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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 33-37078
FNC BANCORP, INC. (A GEORGIA CORPORATION)
I.R.S. EMPLOYER IDENTIFICATION NUMBER 58-1910615
420 SOUTH MADISON AVENUE, DOUGLAS, GEORGIA 31533
TELEPHONE NUMBER: (912) 384-1100
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, Par Value $1 Per Share
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ____
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The registrant's total revenues for the fiscal year ended December 31, 1997 were
$3,804,000.
As of March 1, 1998, registrant had outstanding 405,710 shares of common stock,
$1 par value per share, which is registrant's only class of common stock. There
is no established market for the common stock of the registrant. Therefore, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant is not known.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
The Company
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
General
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 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.
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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
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 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.
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Market Area
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
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 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.
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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.
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 noninterest-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 time and savings 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.
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
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 include
Bankers Bank (Atlanta, Georgia), Regions Bank (Gainesville, Georgia) and
SunTrust Bank (Atlanta, 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
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.
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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 quarterly 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.
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
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 two regional banks and four local banks. These
include SunTrust, Citizens Security Bank, 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.
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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
At December 31, 1997, the Bank employed 23 full-time employees and 4
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.
Supervision and Regulation
General
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.
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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
Federal Law. 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.
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.
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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.
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.
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Under Section 106(b) of the Bank Holding Company Act Amendments of 1970
(12 U.S.C. ss. 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 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.
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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 the 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
levels 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.
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.
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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 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.
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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.
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.
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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.
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, 1997, the Company's bank subsidiary had the requisite
capital levels to qualify as well capitalized.
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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.
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.
15
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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.
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.
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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.
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.
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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.
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 on private activity bonds 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 its AMTI
(determined without regard to this item), with certain adjustments, including
the addition of tax-exempt income.
Future Requirements
Statutes and regulations are regularly introduced which contain
wide-ranging proposals for altering the structure, regulations and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or in what form any proposed statute or regulation will be adopted or
the extent to which the business of FNC Bancorp, Inc. or its Subsidiary Bank may
be affected by such statute or regulation.
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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 totaled approximately $1.3 million.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary bank is a party to, nor is any
of their property the subject of, any material pending legal proceedings, other
than the ordinarily routine proceedings incidental to the business of the Bank,
nor to the knowledge of the management of the Company are any such proceedings
contemplated or threatened against it or its subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
(a) There currently is no public market for the Common Stock.
(b) As of March 1, 1998, there were approximately 350 holders of
record of the Common Stock.
(c) The Company has never declared or paid a cash
dividend but expects to do so in the future. The
payment of dividends by national banks is restricted
by statute and regulation. See "Item 1.
Description of Business - Supervision and Regulation."
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
The Company's 1997 Annual Report on Form 10-KSB contains
forward-looking statements in addition to historical information. The Company
cautions that there are various important factors that could cause actual
results to differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated result
will be realized. These factors include legislative and regulatory initiatives
regarding deregulation and restructuring of the banking industry; the extent and
timing of the entry of additional competition in the Company's markets;
potential business strategies, including acquisitions or dispositions of assets
or internal restructuring, that may be pursued by the Company; state and Federal
banking regulations; changes in or application of environmental and other laws
and regulations to which the Company is subject; political, legal and economic
conditions and developments; financial market conditions and the results of
financing efforts; changes in commodity prices and interest rates; weather,
natural disasters and other catastrophic events; and other factors discussed in
the Company's filings with the Securities and Exchange Commission, including
this Annual Report on Form 10-KSB. The words "believe", "expect", "anticipate",
"project" and similar expressions signify forward-looking statements. Readers
are cautioned not to place undue reliance on any forward-looking statements made
by or on behalf of the Company. Any such statement speaks only as of the date
the statement was made. The Company undertakes no obligation to update or revise
any forward-looking statements. Additional information with respect to factors
that may cause results to differ materially from those contemplated by such
forward-looking statements is included in the Company's current and subsequent
filings with the Securities and Exchange Commission.
General
The Company's principal asset is its ownership of the Bank.
Accordingly, the Company's results of operations are primarily dependent upon
the results of operations of the Bank. The Bank conducts a commercial banking
business which consists of attracting deposits from the general public and
applying those funds to the origination of commercial, consumer and real estate
loans (including commercial loans collateralized by real estate). The Bank's
profitability depends primarily on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate paid and earned on these balances. Net
interest income is dependent upon the Bank's interest rate spread, which is the
difference between the average yield earned on its interest-earning assets and
the average rate paid on its interest-bearing liabilities. When interest-earning
assets approximates or exceeds interest-bearing liabilities, any positive
interest rate spread will generate interest income. The interest rate spread is
impacted by interest rates, deposit flows and loan demand. Additionally, and to
a lesser extent, the Bank's profitability is affected by such factors as the
level of noninterest income and expenses, the provision for loan losses and the
effective tax rate. Noninterest income consists primarily of loan and other fees
and income from the sale of investment securities. Noninterest expenses consist
of compensation and benefits, occupancy-related expenses, deposit insurance
premiums paid to the FDIC and other operating expenses.
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Results of Operations For Years Ended December 31, 1997 and 1996
The Company's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and investment
losses, to generate noninterest income and to control noninterest expense. Since
interest rates are determined by market forces and economic conditions beyond
the control of the Company, the ability to generate net interest income is
dependent upon the Bank's ability to obtain an adequate spread between the rate
earned on interest-earning assets and the rate paid on interest-bearing
liabilities. Thus, the key performance measure for net interest income is the
interest margin or net yield, which is taxable-equivalent net interest income
divided by average earning assets.
The primary component of consolidated earnings is net interest income,
or the difference between interest income on interest-earning assets and
interest paid on interest-bearing liabilities. The net interest margin is net
interest income expressed as a percentage of average interest-earning assets.
Interest-earning assets consist of loans, investment securities and Federal
funds sold. Interest-bearing liabilities consist of deposits and other
short-term borrowings. A portion of interest income is earned on tax-exempt
investments, such as state and municipal bonds. In an effort to state this
tax-exempt income and its resultant yield on a basis comparable to all other
taxable investments, an adjustment is made to analyze this income on a
taxable-equivalent basis.
The Company's net interest margin increased 29 basis points or 6.92% to
4.48% in 1997 as compared to 4.19% in 1996. The yield on average
interest-earning assets increased marginally to 8.73% in 1997 as compared to
8.71% in 1996. The interest rate paid on average interest-bearing liabilities
decreased 17 basis points or 3.27% to 5.03% in 1997 as compared to 5.20% in
1996. Net interest income on a taxable-equivalent basis was $1,736,000 in 1997
as compared to $1,787,000 in 1996, representing a decrease of $51,000 or 2.85%.
Although net interest income was favorably impacted by changes in interest rates
which resulted in an increase in average yield on earning assets and a decrease
in average interest paid on interest-bearing liabilities, the increase
attributable to changes in interest rates amounting to $131,000 was offset by a
decrease of $182,000 attributable to a decrease in volume.
Average interest-earning assets decreased $3,931,000 to $38,755,000 in
1997 from $42,686,000 in 1996, a decrease of 9.21%. Average loans decreased
$4,512,000; average Federal funds sold decreased $1,940,000 and average
investments increased $2,521000. The decrease in average interest-earning assets
was accompanied by a decrease of $4,970,000, or 11.66%, in average deposits to
$37,647,000 in 1997 from $42,617,000 in 1996. Approximately 19% of the average
deposits were noninterest-bearing deposits in 1997 and 1996.
22
<PAGE>
The allowance for loan losses is established through a provision for
loan losses charged to expense and represents a reserve for potential losses in
the loan portfolio. 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. The adequacy of the allowance for loan losses is evaluated periodically
based on a review of all significant loans, with a particular emphasis on
nonaccruing, past due and other loans that management believes require
attention.
The provision for loan losses charged to earnings amounted to $30,000
in 1997 as compared to $2,305,000 in 1996. The significant provision recorded by
the Company in 1996 resulted from the charge off of a large number of consumer
loans and real estate mortgage loans. In 1996, net charge offs amounted to
$1,170,000, which consisted of $397,000 in consumer loans, $495,000 in real
estate loans, $373,000 in commercial and agricultural loans and net recoveries
of $95,000 in overdrafts. The Company also recorded additional provisions to
cover loans that had been classified by regulators. By comparison, the Company
recorded net charge offs of $391,000 in 1997, which consisted of $176,000 in
consumer loans, $123,000 in real estate loans and $92,000 in commercial and
agricultural loans. The current year's provision for loan losses and the balance
in the allowance for loan losses at December 31, 1997 were based upon
management's evaluation of the loan portfolios and the potential loan risk
associated with specific loans and selected loan categories. The allowance for
loan losses as a percentage of total loans outstanding amounted to 3.66% at
December 31, 1997 as compared to 5.56% at December 31, 1996. Management
considers the year-end allowances adequate to cover potential losses in the loan
portfolio.
Following is a comparison of noninterest income for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Increase
1997 1996 (Decrease)
--------------- --------------- ---------------
<S> <C> <C> <C>
Service charges on deposit accounts ..................... $ 346,000 $ 366,000 $ (20,000)
Other service charges, commissions and fees ............. 18,000 18,000 -
Net realized gains on securities available for sale ..... 1,000 1,000 -
Origination fees on mortgage loans ...................... 19,000 22,000 (3,000)
Other ................................................... 38,000 26,000 12,000
--------------- --------------- ---------------
$ 422,000 $ 433,000 $ (11,000)
=============== =============== ===============
</TABLE>
The decrease in service charges on deposit accounts of $20,000 is
attributable to a decrease of approximately $5,000,000 in average deposits in
1997.
23
<PAGE>
Following is an analysis of noninterest expense for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Increase
1997 1996 (Decrease)
----------------- ---------------- -----------------
<S> <C> <C> <C>
Salaries and employee benefits .................. $ 805,000 $ 872,000 $ (67,000)
Equipment and occupancy expense ................. 233,000 213,000 20,000
Accounting and auditing expenses ................ 97,000 45,000 52,000
Advertising expense ............................. 40,000 61,000 (21,000)
Data processing expenses ........................ 62,000 66,000 (4,000)
Printing and office supplies .................... 54,000 61,000 (7,000)
Other ........................................... 318,000 334,000 (16,000)
----------------- ---------------- -----------------
$ 1,609,000 $ 1,652,000 $ (43,000)
================= ================ =================
</TABLE>
The decrease in salaries and wages in 1997 is attributable to the fact
that severance pay for terminated employees were incurred in 1996 but not in
1997. The increase in equipment and occupancy expense is attributable to
depreciation on new equipment acquired in 1997. The increase in accounting and
auditing expense in 1997 is attributable to the engagement of an outside
consultant to perform a review of the Company's loan portfolio in 1997 and an
increase in internal audit fees for outsourced audit services. Decreases in all
other expenses resulted from management's objective to significantly reduce
noninterest expense.
Average total assets decreased $5,177,000 or 10.64% to $43,489,000 in
1997 as compared to $48,666,000 in 1996. Average interest-earning assets
decreased 9.21% in 1997 from 1996. Loan demand was not as strong in 1997 as in
1996 as evidenced by a loan to deposit ratio of 73% in 1997 as compared to 75%
in 1996. Average loans decreased $4,512,000 or 14.17% in 1997 as compared to
1996
Liquidity and Capital Resources
Liquidity management involves the matching of the cash flow
requirements of customers who may be either depositors desiring to withdraw
funds or borrowers needing assurance that sufficient funds will be available to
meet their credit needs and the ability of the Company and the Bank to meet
those needs. The Company and the Bank seek to meet liquidity requirements
primarily through management of short-term investments (principally Federal
funds sold) and monthly amortizing loans. Another source of liquidity is the
repayment of maturing single payment loans. The Bank is a member of the Federal
Home Loan Bank of Atlanta and as such has the ability to obtain advances
therefrom, although the cost of such advances exceed lower cost alternatives
such as deposits from the local community. The Bank had outstanding advances
from the Federal Home Loan Bank of Atlanta of $1,075,000 at December 31, 1997
at an average rate of 5.67%. The Bank also has the ability to borrow and
purchase Federal funds from other financial institutions on a short-term basis,
if needed.
24
<PAGE>
The liquidity and capital resources of the Company and the Bank are
monitored on a periodic basis by state and Federal regulatory authorities. As
determined under guidelines established by these regulatory authorities, the
Bank's liquidity ratio at December 31, 1997 was considered satisfactory. At
that date, the Bank's short-term investments were adequate to cover any
reasonable anticipated immediate need for funds. The Company and the Bank were
aware of no events or trends likely to result in a material change in their
liquidity. During 1997, the Company increased its capital by retaining earnings
of $341,000. After recording an increase in capital of $8,000 for unrealized
gains on securities, net of taxes, total capital increased $349,000 to
$3,283,000 from $2,934,000 at December 31, 1996.
At December 31, 1997, there were no outstanding commitments for any major
capital expenditures.
In accordance with risk capital guidelines issued by the Federal
Reserve Board, the Bank is required to maintain a minimum standard of total
capital to weighted risk assets of 8%. Additionally, all member banks must
maintain "core" or "Tier 1" capital of at least 4% of total assets ("leverage
ratio"). Member banks operating at or near the 4% capital level are expected to
have well-diversified risks, including no undue interest rate risk exposure,
excellent control systems, good earnings, high asset quality, and well managed
on- and off-balance sheet activities; and, in general, be considered strong
banking organizations with a composite 1 rating under the CAMEL rating system of
banks. For all but the most highly rated banks meeting the above conditions, the
minimum leverage ratio is to be 4% plus an additional 100 to 200 basis points.
The following table summarizes the regulatory capital levels of the
Bank at December 31, 1997.
<TABLE>
<CAPTION>
Actual Required Excess
------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
----------- ------------ ----------- ------------ -------------------------
(Dollars in Thousands)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ............ $ 3,729 8.24 % $ 1,810 4.00 % $ 1,919 4.24 %
Risk-based capital:
Core capital ............... 3,729 12.40 1,203 4.00 2,526 8.40
Total capital .............. 4,114 13.68 2,406 8.00 1,708 5.68
</TABLE>
Year 2000 Issue Costs
Based on estimates by management of the Company, the Company expects to
incur approximately $30,000 to $50,000 to modify its information systems
appropriately to accurately process information in the year 2000 and beyond. The
Company continues to evaluate appropriate courses of corrective action,
including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Management expects that the costs to convert
the Company's information systems to year 2000 compliance will not have a
material impact on the Company's consolidated financial statements.
