adopted regulations reducing the assessment rates for BIF-member banks.
Subsequently, on November 14, 1995, the FDIC announced that, beginning in
1997, it would further reduce the deposit insurance premiums for 92% of all
BIF members that are in the highest capital and supervisory categories to
$2,000 per year, regardless of deposit size.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Safety and Soundness Standards
------------------------------
The FDIA, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation and compensation, fees and
benefits, and such other operational and managerial standards as the agencies
deem appropriate. The federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines prescribing safety and
soundness standards pursuant to FDICIA, as amended. The guidelines establish
general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth and compensation, fees, and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholders. The
federal banking agencies determined that stock valuation standards were not
appropriate. In addition, the agencies adopted regulations that authorize,
but do not require, an agency to order an institution that has been given
notice by an agency that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so
notified, an institution fails to submit an acceptable compliance plan or
fails in any material respect to implement an accepted compliance plan, the
agency must issue an order directing action to correct the deficiency and may
issue an order directing other actions of the types to which an
undercapitalized association is subject under the "prompt corrective action"
provisions of FDICIA. If an institution fails to comply with such an order,
the agency may seek to enforce such order in judicial proceedings and to
impose civil money penalties. The federal bank regulatory agencies also
proposed guidelines for asset quality and earnings standards.
<PAGE> 18
The following table presents the Bank's capital ratios as of December 31,
1996 compared to the required ratios as of that date.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Total Capital
(to Risk Weighted
Assets) $3,877,311 11.5% 2,694,097 8.0% 3,367,621 10.0%
Tier I Capital
(to Risk Weighted
Assets) 3,491,951 10.4% 1,347,048 4.0% 2,020,573 6.0%
Tier I Capital
(to Average Assets) 3,491,951 7.4% 1,898,320 4.0% 2,372,900 5.0%
As of December 31, 1996
Total Capital
(to Risk Weighted
Assets) 3,310,365 11.3% 2,342,089 8.0% 2,927,611 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 2,944,414 10.1% 1,171,044 4.0% 1,756,566 6.0%
Tier 1 Capital
(to Average Assets) 2,944,414 6.2% 1,914,080 4.0% 2,392,600 5.0%
</TABLE>
The Bank is in compliance with the regulatory capital requirements as of
December 31, 1996 and 1995.
Federal banking regulations applicable to all banks, among other things,
(i) provide federal bank regulatory agencies with powers to prevent unsafe
and unsound banking practices; (ii) restrict preferential loans by banks to
"insiders" of banks; (iii) require banks to keep information on loans to
principal shareholders and executive officers; and (iv) prohibit certain
director and officer interlocks between financial institutions.
While the affects on the operations of the Bank and the Company as a result
of the regulatory changes previously discussed cannot be quantified,
increases in FDIC insurance rates and the additional costs of complying with
additional regulatory requirements will result in significant additional
costs to the Company and the Bank. Management plans to recover such
increases through modifications to its fee structure as necessary.
Monetary Policy
---------------
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rates paid by the Bank on its
deposits and other borrowings and the interest rates received on loans
extended to its customers and on securities held in its portfolios comprises
the major portion of the Bank's earnings.
The earnings and growth of the Bank and of the Company are affected not
only by general economic conditions, both domestic and foreign, but also by
the monetary and fiscal policies of the United States and its agencies,
particularly the Board. The Board implements national monetary policy (as
opposed to fiscal policy), such as seeking to curb inflation and combat
recession, by its open market operations in the United States government
securities, adjustments in the amount of industry reserves that banks and
other financial institutions are required to maintain and adjustments to the
discount rates applicable to borrowings by banks from the Federal Reserve
System. The actions of the Board in these areas influence the growth of bank
loans, investments and deposits and also affect interest rates charged and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted with certainty.
<PAGE> 19
Other Regulatory Matters
------------------------
The Board, in 1985, issued a policy statement on the payment of cash
dividends by bank holding companies. In the statement, the Board expressed
its view that a bank holding company experiencing earnings weakness should
not pay cash dividends exceeding its net income or that can be funded only in
ways that weaken the holding company's financial health, such as by
borrowing.
The United States Congress and the Georgia General Assembly have
periodically considered and adopted legislation that has resulted in, and
could further result in deregulation of both banks and other financial
institutions. Such legislation could modify or eliminate geographic
restrictions on banks and bank holding companies and current prohibitions
against banks engaging in certain non-banking activities. Such legislative
changes could place the Company in more direct competition with other
financial institutions, including mutual funds, securities brokerage firms,
insurance companies and investment banking firms. The effect of any such
legislation on the business of the company cannot be accurately predicted.
The Company cannot predict what other legislation might be enacted or what
other regulations might be adopted, or if enacted or adopted, the effect
thereof.
Taxation
--------
General
-------
In general, the Company and the Bank is taxed in the same manner as other
corporations under the Internal Revenue Code of 1986, as amended (the
"Code"), although the Code contains certain rules which may affect the
taxation of banks to a greater degree than other corporations. The general
rate structure and certain of these special rules are discussed below.
Rates
-----
Corporation income is subject to graduated federal income tax rates,
beginning at 15% of the corporation's first $50,000 of taxable income, and
increasing to a maximum rate of 34% with respect to taxable income in excess
of $75,000. However, taxable income that falls between $100,000 and $335,000
is subject to an additional 5% surcharge, up to a maximum surcharge of
$11,750.
Bad Debt Reserves
-----------------
The use of the reserve method of computing the bad debt deduction is no
longer available to any bank which, either alone or in combination with all
members of its parent-subsidiary controlled group, has an average adjusted
basis in its total combined assets of in excess of $500 million. Such a bank
must use the specific charge-off method of deducting bad debts. Because the
company has assets of less than $500 million, it is eligible to use the
reserve method, but is limited to the experience method of calculating
additions to its bad debt reserve. The experience method measures the ratio
of actual bad debts to total outstanding loans based on a six-year moving
average.
Interest Expense on Tax-Exempt Obligations
------------------------------------------
In general, a bank is not permitted to deduct that portion of its interest
expense allocable to tax-exempt interest income. The allocation of a bank's
interest expense to tax-exempt interest income is based on the relative
proportion of the bank's total average adjusted basis in its tax-exempt
obligations to its total average adjusted basis in all of its assets. There
is an exception to this disallowance rule for interest expense allocable to
"qualified tax-exempt obligations," which must be designated as such by the
issuer and which are not private activity bonds.
<PAGE> 20
Net Operating Losses
--------------------
Net operating losses of a bank generally may be carried back three taxable
years and carried forward 15 taxable years. An exception to the general rule
permits the portion of a net operating loss incurred after 1986 and before
1994 which is attributable to bad debt losses to be carried back ten years
and forward at least five years.
Alternative Minimum Tax
-----------------------
All corporations, including banks, are subject to the corporate alternative
minimum tax. For corporations, the alternative minimum tax rate is 20% of
the alternative minimum taxable income ("AMTI") in excess of certain
exemption amounts ($40,000, phased out when AMTI exceeds $150,000). The
alternative minimum tax is payable to the extent it exceeds regular tax
liability. It is possible for a taxpayer such as the Company to be liable
for alternative minimum tax even if its regular tax liability is zero.
In computing AMTI, a taxpayer must include certain items not included in
the computation of regular taxable income. Financial institutions must
include in AMTI the difference between the amount added to the bad debt
reserve for the year and the amount which would have been deducted for bad
debts using the actual experience method. For all corporations, AMTI
includes certain tax-exempt income and 75% of the difference between the
corporation's "current adjusted earnings" and its AMTI (determined without
regard to this item). A corporation's "current adjusted earnings" means it
AMTI (determined without regard to this item), with certain adjustments,
including the addition of tax-exempt income.
<PAGE> 21
<TABLE>
Average Balance Sheets
----------------------
The following table presents average balance sheets for the years ended
December 31, 1995 and 1996.
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
ASSETS 1995 1996
------ ---------- ----------
($ In Thousands)
<S> <C> <C>
Cash and Due From Banks $ 4,180 4,415
Interest-Bearing Deposits in Banks -0- 134
Investment Securities 5,871 5,837
Federal Funds Sold and
Securities Purchased Under Agreements to Resell 3,307 5,106
Loans, Net of Allowance for Loan Losses and Unearned
Interest 28,643 30,192
Bank Premises and Equipment 1,733 1,680
Property Acquired in Settlement of Loans 18 34
Accrued Interest Receivable 642 788
Other Assets 170 480
---------- ----------
Total Assets $ 44,564 48,666
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 7,209 7,929
NOW 7,595 7,306
Savings 2,275 2,002
Time 22,784 25,006
---------- ----------
39,863 42,243
Federal Funds Purchased 223 -0-
Advances from Federal Home Loan Bank 103 2,151
Accrued Interest 388 522
Other Liabilities 102 204
---------- ----------
Total Liabilities 40,679 45,120
---------- ----------
Stockholders' Equity:
Common Stock 406 406
Additional Paid in Capital 3,611 3,611
Retained Earnings (Deficit) (132) (471)
---------- ----------
3,885 3,546
---------- ----------
Total Liabilities and Stockholders' Equity $ 44,564 48,666
========== ==========
</TABLE>
<PAGE> 22
Average Yields Earned and Rates Paid
------------------------------------
The following table presents the average balances, average yields and
interest earned on interest-earning assets and average rates and interest
paid on interest-bearing liabilities for the years ended December 31, 1995
and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996
---------------------- ----------------------
AVERAGE INC/ YLDS/ AVERAGE INC/ YLDS/
BALANCES EXP RATES BALANCES EXP RATES
-------- ----- ----- -------- ----- -----
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average yield on
loans (1) (2) $ 29,064 2,856 9.83% 31,215 3,058 9.80%
Average yield on
taxable investment
securities 5,912 316 5.34 5,847 320 5.48
Average yield on
interest-bearing
deposits in banks -0- -0- .00 134 5 3.37
Average yield on
Federal Funds sold
and securities
purchased under
agreement to resell 3,307 182 5.50 5,106 275 5.39
-------- ----- ----- -------- ----- -----
Average yield on all
interest-earning assets $ 38,283 3,354 8.76% 42,302 3,658 8.65%
======== ===== ===== ======== ===== =====
Average rate paid
on NOW account deposits $ 7,595 206 2.71% 7,306 192 2.63%
Average rate paid
on savings deposits 2,275 69 3.02 2,002 62 3.12
Average rate paid
on time deposits 22,784 1,368 6.00 25,006 1,541 6.16
Average rate paid
on federal funds
purchased 223 12 5.50 -0- -0- .00
Average rate paid
on advances from
Federal Home Loan Bank 103 5 5.50 2,151 136 6.32
-------- ----- ----- -------- ----- -----
Average rate paid
on all interest-
bearing liabilities $ 32,980 1,660 5.03% 36,465 1,931 5.30%
======== ===== ===== ======== ===== =====
Average net yield on
interest-earning assets
(net interest income as
a percentage of average
interest-earning assets) 4.42% 4.08%
===== =====
</TABLE>
Non-accruing loans have been included in the "average amount outstanding" and
average loans have not been reduced by the allowance for loan losses.
(1) Loan fees included in interest income amounted to approximately $134,722
in 1995 and $66,660 in 1996.
(2) Average balances were computed over the term in which the related
interest was earned or incurred.
<PAGE> 23
The table below sets forth certain information regarding changes in
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rates (change in
rate multiplied by old volume); (3) changes in rate-volume (changes in rate
multiplied by the change in volume). The net change attributable to both
volume and rate, which cannot be segregated, has been allocated
proportionately to change due to volume and change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 VS. 1995 1995 VS. 1996
------------------ -----------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------ -----------------
VOLUME RATE NET VOLUME RATE NET
------ ----- ----- ------ ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $ 523 306 829 211 (9) 202
Taxable investment securities 20 23 43 (3) 7 4
Interest-bearing deposits
in banks (4) (3) (7) 5 -0- 5
Federal Funds Sold and
securities purchased
under agreement to resell 45 23 68 97 (4) 93
----- ----- ----- ----- ----- -----
Total 584 349 933 310 (6) 304
----- ----- ----- ----- ----- -----
Interest Expense:
NOW account deposits 14 29 43 (8) (6) (14)
Savings deposits (20) (6) (26) (10) 3 (7)
Time deposits 237 308 545 136 37 173
Federal funds purchased 10 -0- 10 (6) (6) (12)
Advances from Federal
Home Loan Bank 5 -0- 5 130 1 131
----- ----- ----- ----- ----- -----
Total 246 331 577 242 29 271
----- ----- ----- ----- ----- -----
Net Interest Income $ 338 18 356 68 (35) 33
===== ===== ===== ===== ===== =====
</TABLE>
Investment Portfolio
--------------------
The following table presents the book value of investments and obligations
of (1) U.S. Treasury and other U.S. government agencies and corporations, (2)
states of the U.S. and political subdivisions and (3) other securities as of
December 31, 1995 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996
------------------ --------------------
SECURITIESSECURITIES SECURITIESSECURITIES
AVAILABLE- HELD-TO- AVAILABLE- HELD-TO-
FOR-SALE MATURITY FOR-SALE MATURITY
-------------------- --------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and
corporations $ 4,253 703 7,367 -0-
Other securities 237 -0- 459 -0-
--------- --------- --------- ---------
Total 4,490 703 7,826 -0-
Unrealized losses on available-
for-sale securities (1) (-0-) 3 -0-
--------- --------- --------- ---------
Total $ 4,489 703 7,829 -0-
========= ========= ========= =========
</TABLE>
<PAGE> 24
Securities available-for-sale are carried at market value and securities
held-to-maturity are carried at amortized cost.