25
<PAGE>
Average Balances and Net Income Analysis
The following table sets forth the amount of the Company's interest
income or interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets. Federally tax-exempt
income is presented on a taxable-equivalent basis assuming a 34% Federal tax
rate.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- -------------------------------- -------------------------------
(Dollars in Thousands)
----------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Paid Paid Paid
----------- ---------- --------- ---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Loans, net of
unearned interest $ 27,336 $ 2,698 9.87 % $ 31,848 $ 3,118 9.79 % $ 29,064 $ 2,856 9.83 %
Investment
securities:
Taxable ........ 8,291 511 6.16 5,770 325 5.63 5,912 316 5.35
Nontaxable - - - - - - - - -
Federal funds sold 3,128 173 5.53 5,068 275 5.43 3,307 182 5.50
---------- --------- --------- --------- -------- --------
Total interest-
earning assets . 38,755 3,382 8.73 42,686 3,718 8.71 38,283 3,354 8.76
---------- --------- --------- --------- -------- --------
Noninterest-earning
assets:
Cash ............. 2,953 4,415 4,180
Allowance for loan
losses ......... (1,201) (1,023) (421)
Unrealized gain
(loss)
on available
for sale securities (3) (7) (41)
Other assets ..... 2,985 2,595 2,563
----------- ---------- ---------
Total
noninterest-
earning assets . 4,734 5,980 6,281
----------- ---------- ---------
Total assets ...$ 43,489 $ 48,666 $ 44,564
=========== ========== =========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- -------------------------------- --------------------------------
(Dollars in Thousands)
---------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Paid Balance Expense Rate Paid Balance Expense Rate
Paid
----------- ---------- ---------- --------- ---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-bearing
liabilities:
Savings and
interest-bearing
demand deposits .. $ 8,198 $ 227 2.77% $ 9,479 $ 254 2.68% $ 9,870 $ 275 2.79%
Time deposits ...... 22,259 1,280 5.75 25,209 1,541 6.11 22,784 1,368 6.00
Other borrowings ... 2,275 139 6.11 2,433 136 5.59 326 17 5.21
---------- --------- ---------- -------- --------- ----------
Total
interest-bearing
liabilities ...... 32,732 1,646 5.03 37,121 1,931 5.20 32,980 1,660 5.03
---------- --------- ---------- -------- --------- ----------
Noninterest-bearing
liabilities and stock-
holders' equity:
Demand deposits .... 7,190 7,929 7,209
Other liabilities .. 458 570 490
Stockholders' equity 3,109 3,046 3,885
---------- ---------- ---------
Total
noninterest-bearing
liabilities and
stockholders' equity 10,757 11,545 11,584
---------- ----------- ---------
Total liabilities and
stockholders'
equity ................ $ 43,489 $ 48,666 $ 44,564
========== =========== =========
Interest rate spread ..... 3.70% 3.51% 3.73%
======== ======== ========
Net interest income ...... $ 1,736 $ 1,787 $ 1,694
========= ======== ==========
Net interest margin ...... 4.48% 4.19% 4.42%
======== ======== ========
</TABLE>
27
<PAGE>
Rate and Volume Analysis
The following table reflects the changes in net interest income
resulting from changes in interest rates and from asset and liability volume.
Federally tax-exempt interest is presented on a taxable-equivalent basis
assuming a 34% Federal tax rate. The change in interest attributable to rate has
been determined by applying the change in rate between years to average balances
outstanding in the later year. The change in interest due to volume has been
determined by applying the rate from the earlier year to the change in average
balances outstanding between years. Thus, changes that are not solely due to
volume have been consistently attributed to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------------- ----------------------------------------
(Dollars in Thousands)
----------------------------------------------------------------------------------
Increase Changes Due To Increase Changes Due To
-------------------------- --------------------------
(Decrease) Rate Volume (Decrease) Rate Volume
------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans ........ $ (420) $ 22 $ (442) $ 262 $ (12) $ 274
Interest on securities:
Taxable ......................... 186 44 142 9 17 (8)
Tax-exempt - - - - - -
Interest on Federal funds ......... (102) 3 (105) 93 (4) 97
----------- ------------ ----------- ------------ ----------- -----------
Total interest income ...... (336) 69 (405) 364 1 363
----------- ------------ ----------- ------------ ----------- -----------
Expense from interest-bearing liabilities:
Interest on savings and interest-
bearing demand deposits ........... (27) 7 (34) (21) (10) (11)
Interest on time deposits ............ (261) (81) (180) 173 27 146
Interest on other borrowings ......... 3 12 (9) 119 9 110
----------- ------------ ------------ ------------ ----------- ------------
Total interest expense ..... (285) (62) (223) 271 26 245
----------- ------------ ----------- ------------ ----------- ------------
Net interest income ........ $ (51) $ 131 $ (182) $ 93 $ (25) $ 118
=========== ============ =========== ============ =========== ============
</TABLE>
28
<PAGE>
Asset/Liability Management
A principal objective of the Company's asset/liability management
strategy is to minimize its exposure to changes in interest rates by matching
the maturity and repricing horizons of interest-earning assets and
interest-bearing liabilities. At FNC this strategy is overseen in part through
the direction of the Investment Committee which establishes policies and
monitors results to control interest rate sensitivity. At the Bank, the strategy
is overseen by the Board of Directors with the direction and strategy being
directed principally by the President of the Bank.
As part of the Banks' interest rate risk management policy, the
Investment Committee or Board examines the extent to which its assets and
liabilities are "interest rate-sensitive" and monitors its interest
rate-sensitivity "gap". An asset or liability is considered to be interest
rate-sensitive if it will reprice or mature within the time period analyzed,
usually one year or less. The interest rate-sensitivity gap is the difference
between the interest-earning assets and interest-bearing liabilities scheduled
to mature or reprice within such time period. A gap is considered positive when
the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. A gap is considered negative when the amount of
interest rate-sensitive liabilities exceeds the interest rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to adversely affect net interest income.
If the Company's assets and liabilities were equally flexible and moved
concurrently, the impact of any increase or decrease in interest rates on net
interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the Investment Committee or Board also evaluates how the
repayment of particular assets and liabilities is impacted by changes in
interest rates. Income associated with interest-earning assets and costs
associated with interest-bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in general market rates. In
addition, certain assets, such as adjustable rate mortgage loans, have features
((generally referred to as "interest rate caps") which limit changes in interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, prepayment and early withdrawal levels also could
deviate significantly from those assumed in calculating the interest rate gap.
The ability of many borrowers to service their debts also may decrease in the
event of an interest rate increase.
As of December 31, 1997, the Company's cumulative one-year interest
rate sensitivity gap ratio was .94%. This indicates that the Company's
interest-bearing liabilities will reprice during this period at a rate faster
than the Company's interest-earning assets. However, management believes that
the type and amount of the Company's interest rate-sensitive liabilities (a
significant portion of which are composed of money market, NOW and savings
accounts whose yields, to a certain extent, are subject to the discretion of
management) may reduce the potential impact that a rise in interest rates might
have on the Company's net interest income. In addition, the Company has
borrowing agreements with three correspondent banks and the Federal Home Loan
Bank to provide temporary liquidity as necessary.
29
<PAGE>
The following table sets forth the distribution of the repricing of the
Company's earning assets and interest-bearing liabilities as of December 31,
1997, the interest rate sensitivity gap (i.e., interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest rate
sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest
rate sensitivity liabilities) and the cumulative sensitivity gap ratio. The
table also sets forth the time periods in which earning assets and liabilities
will mature or may reprice in accordance with their contractual terms. However,
the table does not necessarily indicate the impact of general interest rate
movements on the net interest margin since the repricing of various categories
of assets and liabilities is subject to competitive pressures and the needs of
the Banks' customers. In addition, various assets and liabilities indicated as
repricing within the same period may in fact reprice at different times within
such period and at different rates.
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------------
Maturing or Repricing Within
--------------------------------------------------------------------
Zero to Three One to Over
Three Months to Three Three
Months One Year Years Years Total
------------ ------------ ------------ ------------- -------------
(Dollars in Thousands)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Interest-bearing deposits ........................... $ 33 $ - $ - $ - $ 33
Federal funds sold .................................. 34 - - - 34
Investment securities ............................... 1,223 1,753 3,523 - 6,499
Loans ............................................... 11,974 5,768 7,584 6,354 31,680
------------ ------------ ------------ ------------- -------------
13,264 7,521 11,107 6,354 38,246
------------ ------------ ------------ ------------- -------------
Interest-bearing liabilities:
Interest-bearing demand deposits (1) ................ - 1,281 5,539 - 6,820
Savings (1) ......................................... - - 1,832 - 1,832
Certificates less than $100,000 ..................... 4,522 9,322 2,367 360 16,571
Certificates, $100,000 and over ..................... 1,809 3,228 747 333 6,117
Other borrowings .................................... 930 1,010 20 45 2,005
------------ ------------ ------------ ------------- -------------
7,261 14,841 10,505 738 33,345
------------ ------------ ------------ ------------- -------------
Interest rate sensitivity gap .......................... $ 6,003 $ (7,320) $ 602 $ 5,616 $ 4,901
============ ============ ============ ============= =============
Cumulative interest rate sensitivity gap ............... $ 6,003 $ (1,317) $ (715) $ 4,901
============ ============ ============ =============
Interest rate sensitivity gap ratio .................... 1.83 0.51 1.06 8.61
============ ============ ============ =============
Cumulative interest rate sensitivity gap ratio ......... 1.83 0.94 0.98 1.15
============ ============ ============ =============
</TABLE>
(1) The Company has found that NOW checking accounts and savings deposits
are generally not sensitive to changes in interest rates and,
therefore, it has placed such liabilities in the "One to Three Years"
category. It has also found that the money-market checking deposits
reprice between three months to one year, on the average.
30
<PAGE>
Loan Portfolio
The amount of loans outstanding at the indicated dates is shown in the
following table according to type of loans.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C>
Commercial and financial ....................................................... $ 4,559 $ 5,100
Agricultural ................................................................... 2,369 2,971
Real estate - construction ..................................................... 1,658 811
Real estate - mortgage, farmland ............................................... 4,683 2,764
Real estate - mortgage, other .................................................. 14,451 10,290
Consumer instalment ............................................................ 3,960 5,409
--------------- ---------------
31,680 27,345
Allowance for loan losses ...................................................... (1,159) (1,520)
--------------- ---------------
Loans, net ..................................................................... $ 30,521 $ 25,825
=============== ===============
</TABLE>
Maturities and Sensitivity of Loans to Changes in Interest Rates
The Company's loan portfolio, as of December 31, 1997, was made up
primarily of short-term fixed rate loans or variable rate loans. The average
contractual life on instalment loans is approximately three years, while
mortgages are generally variable over one-to five-year periods. Total loans as
of December 31, 1997 are shown in the following table according to contractual
maturity classifications: (i) one year or less, (ii) after one year through five
years, and (iii) after five years.
December 31,
1997
(Dollars in
Thousands)
-------------------
Maturity:
One year or less ........................... $ 12,607
After one year through five years .......... 14,782
After five years ........................... 4,291
-------------------
$ 31,680
===================
Following is a summary of loans which presents separately the amount of
loans outstanding as of December 31, 1997 in each category listed above by
maturities.
<TABLE>
<CAPTION>
Due in After One After
One Through Five
Year Five Years Years Total
------------ ------------- ------------- -------------
(Dollars in Thousands)
------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural ...................... $ 4,226 $ 1,896 $ 807 $ 6,929
Real estate - construction .................................. 1,351 192 115 1,658
Real estate - mortgage ...................................... 5,494 10,282 3,358 19,134
Consumer instalment ......................................... 1,536 2,412 11 3,959
------------ ------------- ------------- -------------
Total ............................................... $ 12,607 $ 14,782 $ 4,291 $ 31,680
============ ============= ============= =============
</TABLE>
31
<PAGE>
The following table summarizes loans at December 31, 1997 with the due
dates after one year which (i) have predetermined interest rates and (ii) have
floating or adjustable interest rates.
December 31,
1997
(Dollars in
Thousands)
----------------
Predetermined interest rates ...................... $ 13,820
Floating or adjustable interest rates ............. 5,253
----------------
$ 19,073
================
Nonperforming Loans
The following table presents, at the dates indicated, the aggregate of
nonperforming loans for the categories indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ----------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis ......................................... $ 801 $ 1,038
Instalment loans and term loans contractually past due ninety
days or more as to interest or principal payments and still accruing ........... 6 5
Loans, the term of which have been renegotiated to provide a reduction or
deferral of interest or principal because of
deterioration in the financial position of the borrower ........................ - -
Loans now current about which there are serious doubts as to
the ability of the borrower to comply with present loan
repayment terms ................................................................ - -
In the opinion of management, any loans classified by regulatory
authorities as substandard or special mention that have not been disclosed above
do not (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity or
capital resources, nor (ii) represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms. Any loans
classified by regulatory authorities as loss have been charged off.
</TABLE>
32
<PAGE>
Summary of Loan Loss Experience
The provision for possible loan losses is created by direct charges to
operations. Losses on loans are charged against the allowance in the period in
which such loans, in management's opinion, become uncollectible. Recoveries
during the period are credited to this allowance. The factors that influence
management's judgment in determining the amount charged to operating expense are
past loan experience, composition of the loan portfolio, evaluation of possible
future losses, current economic conditions and other relevant factors. The
Company's allowance for loan losses was approximately $1,159,000 at December 31,
1997, representing 3.66% of year-end total loans outstanding compared with
approximately $1,520,000 at December 31, 1996, which represented 5.56% year end
total loans outstanding.
The allowance for loan losses is reviewed quarterly based on
management's evaluation of current risk characteristics of the loan portfolio,
as well as the impact of prevailing and expected economic business conditions.
Management considers the allowance for loan losses adequate to cover possible
loan losses on each outstanding loan with particular emphasis on any problem
loans. No assurance can be given, however, that adverse economic circumstances
will not result in increased losses in the Bank's loan portfolio, and require
greater provisions for loan losses in the future.
Allocation of the Allowance for Loan Losses
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes the
allowance can be allocated only on an approximate basis. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other
category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
---------------- ------------- ---------------- ------------
(Dollars in Thousands)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, industrial and agricultural ........... $ 256 22 % $ 449 30 %
Real estate .................................................. 325 66 770 50
Consumer ..................................................... 404 12 301 20
Unallocated .................................................. 174 - - -
---------------- ------------- ---------------- ------------
$ 1,159 100 % $ 1,520 100 %
================ ============= ================ ============
</TABLE>
33
<PAGE>
Allocation of the Allowance for Loan Losses (Continued)
The following table presents an analysis of the Company's loan loss
experience for the periods indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
(Dollars in Thousands)
---------------------------------
<S> <C> <C>
Average amount of loans outstanding ............................................... $ 27,336 $ 31,848
=============== ===============
Balance of reserve for possible loan losses at beginning of period ................ 1,520 385
--------------- ---------------
Charge-offs:
Commercial, financial and agricultural ......................................... (152) (397)
Real estate .................................................................... (250) (501)
Consumer ....................................................................... (270) (552)
Recoveries:
Commercial, financial and agricultural ......................................... 60 24
Real estate .................................................................... 127 6
Consumer ....................................................................... 94 250
--------------- ---------------
Net charge-offs ........................................................... (391) (1,170)
--------------- ---------------
Additions to reserve charged to operating expenses ................................ 30 2,305
--------------- ---------------
Balance of reserve for possible loan losses ....................................... $ 1,159 $ 1,520
=============== ===============
Ratio of net loan charge-offs to average loans .................................... 1.43% 3.67%
=============== ===============
</TABLE>
34
<PAGE>
Investment Portfolio
The Company manages the mix of asset and liability maturities in an
effort to control the effects of changes in the general level of interest rates
on net interest income. See " - Asset/Liability Management." Except for its
effect on the general level of interest rates, inflation does not have a
material impact on the Company due to the rate variability and short-term
maturities of its earnings assets. In particular, approximately 56% of the loan
portfolio is comprised of loans which mature or reprice within one year or less.
Mortgage loans, primarily with five- to fifteen-year maturities, are also made
on a variable rate basis with rates being adjusted every one to five years.
Additionally, 46% of the investment portfolio matures within one year.
Types of Investments
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1997:
U. S. Government and agency
securities .................. $ 6,010,722 $ 16,702 $ (1,602) $ 6,025,822
Other investments ............. 473,600 - - 473,600
---------------- -------------- ---------------- ----------------
$ 6,484,322 $ 16,702 $ (1,602) $ 6,499,422
================ ============== ================ ================
December 31, 1996:
U. S. Government and agency
securities .................. $ 7,217,273 $ 8,431 $ (9,658) $ 7,216,046
Mortgage-backed securities .... 150,753 3,727 - 154,480
Other investments ............. 458,600 - - 458,600
---------------- -------------- ---------------- ----------------
$ 7,826,626 $ 12,158 $ (9,658) $ 7,829,126
================ ============== ================ ================
</TABLE>
35
<PAGE>
Maturities
The amounts of investment securities in each category as of December
31, 1997 are shown in the following table according to contractual maturity
classifications (1) one year or less, (2) after one year through five years, (3)
after five years through ten years, and (4) after ten years.
<TABLE>
<CAPTION>
U.S. Treasury and
Other U. S. Government State and
Agencies and Corporations Political Subdivisions
Yield Yield
Amount (1) Amount (1) (2)
------------ ------------ ------------ ------------
(Dollars in Thousands)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity:
One year or less ......................................... $ 2,976 5.86 % $ - - %
After one year through five years ........................ 3,523 6.03 - -
After five years through ten years ....................... - - - -
After ten years .......................................... - - - -
------------ ------------ ------------ ------------
$ 6,499 5.98 % $ - - %
============ ============ ============ ============
</TABLE>
(1) Yields were computed using coupon interest, adding discount accretion
or subtracting premium amortization, as appropriate, on a ratable basis
over the life of each security. The weighted average yield for each
maturity range was computed using the acquisition price of each
security in that range.
(2) Yields on securities of state and political subdivisions are stated on
a taxable equivalent basis using a tax rate of 34%.
36
<PAGE>
Deposits
Average amount of deposits and average rate paid thereon, classified as
to noninterest-bearing demand deposits, interest-bearing demand and savings
deposits and time deposits for the periods indicated are presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Amount Rate Amount Rate
--------------- ------------ --------------- ------------
(Dollars in Thousands)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits ............................ $ 7,190 - % $ 7,929 - %
Interest-bearing demand and savings deposits ................... 8,198 2.77 9,479 2.68
Time deposits .................................................. 22,259 5.75 25,209 6.11
--------------- ---------------
Total deposits ................................... $ 37,647 $ 42,617
=============== ===============
</TABLE>
The Company has a large, stable base of time deposits, with little or no
dependence on volatile deposits of $100,000 or more. The time deposits are
principally certificates of deposit and individual retirement accounts obtained
from individual customers.
The amounts of time certificates of deposit issued in amounts of
$100,000 or more as of December 31, 1997, are shown below by category, which is
based on time remaining until maturity of (i) three months or less, (ii) over
three through twelve months and (iii) over twelve months.
December 31,
1997
----------------
(Dollars in
Thousands)
----------------
Three months or less ........................... $ 1,809
Over three through twelve months ............... 3,228
Over twelve months ............................. 1,080
----------------
Total .......................................... $ 6,117
================
37
<PAGE>
Return on Assets and Stockholders' Equity
The following table shows return on assets (net income divided by
average total assets), return on equity (net income divided by average
stockholders' equity), dividend payout ratio (dividends declared per share
divided by net income per share) and stockholders' equity to asset ratio
(average stockholders' equity divided by average total assets) for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Return on assets ......................................................................... 0.78 % (2.35) %
Return on equity ......................................................................... 10.97 (37.62)
Dividends payout ......................................................................... - -
Equity to assets ratio ................................................................... 7.15 6.26
</TABLE>
Commitments and Lines of Credits
In the ordinary course of business, the Bank has granted commitments to
extend credit to approved customers. Generally, these commitments to extend
credit have been granted on a temporary basis for seasonal or inventory
requirements and have been approved by the Bank's Board of Directors. The Banks
have also granted commitments to approved customers for standby letters of
credit. These commitments are recorded in the financial statements when funds
are disbursed or the financial instruments become payable. The Bank uses the
same credit policies for these off-balance sheet commitments as they do for
financial instruments that are recorded in the consolidated financial
statements. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Because many of the
commitment amounts expire without being drawn upon, the total commitment amounts
do not necessary represent future cash requirements.
Following is a summary of the commitments outstanding at December 31,
1997 and 1996.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C>
Commitments to extend credit ................................................. $ 4,746 $ 4,655
Standby letters of credit .................................................... 12 16
--------------- ---------------
$ 4,758 $ 4,671
=============== ===============
</TABLE>
38
<PAGE>
Impact of Inflation
The consolidated financial statements and related consolidated
financial data presented herein have been prepared in accordance with generally
accepted accounting principles and practices within the banking industry which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are included on pages F-1 through F-32 of this Annual Report on
Form 10-KSB:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1997 and 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1997 and
1996
Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On August 15, 1997, the Company's Board of Directors elected to dismiss
Stewart, Fowler & Stalvey, P.C. as the Company's independent auditors. The
report of Stewart, Fowler & Stalvey, P.C. accompanying the Company's financial
statements as of and for the years ended December 31, 1996 and 1995, did not
contain an adverse opinion, or a disclaimer of opinion, and was not modified
with respect to uncertainty, audit scope or accounting principles.
On August 15, 1997, the Company engaged Mauldin & Jenkins, LLC of
Albany, Georgia as its new certifying accountant. The Company did not consult
with Mauldin & Jenkins, LLC regarding the application of accounting principles
to a specific completed or contemplated transaction or the type of audit opinion
that might be rendered on the Company's financial statements.
The decision of the Company to engage new certifying accountants was
approved by its Board of Directors. There were, during the two most recent
fiscal years of the Company and for the period of January 1, 1997 through August
15, 1997, no disagreements, whether resolved or unresolved, with Stewart, Fowler
& Stalvey, P.C. with regard to any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to its satisfaction would have caused Stewart, Fowler & Stalvey, P.C.
to make reference to the subject matter of the disagreement(s) in connection
with its report.
39
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
Director's
Director Term
Name Age Position Since Expires
----------------------------------- ------------- ------------------------------------- ------------- --------------
<S> <C> <C> <C> <C>
Board Nominees:
William C. Ellis, Jr. 53 Director 1990 1998
Ralph G. Evans 41 Director 1990 1998
Directors Continuing in Office:
A. Curtis Farrar, Jr. 53 Director 1990 1999
Norman E. Fletcher 60 Director 1990 1999
Milton G. Clements 49 Director 1990 2000
Robert L. Cation 53 Chairman of the Board of Directors 1990 2000
Jeffery W. Johnson 48 Director 1997 2000
</TABLE>
Executive Officers
The following table and accompanying notes set 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>
Robert L. Cation 53 Chairman of the Board of FNC Bancorp, Inc.
Chairman of the Board of First National Bank of Coffee County
Jeffery W. Johnson 48 President and CEO of FNC Bancorp, Inc.
President and CEO of First National Bank of Coffee County
Al D. Ross 34 Executive Vice President of First National Bank of Coffee County
Leonard W. Thomas 37 Senior Vice President and CFO of First National Bank of Coffee County
Ralph G. Evans 41 Secretary of FNC Bancorp, Inc.
</TABLE>
40
<PAGE>
Business Experience
Effective May 15, 1997, Jeffery W. Johnson was employed as President
and CEO of the Company and the Bank as well as elected as a director of the
Bank. Mr. Johnson has twenty-five years experience in banking. He most recently
served as President of First State Bank in Cordele, Georgia, a position he held
for ten years. Prior to his tenure with First State Bank, Mr. Johnson served as
CEO of Commercial State Bank, Donalsonville, Georgia, as a Vice President of the
Bank of Perry, Perry, Georgia and as a Banking Officer at C & S National Bank in
Athens, Georgia. Mr. Johnson is a native of Soperton, Georgia, a graduate of the
University of Georgia and the School of Banking at Louisiana State University.
He has served as a directory of the Small Business Administration's Advisory
Board, is a past President of the Cordele Chamber of Commerce and is a delegate
to the 1998 Congressional Conference on Small Business.
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.
Leonard W. Thomas is Senior Vice President and CFO of First National
Bank of Coffee County. His responsibilities include supervision of the Bank's
investment, bookkeeping and accounting operations. He has over 12 years of bank
audit and management experience and is on the Steering Committee of the
Community Bankers Association's Financial Manager's Forum.
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 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.
41
<PAGE>
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.
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, has served ad Chairman of the
Job Training Program in the area.
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 chose by the Company to become directors or executive
officers.
42
<PAGE>
ITEM 10. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Executive Compensation
The Company does not separately compensate any of its executive
officers. The following table sets forth the annual and long-term compensation
paid to the Company's and the Bank's Chief Executive Officer for the most recent
and previous two fiscal years and to each executive officer of the Company and
the Bank whose cash compensation exceeded $100,000 during 1997.
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- -------------------------- -----------
Other Restricted Securities
Name Annual Stock Underlying LTP All Other
Principal Salary Bonus Compensation Award(S) Options Payouts Compensation
Position Year ($) ($) ($) (1) ($) SARS (#) ($) ($)
- ------------------------ ------- ----------- ----------- -------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffery W. Johnson 1997 $ 72,000 $ - $ - $ - 14,640 $ - $ 772
President and CEO
of FNC Bancorp, Inc.
and First National
Bank
of Coffee County
Timothy J. Palmer (2) 1996 71,186 - - - - - -
President and 1995 90,000 13,950 - - 3,642(3) - -
CEO of FNC
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) Mr. Palmer left the Company on May 19, 1996. Jeffery W. Johnson
began employment April 1, 1997 and was elected
President and CEO of the Bank and the Company on May 15, 1997.
(3) Transferred to other Directors as of December 31, 1996.
43
<PAGE>
Until Mr. Palmer's resignation on May 19, 1996, his compensation was
governed by an employment agreement which became effective January 1, 1995. The
1995 employment agreement provided Mr. Palmer with a base salary of $90,000
annually. The 1995 employment agreement also provided for incentive compensation
in the form of bonuses to be paid to Mr. Palmer should certain performance
levels related to asset growth and profitability be achieved as well as various
fringe benefits. Following Mr. Palmer's resignation on May 19, 1996, the Board,
in recognition of is past service, voted to pay his salary for three additional
three (3) months and to continue his health, life and disability insurance until
December 31, 1996 or until Mr. Palmer secures other employment, whichever was
sooner.
Upon Mr. Palmer's resignation, Mr. Robert L. Cation was elected to
serve as interim President and CEO. Mr. Cation received no compensation for
his services in that capacity.
The Board of Directors, after consulting with others in the banking
industry and legal counsel negotiated an employment agreement with Jeffery W.
Johnson which commenced on April 1, 1997 and will continue for a term ending
April 30, 2000. Thereafter such employment agreement will continue from year to
year unless and until terminated by either party. The Board of Directors relied
upon information pertaining to comparable CEO compensation in the industry as
well as its determination of the value of Mr. Johnson's previous experience in
determining a fair and reasonable compensation package for Mr. Johnson as set
forth in the new employment agreement. The terms and conditions of such
employment agreement are summarized described below.
Employment Agreement
The employment agreement (the "Agreement") provides Mr. Johnson with a
base salary of $96,000 annually during the initial term of the Agreement. After
the initial fiscal year, the base salary may be increased at the discretion of
the Board. The Agreement also provides for incentive compensation in the form of
bonuses to be paid to Mr. Johnson should certain performance levels related to
profitability be achieved. Mr. Johnson may receive a bonus equal to fifty per
cent (50%) of the amount by which the Company's net income exceeds return on
equity benchmarks determined as set forth in the Agreement. The return on equity
benchmark for the 1997 fiscal year is 9.5%. For subsequent years, the benchmark
will be determined by the Board of Directors or a compensation committee
thereof. These bonuses are capped at $35,000 for the first fiscal year, $45,000
for the second fiscal year and $50,000 for the third fiscal year. Mr. Johnson is
afforded the right under the Agreement to elect to receive the amount of such
incentive bonus in the form of non-qualified stock options provided that the
total number of stock options issued under this election shall not exceed 25,000
shares. As an additional inducement to Mr. Johnson to accept employment with the
Bank, the Company has agreed to issued stock options for 25,000 shares of the
first two years of employment and 8,334 in the third year. All such stock
options will provide for a strike price of $10 per share and shall have a term
of seven years after the date of issuance or vesting, as applicable. In
addition, Mr. Johnson will receive a one-time cash bonus of $10,000 upon his
brining the Bank to an overall "2" rating with the Office of the Comptroller of
the Currency.