The following table presents the book value of investments and obligations
of (1) U.S. Treasury and other U.S. government agencies and corporations, (2)
states of the U.S. and political subdivisions and (3) other securities as of
December 31, 1996 that are due (1) in one year or less, (2) after one year
through five years, (3) after five years through ten years and (4) after ten
years. In addition, the table provides the weighted average yield for each
range of maturities.
<TABLE>
<CAPTION>
AMOUNT AT DECEMBER 31, 1996 DUE IN
---------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR THROUGH THROUGH AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
----------- ---------------------- ----------- -----------
AMOUNT YIELDAMOUNT YIELDAMOUNTYIELD AMOUNTYIELD AMOUNTYIELD
------ ----------- ---------------- ----------- -----------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and other
U.S. Govern-
ment Agencies
and Corpora-
tions $1,728 5.33%
5,489 5.90 -0- 0.00 150 7.29 7,367 5.80
States of the
U.S. and
Political
Subdivisions
(1) (2) -0- 0.00 -0- 0.00 -0- 0.00 -0- 0.00 -0- 0.00
Other securities
(2) (3) -0- 0.00 -0- 0.00 -0- 0.00 459 7.54% 459 7.54%
------ ----------- ---------------- ----------- -----------
Total $1,728 5.33%
5,489 5.90% -0- 0.00% 609 7.48%7,826 5.90%
====== =========== ================ =========== ===========
</TABLE>
-----------------------------------------
(1) Yields on tax exempt obligations have not been computed on a tax
equivalent basis.
(2) As of December 31, 1996, there was no aggregate book values of any
issuer which exceeded 10% of stockholders' equity.
(3) Yield represents yield earned for 1996.
Loan Portfolio
--------------
The loan portfolio totalled approximately $27.3 million at December 31,
1996, which was a decrease of approximately $4.6 million from December 31,
1995. During the year ended December 31, 1996, average loans before reduction
for the allowance for loan losses were approximately $31.2 million and $29.1
million during the year ended December 31, 1995.
<PAGE> 25
The following table sets forth information summarizing the composition of
the loan portfolio at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---------- ----------
($ In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 9,037 8,071
Real estate - construction 1,291 1,246
Real estate - mortgage 14,198 12,618
Installment loans to individuals and other 6,786 4,517
Loans secured by deposits 322 864
Overdrafts 284 29
Foreign loans -0- -0-
All Other -0- -0-
---------- ----------
31,918 27,345
Unearned interest and fees -0- -0-
---------- ----------
31,918 27,345
Allowance for loan losses (385) (1,520)
---------- ----------
Loans, Net $ 31,533 25,825
========== ==========
</TABLE>
The following table sets forth certain information at December 31, 1996
regarding the dollar amount of loans for the categories indicated maturing
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
AMOUNTS AT DECEMBER 31, 1996 DUE IN
-------------------------------------------
AFTER ONE
YEAR
ONE YEAR THROUGH DUE AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 5,724 1,947 400 8,071
Real estate - construction 1,246 -0- -0- 1,246
Loans secured by deposits 864 -0- -0- 864
Overdrafts 29 -0- -0- 29
---------- ---------- ---------- ----------
Total $ 7,863 1,947 400 10,210
========== ========== ========== ==========
</TABLE>
The following table presents the total amount of loans shown in the
preceding table which are due after one year and which have fixed interest
rates and have variable interest rates.
<TABLE>
<S> <C> <C>
Loans maturing after one year with:
Fixed interest rates $ 1,128 400
Variable interest rates 819 -0-
---------- ----------
Total $ 1,947 400
========== ==========
</TABLE>
<PAGE> 26
The following table presents information concerning outstanding balances of
nonperforming loans at December 31, 1995 and 1996. Nonperforming loans
consists of loans which have been placed on nonaccrual status or are past due
more than ninety days with respect to principal or interest.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---------- ----------
($ In Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis (1) $ 177 1,038
Accruing loans which are contractually past
due 90 days or more as to principal or
interest payments (1) -0- 5
Other loans which are "troubled debt
restructurings" (1) -0- -0-
</TABLE>
A loan is placed on non-accrual status when it is determined by management
that it is reasonably possible that full collection of principal and interest
will not be received.
As of December 31, 1996, in the opinion of management, there are no problem
loans of significance which are not now disclosed under information
concerning non-accrual, past due and restructured loans.
As of December 31, 1996, there are no loan concentrations exceeding 10% of
total loans which are not otherwise disclosed previously as a category of
loans.
As of December 31, 1996, there are no other interest-bearing assets that
would be required to be disclosed as nonaccrual, past due or restructured
loans if such assets were loans.
----------------------------------------
(1) There are no foreign loans.
Reserve For Possible Loan Losses
--------------------------------
An allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible based on evaluations of the collectibility of loans and prior
loan loss experience (when sufficient time elapses to establish experience).
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of
specific problem and/or impaired loans and current economic conditions that
may affect the borrowers' ability to pay.
<PAGE> 27
The reserve for possible loan losses was approximately 5.6% and 1.2% of
outstanding loans at December 31, 1996 and 1995, respectively. Management
believes that the reserve for loan losses of approximately $1.5 million at
December 31, 1996 is adequate due to the fact that approximately $13.9
million or 50.7% of the Bank's loan portfolio consisted of loans secured by
real estate and approximately $1.4 million of loans were charged off during
1996.
The following table sets forth an analysis of loss experience for the
periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---------- ----------
($ In Thousands)
<S> <C> <C>
Balance at beginning of period $ 404 385
---------- ----------
Charge-Off's:
Domestic:
Commercial, financial and agricultural 25 397
Real estate - construction -0- 12
Real estate - mortgage -0- 489
Installment loans to individuals 150 552
Loans secured by deposits -0- -0-
Overdrafts 159 -0-
Foreign -0- -0-
---------- ----------
334 1,450
---------- ----------
Recoveries:
Domestic:
Commercial, financial and agricultural -0- 24
Real estate, construction -0- 1
Real estate - mortgage -0- 5
Installment loans to individuals 11 155
Loans secured by deposits -0- -0-
Overdrafts -0- 95
Foreign -0- -0-
---------- ----------
11 280
---------- ----------
Net Charge-Off's 323 1,170
---------- ----------
Additions charged to operations 304 2,305
---------- ----------
Balance at end of period $ 385 1,520
========== ==========
Ratio of net charge-off's during the period to
average loans outstanding during the period 1.11% 3.75%
========== ==========
</TABLE>
<PAGE> 28
The Bank has allocated the reserve for possible loan losses according to
the amounts deemed to be reasonably necessary at each year end to provide for
the possibility of losses being incurred within the categories of loans set
forth in the table below based on management's evaluation of the loan
portfolio. The amounts of such components of the reserve for possible loan
losses at December 31, 1995 and 1996 and the percent of loans in each
category to total loans are presented below.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996
------------------- -------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT
TOTAL LOANS
---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C>
Domestic:
Commercial, financial and
agricultural $ 110 28.31% 449 29.52%
Real estate - construction 16 4.04 69 4.56
Real estate - mortgage 173 44.48 701 46.14
Installment loans to
individuals 83 21.26 299 16.52
Loan secured by deposits -0- 1.01 -0- 3.16
Overdrafts 3 .90 2 .10
Other -0- .00 -0- .00
Foreign -0- .00 -0- .00
Unallocated -0- .00 -0- .00
---------- ---------- ---------- ----------
$ 385 100.00% 1,520 100.00%
========== ========== ========== ==========
</TABLE>
The following table sets forth an analysis of the average amount
outstanding and the average rate paid for all deposits for the categories and
periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996
------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE PAID AMOUNT RATE PAID
---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C>
Deposits in domestic bank
offices:
Noninterest-bearing demand
deposits $ 7,209 .00% 7,929 .00%
Interest-bearing demand
deposits 7,595 2.71 7,306 2.63
Savings deposits 2,275 3.02 2,002 3.12
Time deposits 22,784 6.00 25,006 6.16
Deposits in foreign banking
offices -0- .00 -0- .00
---------- ----------
Total $ 39,863 42,243
========== ==========
</TABLE>
<PAGE> 29
Deposit Maturities
------------------
The principal sources of funds for the Bank's loans and investments are
demand, time, savings and other deposits and borrowings. The Bank offers a
variety of deposit accounts including checking and NOW accounts, savings and
time accounts, certificates of deposit and money market accounts. As of
December 31, 1996, total deposits were approximately $42.5 million. Although
in some instances time deposits greater than $100,000 may be more sensitive
to changes in interest rates, substantially all the Bank's deposits are
derived from within its primary service areas which management believes are
not as interest rate sensitive as are more urban service areas. The Bank
does not have any brokered deposits.
The following table summarizes maturity information for time deposits
greater than $100,000 at December 31, 1996.
<TABLE>
<CAPTION>
($In Thousands)
--------------
<S> <C>
Three months or less $ 2,251
Over three through six months 2,270
Over six through twelve months 224
Over twelve months 637
--------------
Total $ 5,382
==============
</TABLE>
Advances From The Federal Home Loan Bank
----------------------------------------
The following table shows the Company's borrowings from the Federal Home
Loan Bank and the weighted average interest rates thereon at the end of each
of the last two years. Also provided are the maximum amount of borrowings
and the average amounts outstanding as well as weighted average interest
rates for the last two years.
<TABLE>
<S> <C>
Balance at December 31:
1996 $ 2,485,000
1995 595,000
Weighted Average Interest Rate At Year End:
1996 5.55%
1995 6.16
Maximum Amount Outstanding At Any Month's End:
1996 $ 2,595,000
1995 595,000
Average Amount Outstanding During The Year:
1996 $ 2,151,000
1995 103,000
Weighted Average Interest Rate During The Year:
1996 6.32%
1995 5.50
</TABLE>
Interest Rate Sensitivity
-------------------------
The relative interest rate sensitivity of the Bank's assets and liabilities
indicates the extent to which the Bank's net interest income may be affected
<PAGE> 30
by interest rate movements. The Bank's ability to reprice assets and
liabilities in the same dollar amounts and at the same time minimizes
interest rate risks. One method of measuring the impact of interest rate
changes on net interest income is to measure, in a number of time frames, the
interest-sensitivity gap, by subtracting interest-sensitive liabilities from
interest-sensitive assets, as reflected in the following table. Such
interest-sensitivity gap represents the risk, or opportunity, in repricing.
If more assets than liabilities are repriced at a given time in a rising rate
environment, net interest income improves; in a declining rate environment,
net interest income deteriorates. Conversely, if more liabilities than
assets are repriced while interest rates are rising, net interest income
deteriorates; if interest rates are falling, net interest income improves.
The following table presents the interest sensitivity gap of the company as
of December 31, 1996.