44
<PAGE>
Upon Mr. Palmer's resignation, the remaining directors of the Bank
purchased from Mr. Palmer 5,000 shares of common stock and Mr. Palmer's stock
options for 10,926 shares in the Company. As an additional inducement to Mr.
Johnson to become employed by the Company and the bank, each of the directors
agreed to assign to Mr. Johnson their portion of these stock options for 10,926
shares provided that he exercises one-half of these options within twelve months
of this employment and the remaining half within twenty-four months. If he does
not exercise these options within the required times, they will revert to the
directors. If Mr. Johnson acquired all of the shares of stock available to him
by stock option under his employment agreement or from the Bank's directors,
then he would own 65,926 shares of the Company's stock which would represent
14.1% of the issued and outstanding stock of the Company assuming that no other
holder of options or warrants exercised their rights to acquire additional
stock.
The Agreement also provides for hospitalization and major medical
insurance coverage for Mr. Johnson; 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. The
Agreement also provides $3,000 in reimbursement of the cost of moving his
household goods to Douglas, Georgia. In lieu of a cash payment for reimbursement
for duplicate housing while Mr. Johnson sells his home in Cordele, the Bank has
made a house it purchased at foreclosure available for Mr. Johnson's use until
he secures permanent housing in Douglas or until a buyer for that house is
obtained.
The Agreement will provide that, if the Bank terminates the Agreement
without cause during the first three years of its term, Mr. Johnson will receive
severance pay equal to twelve months base salary. In the event of a change in
control of the Bank, Mr. Johnson will receive severance pay equal to two years
base salary unless he is offered equivalent employment with the acquiring party
and remains employed in such capacity for at least six months.
In addition, the employment agreement will provide that following
termination of his employment with the Bank, Mr. Johnson will not engage in any
banking activities in which he was engaged at the time of his employment within
a fifty mile radius of Douglas, Georgia for a period of one year following
termination.
Other Executive Compensation
With respect to compensation paid to executive officers other than the
CEO, the Board of Directors has offered competitive salaries in comparison to
market practices when hiring. Subsequent raises are based upon a comparison of
current market conditions and management's subjective valuation of job
performance. The Bank paid bonuses to certain executive officers in December
1996. These bonuses were based upon an evaluation of the job performance of each
individual executive officer as well as a comparison of current market
conditions. Subject to shareholder approval of a stock option plan, the Board
does intend to award stock options in the future to certain key executive
officers as an incentive to job performance. The Board will also consider
additional cash bonuses for certain executive officers again in consideration of
job performance and market conditions.
Director Compensation
Currently, directors are reimbursed for expenses in connection with the
performance of their duties but receive no directors' fees.
45
<PAGE>
The following table sets forth certain information concerning each
grant of options to purchase the Company's common stock made during the 1997
fiscal year to the persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------
% of Total
Number of Options
Shares Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted (#) Year ($/SH) Date
---------------------------- ------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
Jeffery W. Johnson 39,640 100% $ 10 2007
</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>
Shares Number of Securities Value of Unexercised
Acquired on Value (1) Underlying Unexercised In-The-Money Options
Name Exercise (#) Realized ($) Options at Year End (#) at Year End ($) (2)
--------------------- --------------- -------------- ------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffery W. Johnson - $ - 33,899 16,667 $ - $ -
</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 $ - - for the
reason stated in (1) above.
46
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Shareholders
The following table presents as of December 31, 1997, 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.
<TABLE>
<CAPTION>
------------------- -----------------
Amount and
Nature of
Name and Address of Beneficial Percent of
Title of Class Beneficial Owner Ownership Class
-------------------- ---------------------------------- ------------------- -----------------
<S> <C> <C> <C>
Common Carl C. Atkinson 25,715 5 6.34%
Rt. 2, Box 777
Broxton, Georgia 31519
Common Robert L. Cation 26,465 6.52
1206 Hampton Road
Douglas, Georgia 31533
Common William C. Ellis, Jr. 26,714 6.58
Post Office Box 270
Douglas, Georgia 31534
Common Ralph G. Evans 31,264 6 7.71
Post Office Box 1264
Douglas, Georgia 31534
Common A. Curtis Farrar, Jr. 26,464 6.52
308 Dogwood Avenue
Douglas, Georgia 31533
Common Norman E. Fletcher 26,014 7 6.41
401 Shirley Avenue
Douglas, Georgia 31533
</TABLE>
5 Includes 12,500 shares held in the name of Malklean B. Atkinson, wife of
Carl C. Atkinson.
6 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.
7 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 Normal E. Fletcher) IRA.
47
<PAGE>
Stock Ownership by Management
The following table presents as of December 31, 1997, certain
information regarding the Company's common stock owned (i) by each of the
Company's directors and (ii) by all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent of
Title of Class Beneficial Owner Ownership Class
-------------------- ---------------------------------- ------------------- -----------------
<S> <C> <C> <C>
Common Robert L. Cation 26,465 6.52%
1206 Hampton Road
Douglas, Georgia 31533
Common Milton G. Clements 18,314 8 4.51
Common William C. Ellis, Jr. 26,714 9 6.58
Post Office Box 270
Douglas, Georgia 31534
Common Ralph G. Evans 31,264 7.71
Post Office Box 1264
Douglas, Georgia 31534
Common A. Curtis Farrar, Jr. 26,464 6.52
308 Dogwood Avenue
Douglas, Georgia 31533
Common Norman E. Fletcher 26,014 10 6.41
401 Shirley Avenue
Douglas, Georgia 31533
All directors and executive officers as a group (10 persons) 155,235 38.26%
=============== =================
</TABLE>
8 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, 1,000 shares held in the name of
William Donovan Clements, son of Milton G. Clements.
9 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.
10 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 Marvalyne G. Fletcher (wife of Norman E. Fletcher) IRA.
48
<PAGE>
The following contains information with respect to the common stock
owned as of the record date (i) by directors and executive officers of the
Company and (ii) by all directors and executive officers of the Company as a
group, who are deemed to be the beneficial owners of additional shares of the
common stock of the Company through their right to exercise warrants or stock
options. The percent owned is calculated for each individual upon the assumption
that they have exercised all of their warrants or stock options while no other
holder of warrants or options has done so. The percent owned of the group is
calculated upon the assumption that all such individuals have simultaneously
exercised all of their warrants and options.
<TABLE>
<CAPTION>
Number of % Owned
Number of Shares and (Including
Name of Shares Number of Number of Options/ Options/
Beneficial Owner Issued 11 Warrants 12 Options Warrants 13 Warrants) 14
-------------------------------- --------------- -------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Robert L. Cation 26,465 25,000 1,561 53,026 12.27%
Milton G. Clements 18,314 12,500 1,561 32,375 7.71
William C. Ellis, Jr. 26,714 25,000 1,561 53,275 12.32
Ralph G. Evans 31,264 25,000 1,561 57,825 13.38
A. Curtis Farrar, Jr. 26,464 25,000 1,560 53,024 12.27
Norman E. Fletcher 26,014 25,000 1,561 52,575 12.16
--------------- -------------- --------------- ----------------- --------------
All directors and executive
officers as a group
(6 persons) 155,235 137,500 9,365 302,100 54.42%
=============== ============== =============== ================= ==============
</TABLE>
Under Mr. Jeffery W. Johnson's pending employment agreement and under
agreements with the Bank's directors individually, he acquired the rights to
acquire certain stock options and stock of the Company. If Mr. Johnson acquired
all of the shares of stock available to him by stock option under his employment
agreement or from the Bank's directors, then he would own 65,926 shares of the
Company's stock which would represent 14.1% of the issued and outstanding stock
of the Company assuming that no other holder of options or warrants exercised
their rights to acquire additional stock.
11 Taken from the previous table except as noted.
12 In recognition of the efforts and financial risks undertaken by the
directors and executive officers in organizing the Company and the Bank, the
directors and executive officers named above were granted warrants to
purchase one share of common stock for each share purchased in the original
offering, however, such persons elected to acquire a total of only 142,500
such warrants. Upon exercise, each warrant will entitle the holder to
purchase one share of the common stock of the company at a price equal to
$10 per share (the same price at which the shares were initially sold to the
public) unless the Bank is, at that time, required to raise capital to meet
its regulatory guidelines in which case the exercise price will be greater
of $10 per share or the book value per share of the common stock of the
Company as reflected in the Company's quarterly financial report for the
quarter and immediately prior to the exercise of the warrant. Subject to
certain limitations, the warrants are exercisable for a period of ten (10)
years from the date of the Company's stock offering.
13 Includes shares deemed to be beneficially owned through the right to
exercise warrants or stock options exercisable within sixty (60) days of the
record date.
14 Based upon 405,710 shares outstanding as of the record date and as adjusted
for warrants or stock options exercisable within sixty (60) days of the
record date.
49
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bank Loans to Affiliates
The Directors, officers and employees of the Company and the Bank, as
well as individuals, firms and companies with which they are associated, have or
are anticipated to have banking transactions with the Bank. Subject to
applicable laws, the Bank has a policy of offering loans to its eligible
employees (i.e., employees other than Directors, executive officers and holders
of more than ten percent of the Company's outstanding Common Stock, as well as
affiliates of such persons) at favorable interest rates which generally will be
equal to or in excess of the Bank's prime lending rate at the time of the loan.
Loans to directors, executive officers, controlling shareholders and their
affiliates are made at the prevailing interest rate for comparable loans to
unaffiliated borrowers. In all respects other than the rate of interest charged
on loans to eligible employees, loans by the Bank to directors, officers,
employees and controlling shareholders, as well as to affiliates of such
persons, are extended only in the ordinary course of business and on
substantially the same terms, including collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve more
than the normal risk of collectability or present other unfavorable features.
Bank policy also requires that any loans by the Bank to any of its directors or
executive officers aggregating in excess of $25,000 must be approved by the
affirmative vote of a majority of the Board of Directors at a meeting in which
any interested director has abstained from participating, either directly or
indirectly.
50
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------ ----------------------------------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant,
(filed as Exhibit 3.1 to the Registrant's Form
S-18 (File Number 33-37078), as amended.)
3.2 Bylaws of the Registrant (filed as Exhibit
3.2 to the Registrant's Form S-18(File Number
33-37078), as amended.)
10.1 Form of subscription Agreement(filed as
Exhibit 10.1 to the Registrant's Annual Report
on Form 10-KSB (File Number 33-37078), filed
with the Commission for the year ended
December 31, 1990 and incorporated herein by
reference.)
10.2 Form of Organizer's Warrant (filed as
Exhibit 10.2 to the Registrant's Form S-18
(File Number 33-37078), as amended.)
10.3 1997 Incentive Stock Option Plan filed
herewith electronically.
10.4 Executive Employment Agreement with Jeffery W.
Johnson filed herewith electronically.
21.1 Subsidiaries of the Registrant. (filed as
Exhibit 21.1 to the Registrant's Annual Report
on Form 10-KSB (File Number 33-37078), filed
with the Commission for the year ended
December 31, 1996 and incorporated herein by
reference.)
24 Power of Attorney relating to this Annual
Report on Form 10-KSB is set forth on the
signature pages to this Annual Report.
27 Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this Report.
</TABLE>
51
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"), the Registrant has duly caused this
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized.
FNC BANCORP, INC.
Date: March 26, 1998 By: /s/ Jeffery W. Johnson
------------- -------------------------------
Jeffery W. Johnson, President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffery W. Johnson as his
attorney-in-fact, acting with full power of substitution for him in his name,
place and stead, in any and all capacities, to sign any amendments to this Form
10-KSB and to file the same, with exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission and hereby
ratifies and confirms all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Exchange Act, this Form 10-KSB has
been signed by the following persons in the capacities and on the dates
indicated.
Date: March 26, 1998 /s/ Jeffery W. Johnson
-------------- ---------------------------------------------------
Jeffery W. Johnson, President
Chief Executive Officer and Director
Date: March 26, 1998 /s/ Robert L. Cation
-------------- ---------------------------------------------------
Robert L. Cation, Director
Date: March 26, 1998 /s/ Milton C. Clements
-------------- ---------------------------------------------------
Milton G. Clements, Director
Date: March 26, 1998 /s/ William C. Ellis, Jr.
-------------- ---------------------------------------------------
William C. Ellis, Jr., Director
Date: March 26, 1998 /s/ Ralph G. Evans
-------------- ---------------------------------------------------
Ralph G. Evans, Director
Date: March 26, 1998 /s/ A. Curtis Farrar, Jr.
-------------- ---------------------------------------------------
A. Curtis Farrar, Jr., Directo
Date: March 26, 1998 /s/ Norman E. Fletcher
--------------- ---------------------------------------------------
Norman E. Fletcher, Director
52
<PAGE>
FNC BANCORP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ---------------------------------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant,
(filed as Exhibit 3.1 to the Registrant's Form
S-18 (File Number 33-37078), as amended.)
3.2 Bylaws of the Registrant (filed as Exhibit
3.2 to the Registrant's Form S-18 (File
Number 33-37078), as amended.)
10.1 Form of subscription Agreement (filed as
Exhibit 10.1 to the Registrant's Annual Report
on Form 10-KSB (File Number 33-37078), filed
with the Commission for the year ended
December 31, 1990 and incorporated herein by
reference.)
10.2 Form of Organizer's Warrant (filed as
Exhibit 10.2 to the Registrant's Form S-18
(File Number 33-37078), as amended.)
10.3 1997 Incentive Stock Option Plan filed
herewith electronically.
10.4 Executive Employment Agreement with Jeffery W.
Johnson filed herewith electronically.
21.1 Subsidiaries of the Registrant. (filed as
Exhibit 21.1 to the Registrant's Annual Report
on Form 10-KSB (File Number 33-37078), filed
with the Commission for the year ended
December 31, 1996 and incorporated herein by
reference.)
24 Power of Attorney relating to this Annual
Report on Form 10-KSB is set forth on the
signature pages to this Annual Report.