<TABLE>
<CAPTION>
OVER OVER
3
3 MONTHS 1 YEAR
MONTHS THROUGH THROUGH OVER
OR LESS
12 MONTHS 5 YEARS 5 YEARS TOTAL
---------------- -------- -------- --------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 9,238 7,276 10,080 751 27,345
Investment securities 1,146 732 5,489 459 7,826
Federal funds sold 7,249 -0- -0- -0- 7,249
---------------- -------- -------- --------
Total interest-
earning assets 17,633 8,008 15,569 1,210 42,420
---------------- -------- -------- --------
Interest-bearing liabilities:
NOW, savings and money
market accounts (1) -0- -0- -0- -0- -0-
Time deposits 5,292 12,206 6,606 -0- 24,104
Notes payable to
Directors 500 -0- -0- -0- 500
Advances from Federal
Home Loan Bank 1,000 78 1,372 35 2,485
---------------- -------- -------- --------
Total interest-bearing
liabilities 6,792 12,284 7,978 35 27,089
---------------- -------- -------- --------
Interest-sensitivity gap $ 10,841 (4,276) 7,591 1,175 15,331
================ ======== ======== ========
Cumulative interest
sensitivity gap $ 10,841 6,565 14,156 15,331
================ ======== ========
</TABLE>
----------------------------------------
(1) Not considered rate sensitive.
Impact of Inflation and Changing Prices
---------------------------------------
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most commercial and
industrial companies that have significant investments in fixed assets, such
as property, plant and equipment, and inventories and therefore are primarily
impacted by interest rates rather than changing prices. While the general
level of inflation underlies most interest rates, interest rates react more
to change in the expected rate of inflation and to changes in monetary and
<PAGE> 31
fiscal policy. Net interest income and the interest rate spread are good
measures of the company's ability to react to changing interest rates. This
information is presented in further detail in the section entitled "Average
Yields Earned and Rates Paid".
<PAGE> 32
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
The Company's principal executive offices are located at 420 South Madison
Avenue, Douglas, Georgia. This location is in the southern portion of
downtown Douglas, which is believed to be the most rapidly growing section of
Douglas. This location was chosen because of its convenience to both the
central downtown area and the retail and professional expansion on the south
side of Douglas. In addition, this site offers good visibility to the one-
way south-bound traffic on Peterson Avenue and provides access to customers
from Cherry Street and Madison Avenue. The Board of Directors are dedicated
to maintaining the viability of the downtown Douglas area and believe that
the new Bank building will add an attractive building to the downtown area
while avoiding traffic congestion.
The Organizers formed a partnership, the CEF Partnership, which obtained an
option to purchase a 3.46 acre site at the above location at a purchase price
of $330,000, which is approximately $20,000 below the appraised value of the
property. On December 28, 1990, the CEF Partnership exercised its option to
purchase the property from the seller, Douglas Peanut and Grain Co., whose
president, Ralph G. Evans, is an Organizer of the Company and the Bank. The
purchase price for the option was $31,800, all of which was credited toward
the purchase price of the property. The Bank used $330,000 of the proceeds
from the sale of its stock to the Company to reimburse the Organizers for the
payment of the purchase price of the option and to complete the purchase of
the site from the CEF Partnership.
During 1992, the Bank completed construction of its headquarters building
on the site purchased from the Partnership. Construction cost and furniture,
fixtures and equipment totalled approximately $1.3 million.
Until construction was completed on the Bank's permanent headquarters, the
Bank's offices were located in a temporary modular office purchased by the
CEF Partnership from a nonaffiliated third party for $26,000. This office
was located at the Bank's permanent site in Douglas. Upon the opening of the
Bank, the Bank purchased the temporary modular office from the CEF
Partnership for the same price the CEF Partnership paid. The Bank spent
approximately $15,000 to prepare the site for the temporary facility. The
Bank sold the temporary office facility in 1993.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
There are no pending legal proceedings to which the Company is a party or
to which any of its property is subject. From time to time in the future,
the Bank may be a party to legal proceedings in the ordinary course of its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters were submitted by the Company to a vote of its security holders
during the fourth quarter of the year ended December 31, 1996.
<PAGE> 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
----------------------------------------------------------------------
There has been no established public market for the Company's common stock
since its public stock offering which was concluded on December 31, 1991.
The Company is aware of occasional private sales of its common stock at $12
in 1992, at prices ranging from $12 to $14 in 1993, at prices averaging
$13.73 in 1994 (based on three transactions ranging from $12 to $15 per share
and totalling 2,600 shares) and at prices averaging $13.50 in 1996 (based on
three transactions ranging from $10.00 to $15.50 per share and totalling 300
shares). There was no sale transactions during 1995. Common stock was issued
by the Company in its stock offering in 1991 at $10 per share.
As of December 31, 1996, 405,710 shares of common stock had been issued and
were held of record by approximately 357 holders.
The Company has never declared or paid cash dividends but expects to do so
in the near future. The payment of dividends by national banks is restricted
by statute and regulation. See "Item 1. Description of Business -
Supervision and Regulation."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------
Results of Operations
---------------------
The Company, including the operation of its subsidiary bank, reported a
consolidated net loss of $(1,146,332) for the year ended December 31, 1996
compared to a net income of $313,176 for the year ended December 31, 1995.
Net interest income after provision for loan losses was a loss of $(578,805)
and $1,389,293 for the years ended December 31, 1996 and 1995, respectively.
The provision for loan losses was $2,305,174 and $304,288 for the years ended
December 31, 1996 and 1995, respectively. Non-interest income totalled
$493,908 and $396,352 for the years ended December 31, 1996 and 1995,
respectively, and non-interest expenses totalled $1,652,367 and $1,387,180
for the years ended December 31, 1996 and 1995, respectively.
The following table summarizes the results of operations of the Company for
the two years ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
---------- ----------
($ In Thousands)
<S> <C> <C>
Interest income $ 3,354 3,657
Interest expense (1,660) (1,931)
---------- ----------
Net interest income 1,694 1,726
Provision for loan losses (304) (2,305)
Non-interest income 396 494
Non-interest expense (1,388) (1,652)
---------- ----------
Income (Loss) before taxes 398 (1,737)
Income taxes (Benefit) 85 (591)
---------- ----------
Net income (Loss) $ 313 (1,146)
========== ==========
Return on assets (net income
divided by average total assets) .70% (2.35)%
Return on equity (net income
divided by average equity) 8.06 (32.32)
Equity to assets ratio (average
equity divided by average total
assets) 8.72 7.29
</TABLE>
<PAGE> 34
Comparison of Years Ended December 31, 1996 and 1995
----------------------------------------------------
Operations for the year ended December 31, 1996 resulted in a net loss of
approximately $(1,146,000) compared to a net income of approximately $313,000
for the year ended December 31, 1995.
Interest Income
---------------
Total interest income increased approximately $303,000 for 1996 compared to
1995. This increase is attributed to the factors explained in the following
paragraphs.
Interest earned on loans increased from approximately $2,857,000 in 1995 to
approximately $3,058,000 in 1996, an increase of $201,000. This increase was
the combined effect of an increase in the average loan portfolio balance from
approximately $29.1 million in 1995 to $31.2 million in 1996 and an increase
in the rate earned on the loan portfolio from 9.83% in 1995 to 9.80% in 1996.
Interest earned on investment securities increased from approximately
$317,000 in 1995 to approximately $320,000 in 1996, an increase of $3,000.
This increase was the net effect of a decrease in the average investment
portfolio balance from approximately $5.9 million in 1995 to approximately
$5.8 million in 1996 and an increase in the rate earned on the investment
portfolio from 5.34% in 1995 to 5.48% in 1996.
Interest earned on interest-bearing deposits in banks increased from $-0-
in 1995 to approximately $5,000 in 1996, an increase of $5,000. This
increase was the effect of an increase in the average interest-bearing
deposit balances from $.0 million in 1995 to approximately $.1 in 1996. The
average rate was 3.37%.
Interest earned on federal funds sold increased from approximately $182,000
in 1995 to approximately $275,000 in 1996, an increase of $93,000. This
increase was the net effect of an increase in the average federal funds sold
balance from approximately $3.3 million in 1995 to approximately $5.1 million
in 1996 and a decrease in the rate earned on the federal funds sold from
5.50% in 1995 to 5.39% in 1996.
Interest Expense
----------------
Total interest expense increased approximately $271,000 in 1996 compared to
1995.
This increase was the combined effect of an increase in the average balance
of interest-bearing deposits from approximately $32.7 million in 1995 to
approximately $34.3 million in 1996 and an increase in the average rate paid
on deposits from 5.03% in 1995 to 5.23% in 1996.
Interest expense on federal funds purchased decreased from approximately
$12,000 in 1995 to approximately $-0- in 1996, a decrease of $12,000. This
decrease was the effect of a decrease in the average balance of federal funds
purchased from approximately $223,000 in 1995 to $-0- in 1996. The average
rate on the federal funds purchased was 5.50% in 1995.
Interest expense on advances from the Federal Home Loan Bank increased from
approximately $5,000 in 1995 to approximately $136,000 in 1996, an increase
of $131,000. This increase was the combined effect of an increase in the
<PAGE> 35
average balance of federal funds sold from approximately $.1 million in 1995
to approximately $2.2 million in 1996 and an increase in the rate paid on the
advances from 5.50% in 1995 to 6.32% in 1996.
Provision for Loan Losses
-------------------------
The provision for loan losses for the year ended December 31, 1996 as
compared to 1995 increased approximately $2.0 million. The balance of the
allowance for loan losses was approximately $1.5 million at December 31, 1996
and approximately $385,000 at December 31, 1995. Actual loan charge-offs net
of recoveries were approximately $1.2 million for the year ended December 31,
1996 and $323,000 for the year ended December 31, 1995. Non-accrual loans
were approximately $1.1 million at December 31, 1996. Loans ninety days or
more past due and still accruing amounted to approximately $5,000 at December
31, 1996. In determining an adequate level of loan loss reserves, such loans
were included in such consideration. The amount of the provision for loan
losses is a result of the amount of loans charged off, the amount of loans
recovered and management's conclusion concerning the level of the allowance
for loan losses. The level of the allowance for loan losses is based upon a
number of factors including the bank's past loan loss experience,
management's evaluation of the collectibility of loans, the review of
specific impaired loans, the general state of the economy and other relevant
factors.
For a further discussion concerning loans and the allowance for loan losses,
refer to "financial condition".
Non-Interest Income
-------------------
The following table presents the principal components of non-interest
income for the two years ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1996
---------- ----------
(In Thousands)
<S> <C> <C>
Service charges on deposit accounts $ 299 366
Insurance commissions 26 18
Gains (Loss) on sale of assets 5 -0-
Fees on mortgage loans originated for sale 22 22
Gain (Loss) on sale of securities -0- 1
Other income 44 87
---------- ----------
Total Non-Interest Income $ 396 494
========== ==========
</TABLE>
Non-interest income for the year ended December 31,1996 as compared to 1995,
increased approximately $98,000. Service charges on deposit accounts for the
year ended December 31, 1996 as compared to 1995 increased approximately
$67,000. This increase was related primarily to an increase in the volume of
transaction deposit accounts. Fees generated from loans originated for sale
amounted to approximately $22000 and $22000 in 1996 and 1995, respectively.
All other non-interest income increased from approximately $75,000 for the
year ended December 31, 1995 to approximately $106,000 for the year ended
December 31, 1996.
<PAGE> 36
Non-Interest Expenses
---------------------
The following table presents the principal components of non-interest
expenses for the two years ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------
1995 1996
---------- ----------
(In Thousands)
<S> <C> <C>
Salaries $ 563 578
Other personnel expenses 104 294
Occupancy expense of bank premises 103 105
Furniture and equipment expense 87 100
Data processing 56 66
Printing and office supplies 69 61
Amortization 22 15
Advertising 45 61
FDIC insurance 44 2
Other operating expenses 295 370
---------- ----------
Total Non-Interest Expenses $ 1,388 1,652
========== ==========
</TABLE>
Increases in non-interest expenses for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 amounted to approximately
$264,000 or 19.0%. Compensation and other personnel expenses increased
approximately $205,000 reflecting an increase in the number of employees, in
wage levels and in the cost of employee benefits. Additionally, the increase
in salaries and employee benefits over 1995 reflected the payment of a
termination amount upon the termination of the employment agreement with the
Bank's President and the costs of a temporary interim management team.
Excluding federal deposit insurance, all other expenses increased
approximately $101,000 or 14.9%. This increase is primarily attributable to
the additional cost associated with a larger volume of business.
Additionally, federal deposit insurance amounted to approximately $2,000 in
1996 and $44,000 in 1995, reflecting industry wide savings on FDIC insurance.
Income Taxes
------------
A tax credit was accrued for the year ended December 31, 1996 based upon the
loss incurred of approximately $1.7 million before taxes.
The effective tax rate for the year ended December 31, 1995 was 21.4%. This
rate is lower that the expected tax provision of approximately 34% due to the
utilization of an alternative minimum tax credit carryover and the
utilization of remaining net operating losses accumulated prior to 1993.