27 Financial Data Schedule
</TABLE>
53
<PAGE>
<TABLE>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORTS....................................................................................F-1 and F-2
FINANCIAL STATEMENTS
Consolidated balance sheets.........................................................................................F-3
Consolidated statements of operation................................................................................F-4
Consolidated statements of stockholders' equity.....................................................................F-5
Consolidated statements of cash flows.......................................................................F-6 and F-7
Notes to consolidated financial statements...................................................................F-8 - F-33
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
FNC Bancorp, Inc. and Subsidiary
Douglas, Georgia
We have audited the accompanying consolidated balance sheet of FNC Bancorp,
Inc. and subsidiary as of December 31, 1997 and the related consolidated
statements of operation, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of FNC Bancorp, Inc. and
Subsidiary for the year ended December 31, 1996 were audited by other auditors
whose report, dated February 6, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FNC Bancorp,
Inc. and subsidiary as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Albany, Georgia
January 30, 1998 /s/ Mauldin & Jenkins, LLC
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
FNC Bancorp, Inc. and Subsidiary
Douglas, Georgia
We have audited the consolidated balance sheet of FNC Bancorp, Inc., and
Subsidiary as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are included for comparative purposes in the "Consolidated
Financial Report" for the year ended December 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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 the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
Valdosta, Georgia
February 6, 1997 Stewart, Fowler & Stalvey, P.C.
F-2
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Assets
------ 1997 1996
--------------------- ---------------------
<S> <C> <C>
Cash and due from banks ...................................................... $ 4,891,736 $ 4,896,285
Interest-bearing deposits in banks ........................................... 32,864 21,337
Federal funds sold ........................................................... 34,000 7,249,000
Securities available for sale, at fair value (Note 2) ........................ 6,499,422 7,829,126
Loans (Note 3) ............................................................... 31,679,747 27,345,643
Less allowance for loan losses (Note 3) ...................................... 1,159,173 1,520,385
--------------------- ---------------------
Loans, net ......................................................... 30,520,574 25,825,258
--------------------- ---------------------
Premises and equipment, net (Note 4) ......................................... 1,655,030 1,682,081
Other assets ................................................................. 1,169,108 1,607,655
--------------------- ---------------------
$ 44,802,734 $ 49,110,742
===================== =====================
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand ............................................... $ 7,708,349 $ 9,409,021
Interest-bearing demand .................................................. 6,819,767 7,253,382
Savings .................................................................. 1,832,359 1,778,551
Time, $100,000 and over .................................................. 6,116,839 5,363,454
Other time ............................................................... 16,570,685 18,740,193
--------------------- ---------------------
Total deposits ................................................. 39,047,999 42,544,601
Notes payable, directors (Note 6) ....................................... 500,000 500,000
Federal funds purchased .................................................. 430,000 -
Other borrowings (Note 5) ................................................ 1,075,000 2,485,000
Other liabilities ........................................................ 466,537 647,569
--------------------- ---------------------
Total liabilities .................................................. 41,519,536 46,177,170
--------------------- ---------------------
Commitments and contingent liabilities (Note 11)
Stockholders' equity
Preferred stock, par value $1; 10,000,000 shares
authorized, no shares issued ......................................... - -
Common stock, par value $1; 10,000,000 shares
authorized 405,710 issued and outstanding ............................ 405,710 405,710
Capital surplus ......................................................... 3,610,541 3,610,541
Accumulated deficit ...................................................... (743,019) (1,084,329)
Unrealized gains on securities available
for sale, net of tax ................................................. 9,966 1,650
--------------------- ---------------------
Total stockholders' equity ......................................... 3,283,198 2,933,572
--------------------- ---------------------
$ 44,802,734 $ 49,110,742
===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
<S> <C> <C>
Interest income
Interest and fees on loans .................................................. $ 2,697,495 $ 3,118,357
Interest on taxable securities .............................................. 510,346 320,422
Interest on deposits in other banks ......................................... 692 4,506
Interest on Federal funds sold .............................................. 173,093 274,544
-------------------- ---------------------
3,381,626 3,717,829
-------------------- ---------------------
Interest expense
Interest on deposits ........................................................ 1,506,970 1,795,263
Interest on other borrowings ................................................ 139,260 135,694
-------------------- ---------------------
1,646,230 1,930,957
-------------------- ---------------------
Net interest income ................................................... 1,735,396 1,786,872
Provision for loan losses (Note 3) .............................................. 30,450 2,305,174
-------------------- ---------------------
Net interest income (loss) after provision for loan losses ............ 1,704,946 (518,302)
-------------------- ---------------------
Other income
Service charges on deposit accounts ......................................... 346,136 366,116
Other service charges, commissions and fees ................................. 18,031 18,392
Net realized gains on securities available for sale ......................... 900 761
Origination fees on mortgage loans .......................................... 19,291 21,564
Other ....................................................................... 38,034 26,572
-------------------- ---------------------
422,392 433,405
-------------------- ---------------------
Other expenses
Salaries and employee benefits (Note 7) ..................................... 805,041 871,840
Equipment expense ........................................................... 140,235 108,202
Occupancy expense ........................................................... 92,868 105,261
Amortization of intangible assets ........................................... - 15,240
Accounting expenses ......................................................... 96,885 44,765
Advertising expense ......................................................... 39,613 60,891
Data processing expenses .................................................... 62,403 66,284
Printing and office supplies ................................................ 54,077 60,865
Other operating expenses .................................................... 318,226 319,019
-------------------- ---------------------
1,609,348 1,652,367
-------------------- ---------------------
Income (loss) before income taxes ..................................... 517,990 (1,737,264)
Applicable income taxes (benefit) (Note 8) ...................................... 176,680 (590,932)
-------------------- ---------------------
Net income (loss) ..................................................... $ 341,310 $ (1,146,332)
==================== =====================
Income (loss) per common share - basic and diluted .............................. $ 0.84 $ (2.83)
==================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Unrealized
Gains
(Losses) on
Securities
Retained Available Total
Common Stock Capital Earnings for Sale, Stockholders'
---------------------------
Shares Par Value Surplus (Deficit) Net of Tax Equity
----------- -------------- ---------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 405,710 $ 405,710 $ 3,610,541 $ 62,003 $ (867) $ 4,077,387
Net (loss) ............... - - - (1,146,332) - (1,146,332)
Net change in unrealized
gains (losses) on
securities available for
sale, net of tax ..... - - - - 2,517 2,517
----------- -------------- ---------------- ------------------ ------------- ----------------
Balance, December 31, 1996 ... 405,710 405,710 3,610,541 (1,084,329) 1,650 2,933,572
Net income ............... - - - 341,310 - 341,310
Net change in unrealized
gains (losses) on
securities available for
sale, net of tax ..... - - - - 8,316 8,316
----------- -------------- ---------------- ------------------ ------------- ----------------
Balance, December 31, 1997 ... 405,710 $ 405,710 $ 3,610,541 $ (743,019) $ 9,966 $ 3,283,198
=========== ============== ================ ================== ============= ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .......................................................... $ 341,310 $ (1,146,332)
--------------------- ---------------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation ........................................................... 134,383 108,536
Amortization of intangible assets ...................................... - 15,240
Provision for loan losses .............................................. 30,450 2,305,174
Provision for deferred income taxes .................................... 176,680 (469,677)
Net realized gains on securities available for sale .................... (900) (761)
Net accretion of investment securities ................................. (18,782) (31,305)
(Increase) decrease in interest receivable ............................. 174,393 (70,743)
Decrease in interest payable ........................................... (154,199) (30,647)
Decrease in taxes payable .............................................. - (55,195)
Decrease in prepaid taxes .............................................. 66,360 -
Other prepaids, deferrals and accruals, net ............................ (10,003) (110,414)
--------------------- ---------------------
Total adjustments ................................................ 398,382 1,660,208
--------------------- ---------------------
Net cash provided by operating activities ........................ 739,692 513,876
--------------------- ---------------------
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits in banks .................. (11,527) 617,230
Proceeds from sales of securities available for sale ....................... 1,123,667 500,000
Purchases of securities available for sale ................................. (4,538,046) (7,657,138)
Proceeds from maturities of securities available for sale .................. 4,776,365 3,845,819
Proceeds from maturities of securities held-to-maturity .................... - 710,000
(Increase) decrease in Federal funds sold .................................. 7,215,000 (3,429,000)
Increase (decrease) in loans, net .......................................... (4,725,766) 3,347,601
Purchase of premises and equipment ......................................... (107,332) (96,604)
--------------------- ---------------------
Net cash provided by (used in) investing activities .............. 3,732,361 (2,162,092)
--------------------- ---------------------
FINANCING ACTIVITIES
Decrease in deposits ....................................................... (3,496,602) (2,640,943)
Increase in Federal funds purchased ........................................ 430,000 -
Increase (decrease) in other borrowings .................................... (1,410,000) 1,890,000
Proceeds from notes payable ................................................ - 500,000
--------------------- ---------------------
Net cash used in financing activities ............................ (4,476,602) (250,943)
--------------------- ---------------------
</TABLE>
F-6
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
<S> <C> <C>
Net decrease in cash and due from banks ........................................ $ (4,549) $ (1,899,159)
Cash and due from banks at beginning of year ................................... 4,896,285 6,795,444
-------------------- ---------------------
Cash and due from banks at end of year ......................................... $ 4,891,736 $ 4,896,285
==================== =====================
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the year for:
Interest ............................................................... $ 1,800,429 $ 1,961,604
Income taxes ........................................................... $ (66,360) $ 121,555
NONCASH TRANSACTION
Net change in unrealized gains (losses) on securities
available for sale ..................................................... $ 12,600 $ 3,814
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
FNC Bancorp, Inc. (the Company) is a bank holding company
whose business is conducted by its wholly-owned subsidiary,
First National Bank of Coffee County, (the Bank). The Bank
is a commercial bank located in Douglas, Coffee County,
Georgia. The Bank provides a full range of banking services
in its primary market area of Coffee County and the
surrounding counties.
Basis of Presentation
The accounting and reporting policies of the Company
conform to generally accepted accounting principles and
general practices within the financial services industry.
In preparing the financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date
of the balance sheet and revenues and expenses for the
period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts
of the Company and its subsidiary. Significant intercompany
transactions and accounts are eliminated in consolidation.
The principles which significantly affect the determination
of financial position, results of operations and cash flows
are summarized below.
Cash and Cash Equivalents
Cash on hand, cash items in process of collection, and
amounts due from banks are included in cash and cash
equivalents. Cash flows from loans originated by the Bank,
deposits, interest-bearing deposits, and Federal funds
purchased and sold are reported at net.
The Company maintains amounts due from banks which, at
times, may exceed Federally insured limits. The Company has
not experienced any losses in such accounts.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified based on management's intention
on the date of purchase. Securities which management has
the intent to hold for an indefinite period of time, but
not necessarily to maturity, are classified as available
for sale and are recorded at fair value with net unrealized
gains and losses included in stockholders' equity, net of
tax.
Interest and dividends on securities, including
amortization of premiums and accretion of discounts, are
included in interest income. Realized gains and losses from
the sales of securities are determined using the specific
identification method.
Loans
Loans are carried at their principal amounts outstanding
less unearned income and the allowance for loan losses.
Interest income on loans is credited to income based on the
principal amount outstanding.
Loan origination fees and certain direct costs of loans are
recognized at the time the loan is recorded. Because net
origination loan fees and costs are not material, the
results of operations are not materially different than the
results which would be obtained by accounting for loan fees
and costs in accordance with generally accepted accounting
principles.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential
losses in the loan portfolio. Management's determination of
the adequacy of the allowance is based on an evaluation of
the portfolio, past loan loss experience, current economic
conditions, volume, growth, composition of the loan
portfolio, and other risks inherent in the portfolio. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's
allowance for loan losses, and may require the Company to
record additions to the allowance based on their judgment
about information available to them at the time of their
examinations.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable
to meet payments as they become due. When accrual of
interest is discontinued, all unpaid accrued interest is
reversed.
A loan is impaired when it is probable the Company will be
unable to collect all principal and interest payments due
in accordance with the terms of the loan agreement.
Individually identified impaired loans are measured based
on the present value of payments expected to be received,
using the contractual loan rate as the discount rate.
Alternatively, measurement may be based on observable
market prices or, for loans that are solely dependent on
the collateral for repayment, measurement may be based on
the fair value of the collateral. If the recorded
investment in the impaired loan exceeds the measure of fair
value, a valuation allowance is established as a component
of the allowance for loan losses. Changes to the valuation
allowance are recorded as a component of the provision for
loan losses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the
assets.
Other Real Estate Owned
Other real estate owned (OREO) represents properties
acquired through foreclosure or other proceedings. OREO is
held for sale and is recorded at the lower of the recorded
amount of the loan or fair value of the properties less
estimated costs of disposal. Any write-down to fair value
at the time of transfer to OREO is charged to the allowance
for loan losses. Property is evaluated regularly to ensure
the recorded amount is supported by its current fair value
and valuation allowances to reduce the carrying amount to
fair value less estimated costs to dispose are recorded as
necessary. Subsequent decreases in fair value and increases
in fair value, up to the value established at foreclosure,
are recognized as charges or credits to noninterest
expense.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Income tax expense consists of current and deferred taxes.
Current income tax provisions approximate taxes to be paid
or refunded for the applicable year. Deferred tax assets
and liabilities are recognized on the temporary differences
between the bases of assets and liabilities as measured by
tax laws and their bases as reported in the financial
statements. Deferred tax expense or benefit is then
recognized for the change in deferred tax assets or
liabilities between periods.
Recognition of deferred tax balance sheet amounts is based
on management's belief that it is more likely than not that
the tax benefit associated with certain temporary
differences, tax operating loss carryforwards, and tax
credits will be realized. A valuation allowance is recorded
for those deferred tax items for which it is more likely
than not that realization will not occur.
The Company and the Bank file a consolidated income tax
return. Each entity provides for income taxes based on its
contribution to income taxes (benefits) of the consolidated
group.
Earnings (Loss) Per Common Share
Basic earnings (loss ) per share are calculated on the
basis of the weighted average number of common shares
outstanding. Diluted earnings per share are computed by
dividing net income (loss) by the sum of the weighted
average number of common shares outstanding and potential
common shares that have a dilutive effect on earnings
(loss).