Interest Rate Sensitivity
-------------------------
As of December 31, 1996, the Company has a positive interest-sensitivity gap
up to one year in the amount of $6.6 million. Within one year, a falling
rate environment of approximately 200 basis points over the year would result
in a reduction of net interest income of approximately $76,000.
<PAGE> 37
Financial Condition
-------------------
The Company, including its subsidiary bank, reported consolidated total
assets of approximately $49.1 million at December 31, 1996 and $50.5 million
at December 31, 1995 representing a decrease of approximately $1.4 million
for the year ended December 31, 1996. During the year ended December 31,
1996, cash and due from banks decreased approximately $2.5 million, loans
decreased approximately $3.3 million, proceeds of loans from Directors were
$.5 million, advances from the Federal Home Loan Bank increased approximately
$1.9 million and operations generated approximately $.5 million. These funds
were used to increase investments by $2.6 million, acquire additional
equipment of approximately $.1 million, increase federal funds sold by $3.4
million and decrease deposits by $2.6 million.
The reduction in total assets of approximately $1.4 million included the
reduction in loans of approximately $3.3 million. The reduction in loans was
due to the charge-off of approximately $1.4 million during the year and the
overall reduction in the loan portfolio resulting from the strengthening of
underwriting standards and procedures. Approximately mid-year, an internal
loan review was performed by the new senior lending officer which concluded
that the underwriting procedures were inadequate. During the quarter ended
September 30, 1996, the Bank received over 100 bankruptcy notices.
Additionally, the reduction in assets was for the purpose of managing the
capital requirements of the Bank for which the Company increased the capital
by $1 million during the year ended December 31, 1996. Based upon the
ongoing loan review program of the Bank, the Bank increased its allowance for
loan losses from approximately $385,000 at December 31, 1995 to approximately
$1.5 million at December 31, 1996.
Interest rates as previously discussed are reflective of interest rates in
general, market conditions and competition. Changes in short-term funds
including cash and due from banks, federal funds sold, interest-bearing
deposits and investment securities are reflective of the liquidity position
of the Company.
The Company's capital to assets ratio as of December 31, 1996 was 6.0%.
In 1988, the Bank regulatory agencies adopted risk-based capital guidelines
which are being phased in between 1990 and 1992. Such guidelines establish a
uniform minimum capital level as a percentage of risk-weighted assets plus
off-balance sheet exposures. Under the guidelines, one of four risk weights
is applied to the different balance sheet assets, primarily based on the
relative credit risk of the counter party. Off-balance sheet items, such as
loan commitments, are also applied a risk weight, after applying one of four
credit conversion factors to these items to determine a balance sheet
equivalent amount. The credit conversion factors are primarily based on the
likelihood of the off-balance sheet item becoming an asset. The risk weights
and credit conversion factors are 0%, 20%, 50% and 100%.
There are two categories of capital under the guidelines. Tier one capital
includes common stockholders' equity and qualifying preferred stock, less
certain intangible assets (substantially goodwill). Tier two capital
generally includes preferred stock not qualifying as tier one capital,
mandatory convertible debt, subordinated and unsecured senior debt and the
allowance for loan losses, all subject to limitations by the guidelines.
Tier two capital is limited to the amount of tier one capital.
The guidelines require a minimum total risk-based capital ratio of 8.00% by
the end of 1992, with at least half of the total capital in the form of tier
one capital.
<PAGE> 38
In early 1990, regulators proposed a new minimum leverage ratio which would
represent the minimum capital to total assets standards for banking
organizations. The minimum leverage ratio is 3% for the highest rated
organizations which are not undertaking significant expansion programs. An
additional 1% to 2% may be required, depending on a bank's regulatory ratings
and expansion plans. The ratio consists of tier one capital based on the
1992 risk-based capital guidelines, divided by total assets (excluding
intangible assets that were deducted to arrive at tier one capital). The
leverage ratio is expected to be used in tandem with the risk-based capital
ratios, thereby eliminating the 5.50% primary and 6.00% total capital to
assets ratios as the minimum capital standards for banking organizations
after year-end 1990.
The following table presents the Bank's capital ratios as of December 31,
1996 compared to the required ratios as of that date.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ----------
-----
---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Total Capital
(to Risk Weighted
Assets) $3,877,311 11.5% 2,694,097 8.0% 3,367,621 10.0%
Tier I Capital
(to Risk Weighted
Assets) 3,491,951 10.4% 1,347,048 4.0% 2,020,573 6.0%
Tier I Capital
(to Average Assets) 3,491,951 7.4% 1,898,320 4.0% 2,372,900 5.0%
As of December 31, 1996
Total Capital
(to Risk Weighted
Assets) 3,310,365 11.3% 2,342,089 8.0% 2,927,611 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 2,944,414 10.1% 1,171,044 4.0% 1,756,566 6.0%
Tier 1 Capital
(to Average Assets) 2,944,414 6.2% 1,914,080 4.0% 2,392,600 5.0%
</TABLE>
The Bank is in compliance with the regulatory capital requirements as of
December 31, 1996 and 1995.
Liquidity and Capital Resources
-------------------------------
Liquidity management involves the matching of the cash flow requirements of
customers, either depositors withdrawing funds or funding additional loans,
and the ability of the Bank to meet those requirements. Management monitors
and maintains appropriate levels of assets and liabilities so that maturities
of assets are such that adequate funds are provided to meet estimated
customer withdrawals and loan requests.
The Bank's liquidity position depends primarily upon the liquidity of its
assets relative to its need to respond to short-term demand for funds caused
by withdrawals from deposit accounts and loan funding commitments. Primary
sources of liquidity are scheduled payments on its loans and interest on the
Bank's investments. The Bank may also utilize its cash and due from banks,
short-term deposits with financial institutions, federal funds sold and
investment securities to meet liquidity requirements. At December 31, 1996,
the Bank's cash and due from Banks were approximately $4.8 million (after
reduction for its required reserves of $.2 million), and its federal funds
sold were $7.2 million. All of the above can be converted to cash on short
notice. The sale of investments which had a market value of approximately
$7.8 million at December 31, 1996, can also be used to meet liquidity
requirements to the extent the investments are not pledged to secure public
funds on deposit as required by law. Securities with a market value of $3.9
million were pledged as of December 31, 1996.
<PAGE> 39
The Bank is a member of the Federal Home Loan Bank of Atlanta and as such
has the ability to secure advances therefrom, although the cost of such
advances exceed lower cost alternatives such as deposits from the local
community. The Bank had advances outstanding from the Federal Home Loan Bank
of Atlanta of $2.5 million at December 31, 1996 at an average rate of 5.55%.
The Bank also has the ability, on a short-term basis, to borrow and purchase
federal funds from other financial institutions.
The Bank's funding needs are based primarily on the volume of lending. The
primary funding source is from new deposits. The Bank seeks to attract new
deposits by paying rates of interest on deposit accounts which are
competitive in its primary service area. The Bank generally does not pay
brokers' commissions in connection with the obtaining of deposits or have
deposits outside the primary service area. The Bank does not pay premiums
to attract deposits. As of December 31, 1996, the average cost for deposit
liabilities was approximately 5.0%. The Bank continues to expect that new
deposits will serve as its primary funding source.
The Company's needs for additional capital will depend to a great extent
upon the capital needs of the Bank, which in turn will depend upon the level
of deposits and total assets of the Bank. Based upon the projected
performance of the Bank, the organizers believe that the net proceeds of the
public offering concluded on December 31, 1991 should be sufficient to meet
the capital requirements of the Company and the Bank for at least the first
five years of operation (see capital ratios as of December 31, 1994 and
regulatory capital requirements discussed previously under "Financial
Condition". The projected performance of the Bank is based upon a variety of
factors such as (i) the initial capitalization of the Bank, (ii) an analysis
of the prospective market in the Bank's service area, (iii) the projected
operating expenses of the Bank, including pre-opening expenses, cost of the
Bank site, construction cost, cost of the Bank's temporary facility, cost of
furniture, fixtures and equipment, personnel expenses, provision for loan
losses, general and administrative expenses and interest on deposits and (iv)
the projected earnings of the Bank, including earnings from the Bank's loan
and investment portfolios. If the Bank were to grow at a more rapid rate
than anticipated by the organizers, the Company may need to raise additional
capital to meet the Bank's capital needs. Management believes that
sufficient sources of capital, such as bank lines of credit, directors loans
and additional equity capital derived from the exercise of warrants or from
private equity offerings, are available should the need for additional
capital arise.
During the year ended December 31, 1996, the Company made an additional
capital contribution to the Bank in the amount of $1 million, of which
$500,000 was funded by loans from directors of the Company.
The average loan to deposit ratio of the Company at December 31, 1996 was
64.3% compared to 70.6% at December 31, 1995.
Management is not aware of any trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations including recommendations by
regulatory authorities which would have such an effect. However, a
regulatory examination concluded in the fourth quarter of 1996 indicated that
a continuation of losses as experienced in 1996 could subject the Bank to a
memorandum of understanding with regulatory authorities.
<PAGE> 40
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
The financial statements, notes thereto and auditor's report thereon,
included on the following pages, are incorporated herein by reference.
Index to Consolidated Financial Statements
------------------------------------------
Financial Statements Page
____
--------------------
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . 41
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Income . . . . . . . . . . . . . . . . . 43
Consolidated Statement of Stockholders' Equity . . . . . . . . . . 44
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 45
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 46
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
------------------------------------------------------------------------
None.
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
FNC Bancorp, Inc. and Subsidiary
Douglas, Georgia
We have audited the accompanying consolidated balance sheets of FNC Bancorp,
Inc., and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
the two years ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 FNC Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows
for the two years ended December 31, 1996 in conformity with generally
accepted accounting principles.
STEWART, FOWLER & STALVEY, P.C.
----------------------------------------
Valdosta, Georgia
February 6, 1997
<PAGE> 42
<TABLE>
<CAPTION>
FNC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
______
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and due from banks $ 4,917,622 7,434,011
Federal funds sold 7,249,000 3,820,000
----------- -----------
Total Cash and Cash Equivalents 12,166,622 11,254,011
Investment securities (Fair value of
$7,829,126 in 1996 and $5,196,885
in 1995), Notes 1 and 2 7,829,126 5,191,927
Loans, net of allowance for loan losses and
unearned interest, Notes 1 and 4 25,825,258 31,532,756
Bank premises and equipment, Notes 1 and 3 1,682,081 1,694,013
Accrued interest receivable 757,467 686,724
Property acquired in settlement of loans, Note 1 68,400 13,677
Organization costs, net of amortization, Note 1 -0- 15,240
Other assets 790,072 129,941
----------- -----------
Total Assets $49,119,026 50,518,289
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 9,409,021 9,965,771
NOW accounts 7,253,382 7,976,781
Savings 1,778,551 2,040,414
Time, $100,000 and over 5,381,660 6,629,345
Other time 18,721,987 18,573,233
----------- -----------
Total Deposits 42,544,601 45,185,544
Notes payable to directors, Note 13 500,000 -0-
Advances from Federal Home Loan Bank, Note 5 2,485,000 595,000
Accrued interest 546,773 577,420
Income taxes payable -0- 55,195
Other liabilities 109,080 27,743
----------- -----------
Total Liabilities 46,185,454 46,440,902
----------- -----------
Stockholders' Equity:
Preferred stock, 10,000,000 shares
authorized, no shares issued -0- -0-
Common stock, $1 par value, 10,000,000
shares authorized, 405,710 shares
issued and outstanding 405,710 405,710
Additional paid in capital 3,610,541 3,610,541
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Retained earnings (deficit) (1,084,329) 62,003
Unrealized gains (losses) on available-
for-sale securities, Net of applicable
deferred income taxes 1,650 (867)
----------- -----------
Total Stockholders' Equity 2,933,572 4,077,387
----------- -----------
Total Liabilities and Stockholders' Equity $49,119,026 50,518,289
=========== ===========
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
FNC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans, Note 1 $ 3,057,854 2,856,716
Interest on investment securities:
Taxable 320,422 315,512
Interest on federal funds sold 274,544 180,737
Interest on deposits in banks 4,506 12
Interest on securities purchased under
agreements to resell -0- 1,042
----------- -----------
Total 3,657,326 3,354,019
----------- -----------
Interest Expense:
Interest on deposits 1,795,263 1,642,503
Interest on federal funds purchased 9 12,253
Interest on advances from Federal Home
Loan Bank 135,685 5,682
----------- -----------
Total 1,930,957 1,660,438
----------- -----------
Net Interest Income 1,726,369 1,693,581
Provision For Loan Losses, Notes 1 and 4 2,305,174 304,288
----------- -----------
Net Interest Income After Provision For
Loan Losses (578,805) 1,389,293
----------- -----------
Other Income:
Service charges on deposit accounts 366,116 299,224
Insurance commissions 18,392 26,135
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Gain (Loss) on sale of assets -0- 5,191
Gain (Loss) on sale of securities 761 -0-
Fees on mortgage loans originated for sale 21,564 22,052
Other income 87,075 43,750
----------- -----------
Total 493,908 396,352
----------- -----------
Other Expenses:
Salaries 577,854 563,097
Other personnel expenses, Note 6 293,986 103,804
Occupancy expense of bank premises 105,261 103,415
Furniture and equipment expense 100,048 86,533
Data processing 66,284 55,726
Printing and office supplies 60,865 68,893
Amortization, Note 1 15,240 22,369
Advertising, Note 1 60,891 44,529
FDIC insurance 2,000 43,839
Other operating expenses 369,938 294,975
----------- -----------
Total 1,652,367 1,387,180
----------- -----------
Income (Loss) Before Taxes (1,737,264) 398,465
Income Taxes (Benefit), Note 7 (590,932) 85,289
----------- -----------
Net Income (Loss) $(1,146,332) 313,176
=========== ===========
Earnings (Loss) Per Common and Common Equivalent
Share, Note 1 $ (2.83) .70
=========== ===========
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
FNC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1996
---------------------------------
UNREALIZED
GAINS (LOSSES)
ON AVAILABLE-
FOR-SALE
SECURITIES,
NET OF
APPLICABLE
COMMON STOCK
ADDITIONAL RETAINED DEFERRED
NUMBER OF PAR PAID IN EARNINGS INCOME
SHARES VALUE
CAPITAL
(DEFICIT)
TAXES
TOTAL
--------- --------- --------- --------- ---------
---------
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Page 45
<S> <C> <C> <C> <C> <C>
<C>
Balances,
December 31,
1994 405,710$ 405,710 3,610,541 (251,173) (74,805)
3,690,273
Net Income -0- -0- -0- 313,176 -0- 313,176
Change in
unrealized
gains/losses
on available-
for-sale
securities,
net of
applicable
deferred
income
taxes -0- -0- -0- -0- 73,938 73,938
-------- -------- -------- -------- -------- --------
Balances,
December 31,
1995 405,710 405,710 3,610,541 62,003 (867)
4,077,387
Net Income
(Loss) -0- -0- -0-(1,146,332) -0-
(1,146,332)
Change in
unrealized
gains/losses
on available-
for-sale
securities,
net of
applicable
deferred
income
taxes -0- -0- -0- -0- 2,517 2,517
--------- --------- --------- --------- ------------------
Balances,
December 31,
1996 405,710 $ 405,710 3,610,541(1,084,329) 1,6502,933,572
========= ========= ========= ========= ==================
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
FNC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Page 46
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $(1,146,332) 313,176
Adjustments to reconcile net income or
loss to net cash provided by operating
activities:
Depreciation 108,536 101,466
Amortization 15,240 22,369
Deferred income taxes (benefit) (469,677) (522)
(Gain) Loss sale of assets -0- (5,191)
(Gain) Loss on sale of securities (761) -0-
Provision for loan losses 2,305,174 304,288
Securities (accretion) amortization (31,305) (36,624)
Change in assets and liabilities:
(Increase) Decrease in accrued interest
receivable (70,743) (122,450)
Increase (Decrease) in accrued interest
payable (30,647) 328,094
(Increase) Decrease in other assets (191,751) (20,786)
Increase (Decrease) in other liabilities 81,337 (19,181)
Increase (Decrease) in income taxes
payable (55,195) 41,274
----------- -----------
Net cash provided (used) by operating
activities 513,876 905,913
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (96,604) (35,867)
Net (increase) decrease in loans 3,347,601 (4,490,467)
(Increase) Decrease in interest-
bearing deposits -0- 122
Proceeds from sale of fixed assets -0- 12,850
Proceeds from sale of available-
for-sale securities 500,000 -0-
Proceeds from maturity of available-
for-sale securities 3,780,000 2,250,000
Proceeds from maturity of held-to-
maturity securities 710,000 3,250,000
Purchase of available-for-sale securities (7,657,138) (2,651,880)
Purchase of held-to-maturity securities -0- (758,402)
Maturity (Purchase) of securities
purchased under agreements to resell -0- 1,250,000
Payments received on mortgage-backed
securities 65,819 90,922
----------- -----------
Net cash provided (used) by investing
activities 649,678 (1,082,722)
----------- -----------
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Page 47
Cash Flows From Financing Activities:
Proceeds from notes payable 500,000 -0-
Proceeds of advances from Federal
Home Loan Bank 2,000,000 595,000
Payments on advances from Federal
Home Loan Bank (110,000) -0-
Increase (Decrease) in time deposits (1,098,931) 5,459,366
Increase (Decrease) in other deposits (1,542,012) (338,633)
----------- -----------
Net cash provided (used) by financing
activities (250,943) 5,715,733
----------- -----------
Net increase (decrease) in cash
and cash equivalents 912,611 5,538,924
Cash and Cash Equivalents at
Beginning of Year 11,254,011 5,715,087
----------- -----------
Cash and Cash Equivalents at
End of Year $12,166,622 11,254,011
=========== ===========
Supplemental Disclosures of Cash
Flow Information
--------------------------------
Cash paid during the year for:
Interest $ 1,961,604 1,332,344
=========== ===========
Income taxes $ 121,555 44,537
=========== ===========
Schedule of Non-Cash Investing and
Financing Activities
----------------------------------
Total increase (decrease) in unrealized
losses on securities available-for-sale $ (3,814) (112,028)
=========== ===========
</TABLE>
<PAGE> 46
FNC BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
---------------------------------------------------
Nature of operations: FNC Bancorp., Inc. is engaged in the activity of
providing traditional banking services through its banking subsidiary, First
National Bank of Coffee County. The Bank is a national bank with one banking
office located in Douglas, Georgia. The Bank primarily grants agri-business,
commercial, consumer and real estate loans with a market area that includes
predominately South Georgia. The composition of the loan portfolio is
detailed in Note 4 of these financial statements. Investments are
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Page 48
predominately limited to U.S. Treasury obligations, obligations of other U.S.
Government agencies and corporations and obligations of state and political
subdivisions. The Bank also purchases time deposits with other banks and
sells federal funds to correspondent banks.
Consolidated financial statements: The consolidated financial statements
include the accounts of FNC Bancorp, Inc. and its sole subsidiary, First
National Bank of Coffee County. All intercompany transactions have been
eliminated in consolidation.
Investment securities: Effective January 1, 1994, debt securities that
management has the ability and intent to hold to maturity are classified as
held-to-maturity and carried at cost adjusted for amortization of premiums
and accretion of discounts using methods approximating the interest method.
Other securities are classified as available-for-sale and are carried at fair
value. Unrealized gains and losses on securities available-for-sale are
recognized as direct increases or decreases in stockholders' equity. Cost of
securities sold is determined using the specific identification method.
Bank premises and equipment and related depreciation: Depreciation of bank
premises and equipment is computed using the straight line method over the
estimated useful lives of the assets. Expenditures for maintenance, repairs,
removals and betterments which do not materially prolong the useful lives of
the assets are charged to income as incurred. The cost of property retired
or sold, and the related accumulated depreciation, is removed from the
accounts, and any gain or loss, after taking into consideration proceeds from
sale, is transferred to income.
Loans and allowance for losses on loans: Loans are stated at the amount of
the unpaid principal, reduced by unearned interest and an allowance for loan
losses. Interest income on loans is calculated primarily by using the simple
interest method on daily balances of the principal amount outstanding. The
Bank provides for loan losses based on management's evaluation of the
collectibility of loans and other relevant factors. Allowances for impaired
loans are generally determined based on collateral values or the present
value of estimated cash flows. Fees for originating loans which exceed the
direct origination cost are deferred net of origination costs and amortized
by the level yield method over the term of the related loans. Accrual of
interest is discontinued when management believes that the borrowers'
financial condition is such that collection of interest is doubtful.
<PAGE> 47
Property acquired in settlement of loans: Real estate and other property
acquired in settlement of loans is initially recorded at market value at
acquisition less estimated costs to sell and subsequently carried at the
lower of cost or market value less estimated costs to sell.
Organizational costs and pre-opening expenses: The company capitalized
organizational costs and pre-opening expenses incurred during the development
stage in accordance with applicable accounting pronouncements and policies.
Organizational costs are being amortized over a five-year period using the
straight-line method beginning with the opening of the bank. Other pre-
opening expenses were charged off as an expense during the first quarter
after opening the bank.
PAGE 49
Income taxes: The tax effects of transactions are recognized in the same
period as they are reported for financial statement purposes, regardless of
the period in which such items are recognized for tax purposes.
Cash and cash equivalents: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal
funds sold.
Off-balance sheet financial instruments: In the ordinary course of business,
the Bank has entered into off-balance sheet instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become
payable.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect 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.
Certain significant estimates: Material estimates that are particularly
susceptible to significant change relate to the determination of the
allowance for losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with
the determination of allowances for losses on loans and the valuation of
foreclosed real estate, management obtains independent appraisals for
significant properties.
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 Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgements about information available to them at the time of
their examination. It is at least reasonably possible that the allowances
for losses on loans and foreclosed real estate may change in the near term.
Advertising costs: The Bank follows the policy of charging the costs of
advertising to expense as incurred. Advertising costs were $60,891 and
$44,529 for the years ended December 31, 1996 and 1995, respectively.
<PAGE> 48
Stock-based compensation: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. The Company has elected to
disclose the proforma effect on net income as if the fair value based method
of accounting for stock options had been used.
Fair values of financial instruments: Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
PAGE 50
whether or not recognized in the statement of financial condition. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets, and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and commercial
and industrial loans) are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates
include judgements regarding future expected loss experience and risk
characteristics. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
checking accounts, interest-bearing checking accounts and savings accounts)
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The fair values for certificates
of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits. The
carrying amount of accrued interest payable approximates fair value.
<PAGE> 49
Short-term borrowings, notes payable and advances from Federal Home Loan
Bank: The carrying amounts of short-term borrowings, notes payable and
advances from the Federal Home Loan Bank approximate their fair values.
Other liabilities: Commitments to extend credit were evaluated and fair
PAGE 51
value was estimated using the terms for similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates.
Earnings per common and common equivalent share: Earnings per common and
common equivalent share were computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year using the modified treasury stock method. Common
stock equivalents include shares issuable on the exercise of warrants and
stock options. Under the modified treasury stock method, the number of
common shares outstanding was increased by the net additional shares which
would be issued assuming that the shares issuable as a result of the exercise
of warrants and stock options were actually issued at the agreed-upon price
and the resulting proceeds were used to reacquire 20% of the outstanding
common shares at the average price of the common stock during the year and
the remaining funds were used to reduce indebtedness or invested in U.S.
Government securities and the resulting income effect (net of taxes) applied
as an adjustment of net income. For 1996, the modified treasury stock method
was not used because its application would be anti-dilutive. Instead, the
1996 earnings per share were computed by dividing the net loss by the actual
weighted average number of shares of common stock outstanding during the
year. For 1995, the modified treasury stock method reflects that 153,426
additional shares would be issued at $10 per share, that 81,142 shares would
be reacquired at $12 per share, that $560,556 would be invested in U.S.
Government securities at an assumed rate of 6% which, at an assumed tax rate
of 34%, would result in an increase in net income of $22,198. Weighted
average shares used in the computation of earnings per common and common
equivalent share were as follows:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Weighted average shares outstanding 405,710 405,710
Weighted average of common equivalent shares -0- 72,284
---------- ----------
Total 405,710 477,994
========== ==========
</TABLE>
New accounting standards: Several new accounting standards were effective in
1995 or 1996 including Statement of Financial Accounting Standards No. 114
(Accounting by Creditors for Impairment of a Loan), Statement No. 118
(Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures), Statement No. 119 (Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments), Statement No. 121
(Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of) and Statement No. 122 (Accounting for Mortgage Servicing
Rights). The new accounting standards are either not currently relevant to
the Company or have an immaterial effect upon its financial statements.