Current Accounting Developments
In June 1996, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
No 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS
No. 125"). This statement provides standards for
distinguishing transfers of financial assets that are sales
from those that are secured borrowings, and provides
guidance on the recognition and measurement of asset
servicing contracts and on debt extinguishments. As issued,
SFAS No. 125 is effective for transactions occurring after
December 31, 1996. However, as a result of an amendment to
SFAS No. 125 by the FASB in December 1996, certain
provision of SFAS No. 125 are deferred for an additional
year. Adoption of the new accounting standard is not
expected to have a material impact on the Company's
financial statements.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Current Accounting Developments (Continued)
In February 1997, the FASB issued SFAS No. 128, "Earnings
per Share". This statement simplifies the standards for
computing earnings per share previously set forth in APB
Opinion No. 15, "Earnings per Share", and makes them
comparable to international earnings per Share ("EPS")
standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital
structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the
weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. This statement is effective for financial
statements issued for periods ending after December 15,
1997. The adoption of this statement did not have a
material impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". This statement establishes standards
for reporting and display of comprehensive income and its
components (revenues. expenses, gains and losses) in a full
set of general-purpose financial statements. This statement
requires that all items that are required to be recognized
under accounting standards as components of comprehensive
income be reported in a financial statement that is
displayed with the same prominence as other financial
statements. This statement does not require a specific
format for that financial statement but requires that an
enterprise display an amount representing total
comprehensive income for the period in that financial
statement. This statement requires that an enterprise
classify items of other comprehensive income by their
nature in a financial statement and display the accumulated
balance or other comprehensive income by their nature in a
financial statement and display the accumulated balance or
other comprehensive income separately from retained
earnings and additional paid-in capital in the equity
section of a statement of financial position. This
statement is effective for fiscal years beginning after
December 15, 1997. The adoption of this statement is not
expected to have a material impact on the Company's
financial statements.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Current Accounting Developments (Continued)
In June 1997, The FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
This statement requires that a public business enterprise
report financial and descriptive information about its
reportable operating segments. Operating segments are
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in assessing performance. Generally,
financial information is required to be reported on the
basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to
segments. The statement requires that a business enterprise
report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. It
requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets and other
amounts disclosed for segments to corresponding amounts in
the enterprise's general purpose financial statements. It
requires that the enterprise report information about the
revenues derived from the enterprise's products or
services, about the countries in which the enterprise earns
revenues and hold assets and about major customers. This
statement is effective for financial statements for periods
beginning after December 15, 1997. The adoption of this
statement is not expected to have a material impact on the
Company's financial statements.
Reclassifications
Certain reclassifications have been made in the 1996
consolidated financial statements to conform to the
presentation used in 1997.
NOTE 2. SECURITIES
The amortized cost and approximate fair value of securities
are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1997:
U. S. Government and agency
securities ................. $ 6,010,722 $ 16,702 $ (1,602) $ 6,025,822
Other investments ............ 473,600 - - 473,600
--------------- -------------- -------------- ----------------
$ 6,484,322 $ 16,702 $ (1,602) $ 6,499,422
=============== ============== ============== ================
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1996:
U. S. Government and agency
securities ................. $ 7,217,273 $ 8,431 $ (9,658) $ 7,216,046
Mortgage-backed securities ... 150,753 3,727 - 154,480
Other investments ............ 458,600 - - 458,600
--------------- -------------- -------------- ----------------
$ 7,826,626 $ 12,158 $ (9,658) $ 7,829,126
=============== ============== ============== ================
</TABLE>
The amortized cost and fair value of securities as of December
31, 1997 by contractual maturity are shown below:
<TABLE>
<CAPTION>
Securities Available for Sale
----------------------------------
Amortized Fair
Cost Value
--------------- ----------------
<S> <C> <C>
Due in one year or less .......................................... $ 2,972,772 $ 2,975,570
Due from one year to five years .................................. 3,511,550 3,523,852
--------------- ----------------
$ 6,484,322 $ 6,499,422
=============== ================
</TABLE>
Securities with a carrying value of $3,524,698 and $3,851,150
at December 31, 1997 and 1996, respectively, were pledged to
secure public deposits and for other purposes.
Gains and losses on sales of securities available for sale
consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Gross gains on sales of securities ................................ $ 2,194 $ 761
Gross losses on sales of securities ............................... (1,294) -
--------------- ---------------
Net realized gains (losses) on sales of securities available for
Sale .............................................................. $ 900 $ 761
=============== ===============
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Commercial and financial .................................. $ 4,558,964 $ 5,099,933
Agricultural .............................................. 2,368,981 2,970,961
Real estate - construction ................................ 1,657,987 810,989
Real estate - mortgage, farmland .......................... 4,682,963 2,763,964
Real estate - mortgage, other ............................. 14,450,885 10,289,866
Consumer instalment ....................................... 3,959,967 5,409,930
------------------- -------------------
31,679,747 27,345,643
Allowance for loan losses ................................. (1,159,173) (1,520,385)
------------------- -------------------
Loans, net ................................................ $ 30,520,574 $ 25,825,258
=================== ===================
</TABLE>
The total recorded investment in impaired loans was $772,654
at December 31, 1997. Included in these loans were $654,438
that had a related allowance for loan loss of $139,461 at
December 31, 1997. The average recorded investment in impaired
loans for 1997 was $1,365,746. Interest income on impaired
loans of $7,987 was recognized for cash payments received for
the year ended December 31, 1997. There were no impaired loans
in 1996.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Balance, beginning of year ................................ $ 1,520,385 $ 385,360
Provision charged to operations ........................ 30,450 2,305,174
Loans charged off ...................................... (672,363) (1,449,603)
Recoveries ............................................. 280,701 279,454
------------------- -------------------
Balance, end of year ...................................... $ 1,159,173 $ 1,520,385
=================== ===================
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Bank has granted loans to certain directors, executive
officers and related entities. The interest rates on these
loans were substantially the same as rates prevailing at the
time of the transaction and repayment terms are customary for
the type of loan involved. The aggregate amount of loans to
such related parties at December 31, 1997 was $176,987. During
1997, new loans to such related parties amounted to $380,880
and repayments amounted to $122,100.
NOTE 4. PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Land ........................................................... $ 372,676 $ 372,676
Buildings and improvements ..................................... 1,064,078 1,064,078
Equipment ...................................................... 811,389 704,057
----------------- -----------------
2,248,143 2,140,811
Accumulated depreciation ....................................... (593,113) (458,730)
----------------- -----------------
$ 1,655,030 $ 1,682,081
================= =================
</TABLE>
Depreciation expense for the years ended December 31, 1997 and
1996 was $134,383 and $108,536, respectively.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Advances from the Federal Home Bank with interestat fixed
rates which averaged 5.67% at December 31,
1997 (5.55% in 1996), various repayment options,
maturities through May 16, 2005. ............................... $ 1,075,000 $ 2,485,000
================= =================
</TABLE>
The advances from the Federal Home Loan Bank are
collateralized by the pledging of first mortgage loans. The
advances must be fully secured after discounting the
qualifying loans at 75% of the principal balance outstanding.
Other borrowings at December 31, 1997 have maturities for the
succeeding five years as follows:
Year ending December 31,
1998 .................................. $ 1,010,000
1999 .................................. 10,000
2000 .................................. 10,000
2001 .................................. 10,000
2002 .................................. 10,000
Later years ........................... 25,000
NOTE 6. NOTES PAYABLE TO DIRECTORS
Notes payable to directors in the amount of $500,000 consist
of notes which were executed on December 26, 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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) salary deferral plan which allows
employees to defer up to 15% of their salary with partially
matching Bank contributions. Bank contributions to this plan
charged to expense amounted to $10,813 and $7,742 in 1997 and
1996, respectively.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
Current ....................................................... $ - $ (121,255)
Deferred ...................................................... 176,680 (469,677)
----------------- ------------------
$ 176,680 $ (590,932)
================= ==================
</TABLE>
The Company's provision for income taxes differs from the
amounts computed by applying the Federal income tax statutory
rates to income before income taxes. A reconciliation of the
differences is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996
-------------------------- --------------------------
Amount Percent Amount Percent
------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Tax provision at statutory rate ............... $ 176,117 34 % $ (590,670) 34 %
Increase (decrease) resulting from:
Other items, net ........................... 563 - (262) -
------------- ----------- -------------- ----------
Provision for income taxes .................... $ 176,680 34 % $ (590,932) 34 %
============= =========== ============== ==========
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves ......................................... $ 256,143 $ 411,997
Net operating loss carryover .............................. 200,795 187,481
----------------- -----------------
456,938 599,478
----------------- -----------------
Deferred tax liabilities:
Depreciation ............................................... 83,377 49,237
Unrealized gain on securities available for sale ........... 5,134 850
----------------- -----------------
88,511 50,087
----------------- -----------------
Net deferred tax assets ....................................... $ 368,427 $ 549,391
================= =================
</TABLE>
NOTE 9. STOCK WARRANTS AND STOCK OPTION PLAN
Stock Warrants
In recognition of the efforts and financial risks
undertaken by the Company's organizers, the Company granted
each organizer an opportunity to purchase one share of
common stock for each share purchased by them in the
Company's common stock offering. The warrants became
exercisable on the date the Bank opened for business and
are exercisable in whole or in part at any time during the
ten year period following that date, at an exercise price
equal to $10 per share unless the Bank is required to raise
capital to meet regulatory guidelines. In the event this
occurs, 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. The warrants are nontransferable, other than by
will or the laws of descent and distribution, but shares
issued pursuant to the exercise of warrants will be
transferable, subject to compliance with applicable
securities laws.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK WARRANTS AND STOCK OPTION PLAN (Continued)
Stock Option Plan
The Company approved a Stock Option Plan in 1997 that
allows the Company to grant "incentive stock options" or
"non-qualified stock options" up to 125,000 shares of
common stock to key employees. The key employee "incentive
stock options" are intended to qualify for favorable tax
treatment under Section 422 of the Internal Revenue Code.
The Stock Option Plan will be administered by the Board of
Directors of the Company and will provide for the granting
of options to purchase shares of the common stock to
officers and other key employees of the Company and its
subsidiary. The purchase price under all such options
intended to qualify as incentive options will not be less
than the fair market value of the shares of common stock on
the date of grant. Options will be exercisable upon such
terms as may be determined by the body administering the
Stock Option Plan, but in any event, all options, whether
intended to qualify as incentive options or not, will be
exercisable no later than ten years after the date of
grant.
A summary of the status of the plan at December 31, 1997
and 1996 and changes during the years ended on those dates
is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
----------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Under option, beginning of year ......... 148,426 $ 10.00 153,426 $ 10.00
Granted .............................. 39,640 10.00 - -
Exercised ............................ - - - -
Forfeited ............................ - - (5,000) 10.00
----------- -----------
Under option, end of year ............... 188,066 10.00 148,426 10.00
=========== ===========
Exercisable at end of year .............. 171,399 148,426
=========== ===========
Available for grant at end of year ...... 85,360 -
=========== ===========
Weighted-average fair value per option
of options granted during the year ... $ 4.53 $ -
=========== ===========
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK WARRANTS AND STOCK OPTION PLAN (Continued)
Stock Option Plan (Continued)
A further summary about options outstanding at December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Range Weighted- Weighted- Weighted-
of Average Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Outstanding Price
-------------- ---------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 10.00 148,426 3.9 $ 10.00 148,426 $ 10.00
10.00 25,000 9.3 10.00 8,333 10.00
10.00 14,640 10.0 10.00 14,640 10.00
---------------- ---------------
188,066 5.09 10.00 171,399 10.00
================ ===============
</TABLE>
As permitted by Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
the Company recognizes compensation cost for stock-based
employee compensation awards in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The
company recognized no compensation cost for stock-based
employee compensation awards for the years ended December 31,
1997 and 1996. If the Company had recognized compensation cost
in accordance with SFAS No. 123, net income and net income per
share on a basic and diluted basis would have been reduced as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996
--------------------------------- --------------------------------
Basic Basic Net
Net Net Income Net (Loss)
Income Per Share (Loss) Per Share
--------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
As reported ....................... $ 341,310 $ 0.84 $ (1,146,332) $ (2.83)
Stock based compensation,
net of related tax effect ...... (68,725) (0.17) - -
--------------- --------------- ----------------- -------------
As adjusted ....................... $ 272,585 $ 0.67 $ (1,146,332) $ (2.83)
=============== =============== ================= =============
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK WARRANTS AND STOCK OPTION PLAN (Continued)
Stock Option Plan (Continued)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Diluted Diluted Net
Net Net Income Net (Loss)
Income Per Share (Loss) Per Share
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
As reported ...................... $ 341,310 $ 0.84 $ (1,146,332) $ (2.83)
Stock based compensation,
net of related tax effect ..... (68,725) (0.17) - -
--------------- --------------- ---------------- --------------
As adjusted ...................... $ 272,585 $ 0.67 $ (1,146,332) $ (2.83)
=============== =============== ================ ==============
</TABLE>
The fair value of the options granted in 1997 was based upon
the discounted value of future cash flows of the options using
the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.13%
Expected life of the options 10 years
Expected dividends (as a percent of the fair value of the stock) 0.00%
Expected volatility 0.00%
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of net income (the
numerator) and the weighted average shares outstanding (the
denominator) used in determining basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ----------------- ---------------
<S> <C> <C> <C>
Basic earnings per share
Net income ........................................ $ 341,310 405,710 $ 0.84
===============
Effect of dilutive securities
Stock options ..................................... - -
---------------- -----------------
Dilutive earnings per share
Net income ........................................ $ 341,310 405,710 $ 0.84
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------ ----------------
<S> <C> <C> <C>
Basic earnings per share
Net loss .......................................... $ (1,146,332) 405,710 $ (2.83)
===============
Effect of dilutive securities
Stock options ..................................... - -
---------------- ------------------
Dilutive earnings per share
Net loss .......................................... $ (1,146,332) 405,710 $ (2.83)
================ ================== ================
</TABLE>
The exercise of any outstanding stock options would have no
dilutive effect on earnings per share because the option price
and average market price were equal.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
off-balance-sheet financial instruments which are not
reflected in the financial statements. These financial
instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are included in
the financial statements when funds are disbursed or the
instruments become payable. These instruments involve, to
varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit
is represented by the contractual amount of those instruments.
The Company uses the same credit and collateral policies for
these off-balance-sheet financial instruments as it does for
on-balance-sheet financial instruments. A summary of the
Company's commitments is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Commitments to extend credit .................................. $ 4,746,000 $ 4,655,000
Standby letters of credit ..................................... 12,300 16,300
----------------- -----------------
$ 4,758,300 $ 4,671,300
================= =================
</TABLE>
Commitments to extend credit generally have fixed expiration
dates or other termination clauses and may require payment of
a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The credit
risk involved in issuing these financial instruments is
essentially the same as that involved in extending loans to
customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may
include real estate and improvements, crops, marketable
securities, accounts receivable, inventory, equipment, and
personal property.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required in
instances which the Company deems necessary.
In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management of the
Company, any liability resulting from such proceedings would
not have a material effect on the Company's financial
statements.