PAGE 52
<PAGE> 50
Note 2 - Investment Securities
------------------------------
Investment securities are carried in the accompanying balance sheets as
follows:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Available-for-sale $7,829,126 4,489,015
Held-to-maturity -0- 702,912
---------- ----------
$7,829,126 5,191,927
========== ==========
</TABLE>
Securities available-for-sale consist of the following:
-------------------------------------------------------
As of December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $4,718,408 7,302 3,349 4,722,361
Obligations of other U.S.
government agencies and
corporations 2,498,865 1,129 6,309 2,493,685
Mortgage-backed securities 150,753 3,727 -0- 154,480
Federal Home Loan Bank stock 338,600 -0- -0- 338,600
Federal Reserve stock 120,000 -0- -0- 120,000
---------- ---------- ---------- ----------
$7,826,626 12,158 9,658 7,829,126
========== ========== ========== ==========
</TABLE>
As of December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $ 952,927 214 417 952,724
Obligations of other U.S.
government agencies and
corporations 3,082,955 3,598 6,603 3,079,950
PAGE 53
Mortgage-backed securities 217,245 1,896 -0- 219,141
Federal Home Loan Bank stock 132,200 -0- -0- 132,200
Federal Reserve stock 105,000 -0- -0- 105,000
---------- ---------- ---------- ----------
$4,490,327 5,708 7,020 4,489,015
========== ========== ========== ==========
</TABLE>
<PAGE> 50
Securities held-to-maturity consist of the following:
-----------------------------------------------------
As of December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of other U.S.
Government agencies and
corporations $ 702,912 4,958 -0- 707,870
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- ----------------------
MARKE MARKET
COST VALUE COS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ -0- -0- 1,728,601 1,727,608
Due after one year through
five years -0- -0- 5,488,672 5,488,438
Due after five years through
ten years -0- -0- -0- -0-
Due after ten years -0- -0- -0- -0-
Mortgage-backed securities -0- -0- 150,753 154,480
---------- ---------- ---------- ----------
$ -0- -0- 7,368,026 7,370,526
========== ========== ========== ==========
</TABLE>
Proceeds from sale of available-for-sale securities were $500,000 with gains
PAGE 54
realized of $761 for the year ended December 31, 1996. There were no sales
of securities during 1995.
Securities with a book value of approximately $3,851,485 and $4,419,437
(market value of approximately $3,851,150 and $4,423,834 at December 31, 1996
and 1995, respectively) at December 31, 1996 and 1995, respectively, were
pledged to secure public monies as required by law or for other purposes.
<PAGE> 51
Note 3 - Bank Premises and Equipment
------------------------------------
Bank premises and equipment are stated at cost less accumulated depreciation,
and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED
1996 1995 USEFUL LIVES
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 372,676 372,676
Building and improvements 1,064,078 1,064,078 10-40 years
Furniture, fixtures and equipment 687,590 590,986 3-5 years
Vehicles 16,467 16,467 5 years
---------- ----------
2,140,811 2,044,207
Less accumulated depreciation 458,730 350,194
---------- ----------
Total $1,682,081 1,694,013
========== ==========
</TABLE>
Depreciation expense amounted to $108,536 and $101,466 for the years ended
December 31, 1996 and 1995, respectively.
Note 4 - Loans
--------------
Major classifications of loans are as follows:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Agricultural $ 2,971,355 3,381,657
Commercial and industrial 5,099,676 5,655,678
Real estate - mortgage 12,618,490 14,197,650
Real estate - construction 1,246,122 1,291,215
Loans to individuals for household,
family and other personal expenditures 5,380,851 7,108,386
Overdrafts 29,149 283,530
----------- -----------
PAGE 55
27,345,643 31,918,116
Unearned interest -0- -0-
----------- -----------
27,345,643 31,918,116
Allowance for loan losses (1,520,385) (385,360)
----------- -----------
Loans, net $25,825,258 31,532,756
=========== ===========
</TABLE>
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $1,038,212 and $177,200 at December 31, 1996 and
1995, respectively. If interest on those loans had been accrued, such income
would have approximated $76,457 and $18,643 for 1996 and 1995, respectively.
Interest income on those loans, which is recorded only when received,
amounted to approximately $-0- and $10,376 in 1996 and 1995, respectively.
The Bank did not have any loans classified as impaired at December 31, 1996
or 1995.
First mortgage loans on residential (one-to-four units) real estate are
pledged to secure advances from the Federal Home Loan Bank (See Note 5). The
advances must be fully secured after discounting the qualifying loans at 75%
of the principal balances outstanding.
<PAGE> 53
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of year $ 385,360 403,800
Provision for losses charged
to operating expenses 2,305,174 304,288
Loans charged off (1,449,603) (335,077)
Recoveries 279,454 12,349
---------- ----------
Balance, end of year $1,520,385 385,360
========== ==========
</TABLE>
Note 5 - Advances From Federal Home Loan Bank
---------------------------------------------
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Advances payable, interest payable
monthly, fixed rates which averaged
PAGE 56
5.55% at December 31, 1996 (6.16% in 1995),
various repayment options, maturities
through May 16, 2005. $2,485,000 595,000
========== ==========
</TABLE>
Maturities of the advances for the succeeding five years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
____________
<S> <C>
1997 $1,078,000
1998 1,078,000
1999 78,000
2000 206,000
2001 10,000
</TABLE>
The advances are secured by first mortgage loans on residential (one-to-four
units) real estate as provided in Note 4.
Note 6 - 401(k) Plan
--------------------
During the year ended December 31, 1995, the Bank adopted a 401(k) plan for
qualified employees. The plan is qualified under the Internal Revenue Code.
Under the 401(k) plan, employees may make salary deferral contributions up to
15% of qualified employee compensation. The Company will also make
contributions to the plan at a level determined by the Board of Directors.
Company contributions to the plan were $7,742 and $9,067 for the years ended
December 31, 1996 and 1995, respectively.
<PAGE> 54
Note 7 - Income Taxes
---------------------
The consolidated provision for income taxes for 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current Federal tax expense (benefit) $ (121,255) 85,811
Deferred Federal tax expense (credit) (469,677) (522)
---------- ----------
$ (590,932) 85,289
========== ==========
</TABLE>
The provision for Federal income taxes differs from that computed by applying
PAGE 57
Federal statutory rates to income before income taxes as indicated in the
following analysis:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Expected tax provision (benefit) at a 34% rate $ (590,670) 135,478
Alternative minimum tax (credit) -0- (33,257)
Net operating loss carryover -0- (13,326)
Increase (Decrease) in deferred tax asset
valuation allowance -0- -0-
Other (262) (3,606)
---------- ----------
$ (590,932) 85,289
========== ==========
</TABLE>
Deferred tax liabilities have been provided for taxable temporary differences
related to accumulated depreciation and unrealized gains on available-for-
sale securities. Deferred tax assets have been provided for deductible
temporary differences related to unrealized losses on available-for-sale
securities, the allowance for loan losses, net operating loss carryover, and
amortization of start-up costs. The net deferred tax assets in the
accompanying balance sheets include the following components:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 411,997 111,144
Alternative minimum tax credit carryover 477 -0-
Net operating loss carryover 187,004 -0-
Unrealized losses on available-for-sale
securities -0- 447
Start-up costs -0- 10,105
---------- ----------
599,478 121,696
---------- ----------
Deferred tax liabilities:
Unrealized gains on available-for-sale
securities 850 -0-
Bank premises and equipment and
depreciation 49,237 40,685
---------- ----------
50,087 40,685
---------- ----------
Net deferred tax assets $ 549,391 81,011
========== ==========
</TABLE>
No valuation allowance was established in view of the Company's tax
PAGE 58
strategies coupled with anticipated future taxable income as evidenced by the
Company's earnings projections.
The Company has a net operating loss carryforward of $540,458 that may be
offset against future taxable income. Substantially all of the carryforward
expires in 2011.
<PAGE> 55
Note 8 - Related Party Transactions
-----------------------------------
The Bank had outstanding loans to its officers, directors and employees at
December 31, 1996 and 1995 in the aggregate of $283,018 and $357,884,
respectively. These individuals maintain customary deposit accounts with the
Bank. Management believes that all of the above transactions were entered
into in the normal course of business. The Bank held deposits of $5,333,194
and $728,418 for officers, directors, employees and their associates at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had outstanding notes payable to directors
in the amount of $500,000, as described in Note 13 to these financial
statements.
Note 9 - Commitments, Contingencies and Financial Instruments with Off-
Balance-Sheet Risk
-----------------------------------------------------------------------
The financial statements do not reflect various commitments and contingent
liabilities which arise in the normal course of business and which involve
elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of the Bank's commitments and
contingent liabilities is as follows:
<TABLE>
<CAPTION> NOTIONAL AMOUNT
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Commitments to extend credit $4,655,000 5,369,000
Standby letters of credit 16,300 28,255
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance by the customer.
The Bank's credit policies and procedures for credit commitments are the same
as those for extensions of credit that are reported in the financial
statements. Because these instruments have fixed maturity dates and because
many of them expire without being drawn upon, they do not generally present
any significant liquidity risk to the Bank. The Bank has not incurred any
losses on its commitments in either 1996 or 1995.
The nature of the business of the Bank is such that it is ordinarily
subjected to a certain amount of litigation. In the opinion of management
PAGE 59
and counsel for the Bank, there is no litigation in which the outcome will
have a material effect on the financial statements.
Note 10 - Regulatory Matters
----------------------------
The primary source of funds available for the payment of cash dividends are
dividends received from the subsidiary Bank. The Bank is limited by banking
regulations as to the amount of dividends that may be paid without prior
approval of the Bank's regulatory agency. No earnings were available for the
payment of dividends at December 31, 1996.
The Bank is required to maintain average cash balances as a reserve
requirement. The average amount of those reserve balances was $152,000 and
$225,000 for the years ended December 31, 1996 and 1995, respectively.
<PAGE> 56
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1995, the most recent notification from the Comptroller of
the Currency, the Bank was categorized as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There have
been no conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
PAGE 60
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ----------
-----
---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Total Capital
(to Risk Weighted
Assets) $3,877,311 11.5% 2,694,097 8.0% 3,367,621 10.0%
Tier I Capital
(to Risk Weighted
Assets) 3,491,951 10.4% 1,347,048 4.0% 2,020,573 6.0%
Tier I Capital
(to Average Assets) 3,491,951 7.4% 1,898,320 4.0% 2,372,900 5.0%
As of December 31, 1996
Total Capital
(to Risk Weighted
Assets) 3,310,365 11.3% 2,342,089 8.0% 2,927,611 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 2,944,414 10.1% 1,171,044 4.0% 1,756,566 6.0%
Tier 1 Capital
(to Average Assets) 2,944,414 6.2% 1,914,080 4.0% 2,392,600 5.0%
</TABLE>
Note 11 - Concentrations of Credit Risk
---------------------------------------
In addition to the concentrations of credit risk disclosures in notes one and
four, the Bank maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Bank has not experienced any losses
in such accounts. The Bank believes it is not exposed to any significant
credit risk on cash and cash equivalents.
<PAGE> 57
Note 12 - Fair Values of Financial Instruments
----------------------------------------------
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYIG FAIR CARRYIG FAIR
AMOUNT VALUE AMOU VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $12,166,622 12,166,622 11,254,011 11,254,011
Investment securities 7,829,126 7,829,126 5,191,927 5,196,885
Loans, net of allowance
for loan losses 25,825,258 25,398,258 31,532,756 32,692,756
PAGE 61
Accrued interest
receivable 757,467 757,467 686,724 686,724
Financial liabilities:
Deposits 42,544,601 42,384,601 45,185,544 46,330,544
Notes payable to
directors 500,000 500,000 -0- -0-
Advances from Federal
Home Loan Bank 2,485,000 2,485,000 595,000 595,000
Accrued interest
payable 546,773 546,773 577,420 577,420
</TABLE>
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Other:
Loan commitments $ 4,655,000 4,655,000 5,369,000 5,369,000
Letters of credit 16,300 16,300 28,255 28,255
</TABLE>
Note 13 - Notes Payable to Directors
------------------------------------
Notes payable to directors in the amount of $500,000 consist of notes which
were executed on December 27, 1996. Each of the notes accrues interest at
the Bank's prime rate less 1%. There are no scheduled principal or interest
payments during the first two years of the notes. Principal and interest
payments in years three through five are subject to certain restrictions
relative to the Bank's earnings and regulatory capital position. Each of the
notes matures on December 27, 2001.
<PAGE> 58
Note 14- Stock Option Plan
--------------------------
In recognition of the efforts and risks undertaken by the Company's
organizers, the Company issued warrants to purchase one share of common stock
for each share purchased by them in the Company's common stock offering.
Upon exercise, each warrant will entitle the holder to purchase one share of
common stock at a price equal to $10 per share (the same price at which the
shares initially were sold to the public) unless the Bank is required to
raise capital to meet its regulatory guidelines in which case the exercise
price will be the greater of $10 per share or the book value per share of the
common stock as reflected in the Company's quarterly financial report for the
quarter ended immediately prior to the exercise of the warrant. Subject to
PAGE 62
certain limitations, the warrants are exercisable for a period of ten years
from the date of the Company's stock offering.
A summary of the status of the Company's stock option plan as of December 31,
1996, and the changes during the year ended December 31, 1996 is presented
below:
<TABLE>
<CAPTION>
DIRECTORS EMPLOYEES
---------------------- ----------------------
WEIGHED- WEIGHED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
January 1, 1996 142,500 $ 10.00 10,926 $ 10.00
Granted -0- .00 -0- .00
Reallocated 10,926 10.00 (10,926) 10.00
Exercised -0- .00 -0- .00
Forfeited (5,000) 10.00 -0- .00
---------- ---------- ---------- ----------
December 31, 1996 148,426 $ 10.00 -0- $ .00
========== ========== ========== ==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
-------- ----------- ---------------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 10.00 148,426 4.85 years $ 10.00 148,426 $ 10.00
</TABLE>
If the Company had used the fair value based method of accounting for its
stock option plan, as prescribed by Statement of Financial Accounting
Standards No. 123, compensation cost in net income for the year ended
December 31, 1996 would not have changed.
<PAGE> 59
PAGE 63
Note 15 - Financial Information of FNC Bancorp, Inc. (Parent Only)
------------------------------------------------------------------
Condensed balance sheets of FNC Bancorp, Inc. as of December 31, 1996 and
1995 and related statements of income and cash flows for the years then ended
are as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
--------------
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
------
Cash on deposit with subsidiary Bank $ 66,591 578,088
Investment in First National Bank
of Coffee County 3,356,055 3,491,084
Other assets 10,926 8,215
---------- ----------
Total Assets $3,433,572 4,077,387
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Notes payable to directors $ 500,000 -0-
---------- ----------
Stockholders' Equity:
Common stock 405,710 405,710
Additional paid in capital 3,610,541 3,610,541
Retained earnings (deficit) (1,084,329) 62,003
Unrealized gains (losses) on available-
for-sale securities, net of applicable
deferred income taxes 1,650 (867)
---------- ----------
2,933,572 4,077,387
---------- ----------
Total Liabilities and Stockholders' Equity $3,433,572 4,077,387
========== ==========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
---------------------
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Income:
Equity in earnings (loss) of First National
Bank of Coffee County $(1,137,546) 309,440
Interest income 11,795 19,042
PAGE 64
----------- -----------
(1,125,751) 328,482
Expenses 28,423 13,382
----------- -----------
Income (loss) before taxes (1,154,174) 315,100
Income taxes (benefit) (7,842) 1,924
----------- -----------
Net Income (Loss) $(1,146,332) 313,176
=========== ===========
<PAGE> 60
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(1,146,332) 313,176
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Equity in earnings (loss) of Bank 1,137,546 (309,440)
Deferred income taxes (benefit) (7,842) 4,111
Amortization 2,944 3,925
(Increase) decrease in income taxes
receivable 2,187 9,402
---------- ----------
Net cash provided (used) by operating
activities (11,497) 21,174
---------- ----------
Cash Flows From Investing Activities:
Additional investment in subsidiary (1,000,000) -0-
---------- ----------
Net cash provided (used) by investing
activities (1,000,000) -0-
---------- ----------
Cash Flows From Financing Activities:
Proceeds from notes payable 500,000 -0-
---------- ----------
Net cash provided (used) by financing
activities 500,000 -0-
---------- ----------
Net Increase (Decrease) in Cash (511,497) 21,174
Cash at Beginning of Period 578,088 556,914
---------- ----------
Cash at End of Period $ 66,591 578,088
PAGE 65
========== ==========
</TABLE>
<PAGE> 61
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
----------------------------------------------------------------------
DIRECTORS
---------
The members of the Board of Directors of the Company are elected by the
shareholders. The directorships of the Company are divided into three
classes, with the members of each class serving three-year terms and the
shareholders of the Company elect one class annually.
The following table and accompanying notes sets forth the name, age,
business experience during the past five years, the year he first became a
director and the year in which his current term will expire of each of the
Directors of the Company as of December 31, 1996.
<TABLE>
<CAPTION> DIRECTOR'S
DIRECTOR TERM
NAME AGE POSITION SINCE EXPIRES
BOARD NOMINEES
---------------------
<S> <C> <C> <C> <C>
Milton G. Clements 48 Director 1990 1997
Robert L. Cation 52 Chairman of the Board 1990 1997
of Directors
DIRECTORS CONTINUING
IN OFFICE
---------------------
A. Curtis Farrar, Jr. 52 Director 1990 1999
Norman E. Fletcher 59 Director 1990 1999
William C. Ellis, Jr. 52 Director 1990 1998
Ralph G. Evans 40 Director 1990 1998
</TABLE>
Executive Officers
------------------
The following table and accompanying notes sets forth the name, age and
business experience during the past five years of individuals who are the
executive officers of the Company and the Bank and all persons chosen to
become executive officers.
<TABLE>
<CAPTION>
Name Age Position With the Company and the Bank
<S> <C> <C>
PAGE 66
Robert L. Cation 52 Interim President and CEO of FNC
Bancorp, Inc.
Interim President and CEO of First
National Bank of Coffee County
Al D. Ross 33 Executive Vice President of First
National Bank of Coffee County
Ralph G. Evans 40 Secretary of FNC Bancorp, Inc.
Pat Williams 28 Vice President of First National
Bank of Coffee County
Rose C. Pope 46 Vice President/Cashier of First
National Bank of Coffee County
Lisa H. Bennett 34 Assistant Vice President/ Mortgage
Lending of First National Bank
of Coffee County
Charlene Hall 44 Banking Officer of First National
Bank of Coffee County
<PAGE> 62
Business Experience
-------------------
Al D. Ross is Executive Vice President of First National Bank of Coffee
County. His responsibilities include supervision of the Bank's lending area
as well as the Bank's loan processing and operation area. He came to First
National Bank with over 11 years of banking experience primarily in
commercial, agricultural and mortgage lending. He is actively involved in
community and civic affairs through his memberships in the Douglas-Coffee
County Chamber of Commerce and Douglas Rotary Club.
Robert L. Cation is an Organizer of the Company and the Bank. Mr. Cation
also is the Chairman of the Board of Directors of the Company and serves as
Chairman of the Board of Directors of the Bank. Since 1970, Mr. Cation has
owned and operated Cation Food Stores, Inc., a retail grocery operation in
south Georgia, where he serves as President and is responsible for the
overall management of the corporation. Mr. Cation served as a director for
Bank South, Douglas (and as a director for The Exchange Bank of Douglas, the
predecessor of Bank South, Douglas) from 1983 until June 1990.
Milton G. Clements is an Organizer of the Company and the Bank. Mr.
Clements also is a Director of the Company and the Bank. He is President and
managing principal of Clements, Purvis & Stewart, P.C., a Certified Public
Accounting firm in Douglas, Georgia. He has served as the 2nd Vice President
and a director of the Douglas-Coffee County Chamber of Commerce as well as a
director of the Douglas Downtown Development Authority. Mr. Clements is a
member of the Douglas Lions Club where he has held all the primary officer
positions, as well as a member of the Georgia Society and the American
Institute of CPA's.
William C. Ellis, Jr. is an Organizer of the Company and the Bank. Mr.
Ellis also is a Director of the Company and the Bank. Mr. Ellis has served
as President of ESCO Industries, Inc., a manufacturing corporation with
branch locations in Asheboro, North Carolina and Lakeland, Florida. In
addition, Mr. Ellis serves as Secretary-Treasurer of Diversified Polymer
Industries, Inc., Dalton, Georgia. Mr. Ellis' professional involvement
includes membership in the Georgia Manufactured Housing Association, the
PAGE 67
Coffee County Manufacturers Council and the Douglas-Coffee County Chamber of
Commerce. From 1984 until June 1990, he served as a director and a member of
the Audit Committee for Trust Company Bank of Coffee County.
Ralph G. Evans is an Organizer of the Company and the Bank. Mr. Evans also
is a Director and the Secretary of the Company and Director of the Bank. Mr.
Evans serves as President of both R. W. Griffin Feed, Seed & Fertilizer,
Inc., a farming and farm supply retail store, and Douglas Peanut and Grain
Co. Mr. Evans also serves as a director of Chem Nut, Inc., an Albany, Georgia
based publicly-held ag-chemical distribution company with annual sales of
$120 million. Mr. Evans previously served as a director of the Downtown
Douglas Development Authority.
A. Curtis Farrar, Jr. is an Organizer of the Company and the Bank. Mr.
Farrar also is a Director of the Company and the Bank. He is presently
Senior Partner with the law firm of Farrar and Hennesy . Since 1973, Mr.
Farrar has served as a Juvenile Court Judge in Douglas and is presently
serving as chairman of the Georgia Board of Natural Resources. From 1987 to
1989, Mr. Farrar served on the Georgia Governor's Task Force on Drug
Awareness and Prevention.
<PAGE> 63
Norman E. Fletcher is an Organizer of the Company and the Bank. Mr.
Fletcher also is a Director of the Company and the Bank. He is President of
Fletcher Oil Company and Floco, Inc. all of which are wholesale oil
companies. He also serves as President of Quick Change, Inc., convenience
store chain in south Georgia. Mr. Fletcher is an active member, deacon and
gideon of the First Baptist Church in Douglas, and since January 1990, he has
served as Chairman of the Job Training Program in the area.
Pat Williams is Vice President/Commercial and Consumer Lending. Pat
graduated from the University of Mississippi with a B.S. degree in Banking
and Finance. He brings seven years of banking experience to the position.
Rose C. Pope is Vice President/Cashier and has been with the Bank since its
inception. Formerly, Ms. Pope was with BankSouth, Douglas. She is Past
President of the Pilot Club of Douglas and an active member of Carver Baptist
Church.
Lisa H. Bennett is Assistant Vice President/Mortgage Lending and has been
with the Bank since August, 1992. Ms. Bennett brings 14 years of banking
experience to the position. She is an active member of the First United
Methodist Church of Douglas.
Charlene Hall is Banking Officer with primary responsibilities in the areas
of Personnel and Customer Service. She joined the staff of First National in
January 1995 and contributes 26 years of banking experience to the management
team.
Unless stated otherwise, each of the above-named persons has been engaged
in his or her present occupation for more than the past five years.
There are no family relationships among directors, executive officers, or
persons nominated or chosen by the Company to become directors or executive
PAGE 68
officers.
<PAGE> 64
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------
Executive Compensation
----------------------
The Company does not separately compensate any of its executive officers.
The following table sets forth certain information concerning the
compensation of the Bank's chief executive officer during fiscal years 1996,
1995 and 1994.
</TABLE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
NAME AND OHER
PRINCIPAL SALARY BOUS COMP
POSITION (2) YEAR $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Robert L. Cation 1996 $ -0- -0- (1)
Interim President
and CEO of FNC
Bancorp, Inc. and
First National Bank
Of Coffee County
Timothy J. Palmer 1996 $ 71,186 -0- (1)
President and 1995 90,000 13,950 (1)
CEO of FNC 1994 79,194 19,000 (1)
Bancorp, Inc. and
First National Bank
Of Coffee County
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------------------------
NAME AND RESRICED SECURIIES ALL
PRINCIPAL STOCK UDERLYIG LTIP OHER
POSITION (2) YEAR AWARD $ OPIOS PAYOU COMP
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Robert L. Cation 1996$ -0- -0- -0- -0-
Interim President
and CEO of FNC
Bancorp, Inc. and
First National Bank
Of Coffee County
Timothy J. Palmer 1996 -0- -0- -0- -0-
PAGE 69
President and 1995 -0- 3,642(4) -0- -0-
CEO of FNC 1994 -0- 3,642(4) -0- -0-
Bancorp, Inc. and
First National Bank
Of Coffee County
</TABLE>
----------------------------------------
(1) Compensation does not include any perquisites and other personal
benefits which may be derived from business-related expenditures that in the
aggregate do not exceed the lesser of $50,000 or 10% of the total annual
salary and bonuses reported for such person.