NOTE 12. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and
consumer loans to customers in the Coffee County and
surrounding counties. The ability of the majority of the
Company's customers to honor their contractual loan
obligations is dependent on the economy in Douglas, Georgia
and surrounding areas.
Although the Bank's loan portfolio is diversified, there is a
relationship in this region between the agricultural economy
and the economic performance of loans made to nonagricultural
customers. The Bank's lending policies for agricultural and
nonagricultural customers require loans to be
well-collateralized and supported by cash flows. Collateral
for agricultural loans include equipment, crops, livestock and
land. Credit losses from loans related to the agricultural
economy is taken into considerations by management in
determining the allowance for loan losses.
A substantial portion of these loans are secured by real
estate in the Company's primary market area. In addition, a
substantial portion of the other real estate owned is located
in those same markets. Accordingly, the ultimate
collectibility of the loan portfolio and the recovery of the
carrying amount of other real estate owned are susceptible to
changes in market conditions in the Company's primary market
area. The other significant concentrations of credit by type
of loan are set forth in Note 3.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CONCENTRATIONS OF CREDIT (Continued)
The Company has a concentration of funds on deposit at its
primary correspondent bank, Georgia Bankers Bank, at December
31, 1997, as follows:
Noninterest-bearing account $ 3,524,698
=================
NOTE 13. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory
approval. Currently, no dividends may be paid by the Bank
without regulatory approval.
The Company and the Bank are 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 financial
statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
and Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. The Company and Bank capital amounts and
classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of total and Tier I capital to
risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1997, the Company and
the Bank meet all capital adequacy requirements to which it is
subject.
As of December 31, 1997, the most recent notification from the
OCC categorized the Bank 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 following table. There are
no conditions or events since that notification that
management believes have changed the Bank's category.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. REGULATORY MATTERS (Continued)
Presented below are the Bank's actual capital amounts and
ratios. Detail disclosures related to the Company have been
excluded as they do not materially deviate from the disclosure
herein.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ---------- ------------- ------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
(to Risk Weighted Assets):
FNB of Coffee County .... $ 4,114,175 13.68% $ 2,405,746 8% $ 3,007,183 10%
Tier I Capital
(to Risk Weighted Assets):
FNB of Coffee County .... $ 3,728,607 12.40% $ 1,202,873 4% $ 1,804,310 6%
Tier I Capital
(to Average Assets):
FNB of Coffee County .... $ 3,728,607 8.24% $ 1,810,040 4% $ 2,262,550 5%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ---------- ------------- ------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(to Risk Weighted
Assets):
FNB of Coffee County ... $ 3,310,365 11.30% $ 2,342,089 8% $ 2,927,611 10%
Tier I Capital
(to Risk Weighted
Assets):
FNB of Coffee County ... $ 2,944,414 10.10% $ 1,171,044 4% $ 1,756,566 6%
Tier I Capital
(to Average Assets):
FNB of Coffee County .... $ 2,944,414 6.20% $ 1,914,080 4% $ 2,392,600 5%
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments. In cases where quoted market prices are not
available, fair values are based on estimates using discounted
cash flow methods. Those methods are significantly affected by
the assumptions used, including the discount rates 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 instrument. The use of
different methodologies may have a material effect on the
estimated fair value amounts. Also, the fair value estimates
presented herein are based on pertinent information available
to management as of December 31, 1997 and 1996. Such amounts
have not been revalued for purposes of these financial
statements since those dates and, therefore, current estimates
of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Company
in estimating fair values of financial instruments as
disclosed herein:
Cash, Due From Banks, and Federal Funds Sold:
The carrying amounts of cash, due from banks, and Federal
funds sold approximate their fair value.
Available For Sale Securities:
Fair values for securities are based on quoted market
prices. The carrying values of equity securities with no
readily determinable fair value approximate fair values.
Loans:
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on
carrying values. For other loans, the fair values are
estimated using discounted cash flow methods, using
interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair
values for impaired loans are estimated using discounted
cash flow methods or underlying collateral values.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits:
The carrying amounts of demand deposits, savings deposits,
and variable-rate certificates of deposit approximate their
fair values. Fair values for fixed-rate certificates of
deposit are estimated using discounted cash flow methods,
using interest rates currently being offered on
certificates.
Other Borrowings:
The carrying amounts of the Company's other borrowings
approximate their fair value.
Off-Balance Sheet Instruments:
Fair values of the Company's off-balance sheet financial
instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit and
standby letters of credit do not represent a significant
value to the Company until such commitments are funded. The
Company has determined that these instruments do not have a
distinguishable fair value and no fair value has been
assigned.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Off-Balance Sheet Instruments:
The carrying value and estimated fair value of the
Company's financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- --------------- ----------------- ---------------
(Dollars in Thousands)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments . $ 4,958,600 $ 4,958,600 $ 12,166,622 $ 12,166,622
================ =============== ================= ===============
Investments in securities ....... $ 6,025,822 $ 6,025,822 $ 7,370,526 $ 7,370,526
================ =============== ================= ===============
Loans ........................... $ 31,679,747 $ 31,458,423 $ 27,345,643 $ 25,398,258
Allowance for loan losses ....... 1,159,173 - 1,520,385 -
---------------- --------------- ----------------- ---------------
Loans, net ........... $ 30,520,574 $ 31,458,423 $ 25,825,258 $ 25,398,258
================ =============== ================= ===============
Financial liabilities:
Noninterest-bearing demand ...... $ 7,708,349 $ 7,708,349 $ 9,409,021 $ 9,049,021
Interest-bearing demand ......... 6,819,767 6,819,767 7,253,382 7,253,382
Savings ......................... 1,832,359 1,832,359 1,778,551 1,778,551
Time deposits ................... 22,687,524 22,994,718 24,103,647 24,303,647
---------------- --------------- ----------------- ---------------
Total deposits ....... $ 39,047,999 $ 39,355,193 $ 42,544,601 $ 42,384,601
================ =============== ================= ===============
Federal funds purchased ............ $ 430,000 $ 430,000 $ - $ -
================ =============== ================= ===============
Other borrowings ................... $ 1,075,000 $ 1,075,000 $ 2,485,000 $ 2,485,000
================ =============== ================= ===============
Notes payable, director ............ $ 500,000 $ 500,000 $ 500,000 $ 500,000
================ =============== ================= ===============
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance
sheets of FNC Bancorp, Inc. and statements of income and cash
flows as of and for the years ended December 31, 1997 and
1996.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1997 1996
------------------ -----------------
<S> <C> <C>
Assets
Cash ........................................................... $ 55,294 $ 66,591
Investment in subsidiary ....................................... 3,738,573 3,356,055
Other Assets ................................................... 27,876 10,926
------------------ -----------------
Total assets ......................................... $ 3,821,743 $ 3,433,572
================== =================
Liabilities:
Notes payable, directors ....................................... $ 500,000 $ 500,000
Other liabilities .............................................. 38,545 -
------------------ -----------------
Total liabilities .................................... 538,545 500,000
------------------ -----------------
Stockholders' equity .............................................. 3,283,198 2,933,572
------------------ -----------------
Total liabilities and stockholders' equity ........... $ 3,821,743 $ 3,433,572
================== =================
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Income, interest ................................................. $ 2,522 $ 11,795
------------------ -----------------
Expense
Interest ...................................................... 38,545 -
Other expense ................................................. 13,819 28,423
------------------ -----------------
52,364 28,423
------------------ -----------------
Loss before income tax benefits and
equity in undistributed earnings (loss)
of subsidiary ....................................... (49,842) (16,628)
Income tax benefits .............................................. (16,950) (7,842)
------------------ -----------------
Loss before equity in undistributed
earnings (loss) of subsidiary ....................... (32,892) (8,786)
Equity in undistributed earnings (loss) of subsidiary ............ 374,202 (1,137,546)
------------------ -----------------
Net income (loss) ................................... $ 341,310 $ (1,146,332)
================== =================
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................................... $ 341,310 $ (1,146,332)
------------------- -------------------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Undistributed earnings (loss) of subsidiary .............. (374,202) 1,137,546
Decrease in income taxes receivable ...................... - 2,187
Increase in deferred tax assets .......................... (16,950) (7,842)
Increase in interest payable ............................ 38,545 -
Amortization ............................................. - 2,944
------------------- -------------------
Total adjustments ...................................... (352,607) 1,134,835
------------------- -------------------
Net cash used in operating activities .................. (11,297) (11,497)
------------------- -------------------
INVESTING ACTIVITIES
Additional investment in subsidiary ......................... - (1,000,000)
------------------- -------------------
Net cash used in investing activities .................. - (1,000,000)
------------------- -------------------
FINANCING ACTIVITIES
Proceeds from notes payable ................................. - 500,000
------------------- -------------------
Net cash provided by financing activities .............. - 500,000
------------------- -------------------
Net decrease in cash ........................................... (11,297) (511,497)
Cash at beginning of year ...................................... 66,591 578,088
------------------- -------------------
Cash at end of year ............................................ $ 55,294 $ 66,591
=================== ===================
</TABLE>
F-33
EXHIBIT 10.3
FNC BANCORP, INC.
1997 STOCK OPTION PLAN
1. Purpose of the Plan. The FNC Bancorp, Inc. 1997 Stock Option
Plan (the "Plan") is intended to advance the interests of FNC Bancorp, Inc. (the
"Company") and its "subsidiaries" (as defined in Section 424 of Internal Revenue
Code of 1986, as amended (the "Code") by encouraging and providing for officers
and other key employees of the Company and its subsidiaries to acquire shares of
the Company's common stock. In addition, the Plan is intended to enhance the
ability of the Company and its subsidiaries to attract and retain employees, to
stimulate the efforts of such employees and to strengthen their desire to remain
in the employ of the Company and its subsidiaries.
The Plan provides for the grant of stock options which qualify as
"incentive stock options" ("Incentive Stock Options") within the meaning of
Section 422 of the Code, or stock options which do not qualify as Incentive
Stock Options ("Non-Qualified Stock Options") (Incentive Stock Options and
Non-Qualified Stock Options are hereinafter collectively referred to as
"Options").
2. Stock Subject to the Plan. The maximum number of shares of
common stock $1.00 par value ("Common Stock"), of the Company that may be issued
under Options granted under the Plan shall be a total of 125,000 shares of
Common Stock. If an Option expires or terminates for any reason without being
exercised in full, the unpurchased shares subject to such Option shall again be
available for purposes of the Plan.
3.> Administration of the Plan. The Plan shall be administered by
the full Board of Directors or by a committee of the Board of Directors
consisting of not less than two (2) non-employee directors. As used herein, the
term "Committee" refers to such committee or, in the absence of appointment of
such committee, to the Board of Directors. Subject to the terms of the Plan, the
Committee shall have full authority in its discretion to determine the officers
or employees of the Company and its subsidiaries to whom Options shall be
granted and the terms and provisions of Options. In making such determinations,
the Committee may take into account the nature of the services rendered and to
be rendered by the respective officers and employees, their present and
potential contributions to the Company and any other factors that the Committee
deems relevant. The Committee may also make the issuance or exercise of Options
subject to the satisfaction of specified financial performance goals established
by the Committee in its discretion. Subject to the provisions of the Plan, the
Committee shall have full and conclusive authority to interpret and construe the
terms and intent of the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and provisions of the
respective Option agreements (which need not be identical); and to make all
other determinations necessary or advisable for the proper administration of the
Plan.
4. Eligibility and Limits. Incentive Stock Options may be granted
only to officers and other key employees of the Company and its present or
future subsidiaries. No Incentive Stock Option shall be granted to any person
who, at the time such Option is granted, owns (as defined in Sections 422 and
424 of the code) Common Stock possessing more than ten present (10%) of the
total combined voting power of all classes of stock of the Company. In the case
of an Incentive Stock Option, the aggregate fair market value (determined as of
the time an Incentive Stock is granted) of Common Stock with respect to which
Incentive Stock Options can become exercisable for the first time by any person
during any one calendar year under this Plan and under all other plans of the
Company and its subsidiary corporations (within the meaning of Sections 422 and
424 of the Code) shall not exceed $100,000.
<PAGE>
5. Incentive Stock Options and Non-Qualified Stock Options. At the time
any Option is granted under this Plan, the Committee shall determine whether
said Option is to be an Incentive Stock Option or a Non-Qualified Stock Option,
and the Option shall be clearly identified as to such status. The number of
shares as to which Incentive Stock Options and Non-Qualified Stock Options shall
be granted shall be determined by the Committee in its sole discretion, subject
to the provisions of Section 4 above with respect to the aggregate fair market
value of the Stock for which an officer or employee shall be granted Incentive
Stock Options in any calendar year and subject to the provisions of Section 2
above as to the total number of shares for which Options may be granted under
the Plan. At the time any Incentive Stock Option granted under this Plan is
exercised, the certificates representing the shares of Common Stock purchased
pursuant to such Option shall be clearly identified as representing shares
purchased upon exercise of an Incentive Stock Option.
6. Terms and Conditions of Options. Subject to the following terms and
conditions, all Options granted under this Plan shall be in such form and upon
such terms and conditions, not inconsistent with this Plan, as the Committee
shall from time to time determine.
(a) Option Term. No option shall be exercisable after the
expiration of ten (10) years from the date the Option is granted.
(b) Option. The option price per share of Common Stock purchasable
under an Option granted under this Plan shall be as set forth in the applicable
Option agreement; provided that the option price for an Incentive Stock Option
shall not be less than the fair market value of a share of Common Stock (as
determined in good faith by the Committee) on the date such Incentive Stock
Option is granted. The date an Option is granted shall be the date on which the
Committee has approved the terms and conditions of an Option agreement
evidencing the Option, has determined the recipient of the Option and the number
of shares covered by the Option, and has taken all such other action as
necessary to complete the grant of the Option.
(c) Payment. Payment for all shares purchased pursuant to exercise of
an Option shall be made in cash, or if the Option agreement provides, by
delivery of Common Stock at its fair market value on the date of delivery. Such
payment shall be made at the time that the Option or any part thereof is
exercised, and no shares shall be issued or delivered until full payment
therefore has been made. The holder of an Option shall, as such, have none of
the rights of a shareholder.
(d) Conditions to Exercise of an Option. Subject to the provisions of
paragraph (g) below, each Option granted under the Plan shall be exercisable at
such time or times, or upon the occurrence of such event or events, and in such
amounts, as the Committee shall specify in the Option agreement, except that no
Option may be exercised to any extent until the holder shall have been employed
by the Company or one of its subsidiaries for at least six (6) months from the
date of the grant.