(2) None of the four other highest paid executive officers earned more than
$100,000 per year.
(3) Mr. Palmer left the Company on May 19, 1996. His successor will begin
employment April 1, 1997.
(4) Transferred to other Directors as of December 31, 1996.
Mr. Timothy J. Palmer, who was a Director, President and Chief Executive
Officer of the Company and served as Director, President and Chief Executive
Officer of the Bank, executed an employment agreement with the Bank effective
December 31, 1994. The employment agreement provided that Mr. Palmer would
serve as President, Chief Executive Officer and Director of the Bank.
In addition, the employment agreement provided for a base salary of $90,000
which may be increased annually at the sole discretion of the Board of
Directors. The agreement also provided for bonuses to be paid to Mr. Palmer
based upon the achievement by the Bank of specified levels of total assets or
profits earned by the Bank. Mr. Palmer would receive a bonus in accordance
with the following:
(1) (Growth Incentive) for each $1 million increase in assets over
the preceding fiscal year, Mr. Palmer shall receive a bonus
equal to 1.3% of his base salary for the year subject to a
maximum of 6.5% of such base salary. For purposes of
calculating the growth incentive for 1996, the 1995 asset base
shall be deemed to be $40 million. For any increase in assets
or portion thereof which is less than $1 million, Mr. Palmer
shall receive a bonus pro-rated based upon the bonus per $1
million.
<PAGE> 65
(2) (Profit Incentive) Mr. Palmer shall receive a bonus equal to the
sum of the following as a profit incentive:
If the net income for the current year exceeds the net income
for the prior fiscal year, then a bonus equal to 2% of Mr.
Palmer's base salary, plus for each $6,000 increase in net
income over the preceding year's net income, a bonus equal to
.7% of his base salary subject to a maximum of 7% of such base
salary. For any increase in net income or portion thereof
PAGE 70
that is less than $6,000, Mr. Palmer shall receive a bonus
prorated based upon the bonus for $6,000. In calculating the
profit incentive bonus, the reserve for loan losses to gross
loans shall equal at least the pro-forma reserves of $1.2% for
1995 and 1.29% for 1996. Thereafter, the actual reserve for
loan losses shall be used. In addition and for all years in
calculating net income, the gain on the sale of securities
(after tax) shall not exceed 20%. Net profit is determined
after accrual for all employee and officer bonuses except
those payable to Mr. Palmer hereunder and all other accruals
including state and federal income taxes.
Under a previous employment agreement, it was provided that the Company's
Board will grant to Mr. Palmer at the end of the first fiscal year an option
to purchase up to 1% of the Company's Common Stock outstanding as of the
first day the Bank opens for business at the original issue price if, at the
end of the first full fiscal year, the Bank's total assets are not less than
125% of the amount estimated in the pro forma statements ($9,003,276.00). At
the end of the second and third years, the Board will grant to Mr. Palmer an
option to purchase an additional 1% of the Company's stock if the Bank's net
profit before tax is not less than 125% of the amount estimated in the pro
forma statements. At no time may the aggregate stock options granted to Mr.
Palmer under the employment agreement exceed 3% of the Company's Common Stock
outstanding as of the first day the Bank opens for business. If Mr. Palmer
is not granted the above options by reason of failure to meet the performance
requirements, at the end of the Bank's fifth full fiscal year he will be
granted any of the above specified options not already granted provided he is
still employed by the Bank and the Bank's return on average assets is not
less than 1.2% for the fifth fiscal year. As of December 31, 1994, the
maximum number of options had been issued representing shares of 10,926. All
stock options granted to Mr. Palmer must be exercised within five years after
their issuance. As of the date Mr. Palmer terminated his employment, all
options outstanding were transferred to the other Directors.
The employment agreement also provided for hospitalization and major
medical insurance coverage for Mr. Palmer and his immediate family; term life
insurance; disability insurance; an automobile; membership in a social club
suitable for conducting banking business; and reimbursement for expenses
incurred on behalf of the Bank.
In addition, the employment agreement provided that following the
termination of his employment with the Bank, Mr. Palmer will not engage in
any banking activities in which he was engaged at the time of his employment
within Coffee County for a period of one year following termination.
<PAGE> 66
The following table sets forth certain information concerning each grant of
options to purchase the Company's common stock made during the 1996 fiscal
year to the persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PAGE 71
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Robert L. Cation -0- -0- N/A N/A
Timothy J. Palmer -0- -0- N/A N/A
</TABLE>
The following table sets forth certain information regarding the exercise of
stock options in the 1996 fiscal year by the person named in the Summary
Compensation Table and the value of options held by such person at the end of
such fiscal year.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS
SHARES OPTIONS AT AT
ACQUIRED VALUE YEAR END (#) YEAR END ($)(2)
O REALIZED EXERCISABLE (E)/ EXERCISABLE (E)/
NAME EXERCISE (1) UNEXERCISABLE (U)
UNEXERCISABLE (U)
<S> <C> <C> <C> <C>
Timothy J. Palmer -0- -0- -0- -0-
Robert L. Cation -0- -0- 26,561(E) -0-
</TABLE>
----------------------------------------
(1) Values are calculated by subtracting the exercise or base price from
the fair market value of the stock as of the exercise date or fiscal year
end, as appropriate, which is assumed to be the same price at which the stock
was initially sold in 1991, due to the lack of an established trading market.
(2) Assumes, for all unexercised in-the-money options, the difference
between fair market value and the exercise price to be -0- for the reason
stated in (1) above.
Director Compensation
---------------------
Initially, Directors are reimbursed for expenses in connection with the
performance of their duties but receive no directors' fees at the current
time.
<PAGE> 67
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The following table presents as of December 31, 1996, certain information
regarding the Company's common stock owned by each person who beneficially
owns more than 5% of the shares of the Company's common stock.
PAGE 72
<TABLE>
<CAPTION>
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
BENEFICIAL BENEFICIAL PERCENT
TITLE OF CLASS OWNER OWNERSHIP OF CLASS
----------------- ------------- ----------- ---------
<S> <C> <C> <C>
Common Carl C. Atkinson 25,715 (1) 6.34%
Rt. 2, Box 777
Broxton, GA 31519
Common Robert L. Cation 26,465 6.52
1206 Hampton Road
Douglas, GA 31533
Common William C. Ellis, Jr. 26,714 6.58
P. O. Box 270
Douglas, GA 31533
Common Ralph G. Evans 28,264 (2) 6.97
P. O. Box 1264
Douglas, GA 31533
Common A. Curtis Farrar, Jr. 26,464 6.52
308 Dogwood Avenue
Douglas, GA 31533
Common Norman E. Fletcher 26,014 (3) 6.41
401 Shirley Avenue
Douglas, GA 31533
</TABLE>
The following table presents as of December 31, 1996, certain information
regarding the Company's common stock owned, (1) by each of the Company's
directors (2) each of the named executive officers and (3) by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
BENEFICIAL BENEFICIAL PERCENT
TITLE OF CLASS OWNER OWNERSHIP OF CLASS
----------------- ------------- ----------- ---------
<S> <C> <C> <C>
Common Robert L. Cation 26,465 6.52%
Common Milton G. Clements 18,314 (4) 4.51
Common William C. Ellis, Jr. 26,714 6.58
Common Ralph G. Evans 28,264 (2) 6.97
Common A. Curtis Farrar, Jr. 26,464 6.52
Common Norman E. Fletcher 26,014 (3) 6.41
All directors and executive officers
as a group (10 persons). 152,490 37.59%
PAGE 73
(1) Includes 12,500 shares held in the name of Malklean B. Atkinson, wife
of Carl C. Atkinson.
<PAGE> 68
(2) Includes 600 shares held in the name of Cady Suzanne Evans, daughter of
Ralph G. Evans, 600 shares held in the name of Christy Elizabeth Evans,
daughter of Ralph G. Evans and 600 shares held in the name of Ralph G.
Evans, Jr., son of Ralph G. Evans.
(3) Includes 200 shares held in the name of CEDE & Company F/B/O Norman E.
Fletcher IRA and 200 shares held in the name of CEDE & Company F/B/O
Marvelyne G. Fletcher (wife of Norman E. Fletcher) IRA.
(4) Includes 1,000 shares held in the name of Laura B. Clements, wife of
Milton G. Clements, 1,000 shares held in the name of Milton Bryan
Clements, son of Milton G. Clements, 1,000 shares held in the name of
Steven Griffin Clements, son of Milton G. Clements and 1,000 shares
held in the name of William Donovan Clements, son of Milton G. Clements
and 1,000 shares held in the name of CEDE & Company F/B/O Milton G.
Clements IRA.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
Certain of the executive officers, directors and principal shareholders of
the Company and the Bank, and affiliates of such persons, may from time-to-
time be engaged in banking transactions with the Bank. Any loans or other
extensions of credit made by the Bank to such individuals are made in the
ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated third parties and do not involve more than the
normal risk of collectibility or present other unfavorable features. At
December 31, 1996, loans to executive officers, directors and principal
shareholders and their associates amounted to $159,252.
<PAGE> 69
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Documents filed as part of this report:
1. The following financial statements of the Company are included in Item
7 of this report:
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted as the required information is not
PAGE 74
applicable.
3. Exhibits
The following exhibits are filed as part of or incorporated by
reference in this Report.
Exhibit No. Documents
___________ _________
3.1 Articles of Incorporation of the Company (Attached
as Exhibit 3.1 to the Company's Form S-18, as
amended, No. 33-37078)
3.2 Bylaws of the Company (Attached as Exhibit 3.2 to
the Company's Form S-18, as amended, No. 33-37078)
10.1 Form of Subscription Agreement (Attached as Exhibit
10.1 to the Company's Form 10-K filed for the year
ended December 31, 1990)
10.2 Form of Organizer's Warrant (Attached as Exhibit
10.2 to the Company's Form S-18, as amended, No. 33-37078)
21.1 Subsidiaries of the Registrant (Filed Herewith)
27.1 Financial Data Schedule (Filed Herewith)
(b) Reports on Form 8-K
None.
<PAGE> 70
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FNC BANCORP, INC.
(Registrant)
Date: March 31, 1997 By: /s/ Robert L. Cation
__________________ _______________________________
Robert L. Cation
Chairman
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
_________ _____ ____
/s/ Robert L. Cation Director March 31, 1997
--------------------
Robert L. Cation
/s/ Milton G. Clements Director March 31, 1997
PAGE 75
-------------------------
Milton G. Clements
/s/ William C. Ellis, Jr. Director March 31, 1997
-------------------------
William C. Ellis, Jr.
/s/ Ralph G. Evans Director March 31, 1997
-------------------------
Ralph G. Evans
/s/ A. Curtis Farrar, Jr. Director March 31, 1997
-------------------------
A. Curtis Farrar, Jr.
/s/ Norman E. Fletcher Director March 31, 1997
-------------------------
Norman E. Fletcher
PAGE 76
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
FNC BANCORP, INC.
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------------------------- ----------------------
First National Bank of Coffee County Georgia
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE
FNC BANCORP, INC.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,917,622
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,249,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,829,126
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 27,345,643
<ALLOWANCE> 1,520,385
<TOTAL-ASSETS> 49,119,026
<DEPOSITS> 42,544,601
<SHORT-TERM> 0
<LIABILITIES-OTHER> 655,853
<LONG-TERM> 2,985,000
<COMMON> 405,710
0
0
<OTHER-SE> 2,527,862
<TOTAL-LIABILITIES-AND-EQUITY> 49,119,026
<INTEREST-LOAN> 3,057,854
<INTEREST-INVEST> 320,422
<INTEREST-OTHER> 279,050
<INTEREST-TOTAL> 3,657,326
<INTEREST-DEPOSIT> 1,795,263
<INTEREST-EXPENSE> 1,930,957
<INTEREST-INCOME-NET> 1,726,369
<LOAN-LOSSES> 2,305,174
<SECURITIES-GAINS> 761
<EXPENSE-OTHER> 1,652,367
<INCOME-PRETAX> (1,737,264)
<INCOME-PRE-EXTRAORDINARY> (1,146,332)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,146,332)
<EPS-PRIMARY> (2.83)
<EPS-DILUTED> (2.83)
<YIELD-ACTUAL> 4.08
<LOANS-NON> 1,056,000
<LOANS-PAST> 5,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 385,360
<CHARGE-OFFS> 1,449,603
<RECOVERIES> 279,454
<ALLOWANCE-CLOSE> 1,520,385
<ALLOWANCE-DOMESTIC> 1,520,385
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