(e) Nontransferability of Option. An Option shall not be assignable or
transferable except by will or by the laws of descent and distribution, and
shall be exercisable, during the holder's lifetime, only by the holder. Any
distributee by wil or by laws of descent and distribution shall be bound by the
provisions of the Plan. Any attempt to assign, pledge, transfer, hypothecate or
otherwise dispose of an Option, and any levy of execution, attachment or similar
process on an Option shall be null and void.
<PAGE>
(f) Termination of Employment or Death. In the event of termination of
employment of the holder for any reason other than death or disability, the
holder may not exercise an Option more than three (3) months after the date of
such termination of employment; provided, however, that no Option shall be
exercised following the date of notice to the holder of termination of his
employment by the Company or by any of its subsidiaries for violation by him or
her of any provision of any written employment contract between the Company or
any of its subsidiaries and the holder, or for "cause" (as defined in the Option
agreement between the holder and the Company). Upon any termination of
employment of the holder by reason of disability, within the meaning of Section
22(e)(3) of the Code, the holder may not exercise an Option later than twelve
(12) months after the date of such termination of employment. If the holder of
an Option dies, such Option may be exercised (to the extent that the holder
shall have been entitled to do so at the date of his death) by a legatee or
legatees of the holder under his last will, or by his personal representatives
or distributees, at any time within the twelve (12) month period following his
death. Notwithstanding this paragraph (f), no Option may be exercised more than
ten (10) years after the date on which such Option was granted. For purposes of
this paragraph (f), employment of a holder shall not be deemed terminated so
long as the holder is employed by, or a director of, a parent or subsidiary of
the Company or another corporation (or a parent or subsidiary corporation of
such other corporation) which has assumed the Option of the holder in a
transaction to which Section 424(a) of the Code is applicable.
(g) Acceleration of Right of Exercise. Notwithstanding the vesting
provisions of subparagraph (d) above, but subject to the provisions of
subparagraph (b) above, an Option may be exercised in any amount up to the full
number of shares covered by the Option without regard to the date of grant of
the Option if: (i) a tender offer or exchange offer has been made for at least
twenty-five percent (25%) of the outstanding shares of Common Stock, other than
one made by the Company, provided that the corporation, person or other entity
making such offer purchases or otherwise acquires shares of Common Stock
pursuant to such offer; or (ii) the shareholders of the Company have approved a
definitive agreement (the "Agreement") to merge or consolidate with or into
another corporation pursuant to which the Company will not survive or will
survive only as a subsidiary of another corporation or to sell or otherwise
dispose of all or substantially all of its asses; or (iii) any person, entity or
group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act
(excluding for purposes of this section any employee benefit plan of the Company
which acquires beneficial ownership of voting securities of the Company) becomes
the holder of twenty-five percent (25%) or more of the outstanding shares of
Common Stock. If any of the events specified in this subparagraph (g) have
occurred, the Option shall be fully exercisable; (x) in the event of (i) above,
within a 30-day period commencing on the date of expiration of the tender offer
or exchange offer; or (y) in the event of (ii) above, within a 30-day period
commencing on the date of approval by the shareholders of the Agreement' or (z)
in the event of (iii) above, within a 30-day period commencing on the date upon
which the Company is provided a copy of Schedule 13D (filed pursuant to Section
13(d) of the Exchange Act and rules and regulations promulgated thereunder)
indicating that any person or group has become the holder of twenty-five percent
(25%) or more of the outstanding shares of Common Stock or, if the company is
not subject to Section 13(d) of the Exchange Act, within a 30-day period
commencing on the date upon which the Company receives written notice that any
person or group has become the holder of twenty-five (25%) or more of the
outstanding shares of Common Stock.
<PAGE>
7. Changes in Capitalization; Merger; Liquidation. The number of shares
of Common Stock as to which Options may be granted, the number of shares covered
by each outstanding Option, and the price per share of each outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Common Stock resulting from a subdivision or combination
of shares, the payment of a stock dividend, or other combination or
reclassification of the Common Stock resulting from a subdivision or combination
of shares, the payment of a stock dividend, or other combination or
reclassification of the Common Stock effected without receipt of consideration
by the Company. If the Company shall be the surviving entity in any merger or
consolidation, recapitalization, reclassification of shares or similar
reorganization, the holder of each outstanding Option shall be entitled to
purchase upon any exercise of an Option, at the same times and upon the same
terms and conditions as are then provided in the Option, the number and class of
shares of Common Stock or other securities to which a holder of the same number
of shares of Common Stock at the time of such transaction would have been
entitled to receive as a result of such transaction. Any such adjustment may
provide for the elimination of any fractional shares which might otherwise
become subject to any Option without payment therefor. Comparable rights shall
accrue to each holder in the event of successive mergers or consolidations. In
the event of any such changes in capitalization of the Company, the Committee or
the Board of Directors may make such additional adjustments in the number and
class of shares of Common Stock or other securities with respect to which
outstanding Options are exercisable and with respect to which future Options may
be granted as the committee in its sole discretion shall deem equitable or
appropriate, subject to the provisions of Section 10. In the event of a
dissolution or liquidation of the Company or a merger or consolidation in which
the Company is not the surviving corporation or in which the Company survives
only as a subsidiary of another corporation, provision shall be made for each
outstanding Option to become exercisable prior to such dissolution, liquidation,
merger or consolidation, except to the extent that another corporation or other
legal entity assumes such Option or substitutes another option therefor in a
transaction to which Section 424(a) of the Code applies. In the event of a
change of the Company's shares of Common Stock into the same number of shares
with a different par value or without par value, the shares resulting from any
such change shall be deemed to be Common Stock within the meaning of the Plan
Except as expressly provided in this Section 7, the holder of an Option
shall have no rights by reason of any subdivision or combination of shares of
Common Stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of Common Stock of any class or by
reason of any dissolution, liquidation, merger, consolidation or distribution to
the Company's shareholders of assets or stock of another corporation, and any
issuance by the Company of shares of Common Stock of any class, or securities
convertible into shares of Common Stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to the Option. The existence of the Plan and
the Options granted pursuant to the Plan shall not affect in any way the right
or power of the Company to make or authorize any adjustment, reclassification,
reorganization or other change in its capital or business structure, any merger
or consolidation of the company, any issue of debt or equity securities having
preferences or priorities as to the Common Stock or the rights thereof, the
dissolution or liquidation of the Company, any sale or transfer of all or any
part of its business or assets, or any other corporate act or proceeding.
<PAGE>
8. Restriction on Issuance of Shares. The Company shall not be
obligated to sell or issue any shares of Common Stock pursuant to any Option
agreement if such issuance would result in the violation of any laws, including
the Securities Act of 1933, as amended (the "1933 Act"), any applicable state
securities laws, or any rules and regulations promulgated by the Georgia
Department of Banking and Finance ("Georgia Department"), the Federal Deposit
Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency
("OCC") or the Federal Reserve Board or any successor agency of the Georgia
Department, FDIC, OCC or Federal Reserve Board.
9. Purchase for Investment: Other Representations of Holder. In the
event that the offering of shares with respect to which an Option is being
exercised is not registered under the 1933 Act, but an exemption is available
which requires an investment representation or other representation, each holder
electing to purchase such shares will be required to represent that such shares
are being acquired for investment and not with a view to the sale or
distribution thereof, and to make such other representations as are deemed
necessary by counsel to the Company. The Corporation may endorse on certificates
representing shares delivered pursuant to a Stock Option such legends referring
to the foregoing representations or restrictions or any other applicable
restrictions on resale as the Corporation, in its discretion, shall deem
appropriate.
10. Termination and Amendment of the Plan. The Plan shall terminate on
the date ten years after adoption of the Plan by the Board of Directors and no
Option shall be granted under the Plan after that date, but Options granted
before termination of the Plan shall remain exercisable thereafter until they
expire or lapse according to their terms. The Plan may be terminated, modified
or amended by the shareholders or the Board of Directors of the Company;
provided, however, that:
(a) no such termination, modification or amendment without the consent
of the holder of an outstanding Option shall adversely affect his or her rights
under such outstanding Option, except the Committee may terminate an Option if
the employment of the Option holder is terminated for cause (as defined in the
Option Agreement between the holders and the Company);
(b) any modification or amendment that would require shareholder
approval in order for the Plan to continue to meet the requirements of Rule
16b-3 or any successor rule, if Rule 16b-3 or any successor rule is applicable,
or any other legal or regulatory requirements, shall be effective only if it is
approved by the shareholders of the Corporation in the manner required thereby.
11. Miscellaneous
(a) Construction. All Incentive Stock Options to be granted hereunder
are intended to comply with Sections 422 and 424 of the Code, and all provisions
of this Plan and all Incentive Stock Options granted hereunder shall be
construed in such manner as to effect that intent. This Plan and all Common
Stock acquired by the exercise of Options granted pursuant to this Plan are
intended to comply with all applicable provisions of SEC Rule 16b-3 or any
successor provision under the Exchange Act, and this Plan shall be construed in
such manner as to effect that intent insofar as holders subject to Section 16 of
the Exchange Act are concerned. In administering this Plan, the Committee may
adopt such requirements as it deems appropriate to comply with Sections 422 and
424 of the Code or SEC Rule 16b-3, and the Board of Directors may amend this
Plan to the extent necessary to comply with such provisions, subject to Section
10 of this Plan.
<PAGE>
(b) No Right to Employment. No person shall have any claim or right to
be granted an Option, and the grant of an Option shall not be construed as
giving any person the right to continued employment. Nothing contained in the
Plan or in any Option granted under the Plan shall confer upon any Option holder
any right with respect to the continuation of his or her employment by the
Company or a subsidiary corporation or interfere in any such way with the right
of the Company or a subsidiary corporation, subject to the terms of any separate
employment agreement to the contrary, at any time to terminate such employment
or to increase or decrease the compensation of the holder from the rate in
existence at the time of the grant of an Option.
(c) Withholding. Whenever the Company proposes or is required to issue
or transfer shares of Common Stock under this Plan, the Company shall have the
right to require the recipient to remit to the Company an amount sufficient to
satisfy any Federal, state and local withholding tax requirements prior to the
delivery of any certificates for such shares.
(d) No Fractional Shares. No fractional shares of Common Stock shall be
issued under the Plan, and cash shall be paid in lieu of any fractional shares
in settlement of Options granted under the Plan.
(e) Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of Georgia.
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), effective as of April 1,
1997, is by and among First National Bank of Coffee County ("Bank"), its holding
company FNC Bancorp, Inc. ("Holding Company"; Bank and Holding Company being
collectively referred to as "Employer"), and Jeffery W. Johnson ("Executive").
Background Statement
Executive has been retained as President and Chief Executive Officer of
the Bank and its Holding Company. The parties desire to enter into this
Agreement to memorialize the terms of Executive's employment.
Agreement
In consideration of the mutual promises set forth below, and other good
and valuable consideration, the receipt and sufficiency of which are
acknowledged, the parties agree as follows:
1. Employment Duties.
(a) General. Employer employs Executive as President and Chief
Executive Officer of the Bank and its Holding Company. In this capacity,
Executive agrees to use his best efforts to carry out the responsibilities
associated with the positions of President and Chief Executive Officer.
Executive further agrees to perform such other duties as are and may be assigned
to him from time to time by the Boards of Directors of the Bank and its Holding
Company ("the Boards").
(b) Exclusive Services. Throughout his employment, except as may from
time to time be otherwise agreed in writing by Employer, and unless prevented by
ill health, Executive will devote his full-time working hours to his duties as
President and Chief Executive Officer, will exclusively and faithfully serve
Employer, will conform to and comply with the lawful and reasonable directions
and instructions given to him by the Boards, and will use his best efforts to
promote and serve the interests of Employer. Executive will not render services,
directly or indirectly, to any other person or organization for which he
receives compensation without the written consent of Employer, or otherwise
engage in activities that would interfere significantly with the faithful or
competent performance of his duties under this Agreement.
2. Term of Employment.
The initial term of employment under this Agreement will be
three (3) years from the date of employment and will continue for successive
one-year periods thereafter, unless sooner terminated as provided by Section 6
of this Agreement.
<PAGE>
3. Compensation.
(a) Base Salary. The Bank will pay Executive a monthly base salary of
$8,000.00, in accordance with the Bank's standard payroll procedures.
Executive's base salary may be increased at the Board's discretion.
(b) Annual Incentive Bonus.
(i) Eligibility; Maximum. Executive will be eligible to earn an
annual incentive bonus based upon the achievement of the Holding Company goals
set forth below. Executive's annual incentive bonus with respect to each fiscal
year of Holding Company will equal fifty (50%) percent of the amount, if any, by
which the Holding Company's consolidated net income (with respect to such year
and as reported in the Holding Company's audited financial statements for such
year) exceeds the Net Income Target (as defined below) for such year. The
maximum bonus shall not exceed $35,000.00 with respect to the 1997 fiscal year,
$45,000.00 with respect to the 1998 fiscal year, and $50,000.00 with respect to
each succeeding fiscal year.
(ii) Net Income Target. With respect to each fiscal year for
which Executive is eligible to receive an annual incentive bonus under this
Section 3(b), the "Net Income Target" for such year shall be equal to the total
stockholders' equity for the prior fiscal year of the Holding Company, as set
forth in the Holding Company's audited financial statements for such prior
fiscal year, multiplied by the ROE Benchmark applicable to the fiscal year for
which Executive is eligible to receive such annual incentive bonus, as set forth
in Section 3(b)(iii) below.
(iii) ROE Benchmarks. The ROE benchmarks to be applied in
calculating Executive's annual incentive bonus are as follows:
1997 = 9.50%
Following the 1997 fiscal year, ROE benchmarks will be as
determined by the Board of Directors of Holding Company, or the Compensation
Committee thereof. ROE will be computed by net after-tax income divided by the
equity as of the last day of the previous year.
(iv) Time of Payment. Unless otherwise specified, each incentive
bonus earned will be paid in the fiscal year next succeeding the fiscal year
with respect to which Executive was eligible to earn the incentive bonus, within
thirty (30) days after receipt by Holding Company of final audit results for
such prior year's performance of the Holding Company.
<PAGE>
(c) Stock Options in Lieu of Cash Bonus. Employer recognizes
Executive's preference to receive certain non-qualified stock options as
described below in lieu of the cash bonus under Section (b) hereof if such
arrangements can be made. The Holding Company intends to establish a program to
provide for the availability of non-qualified stock options ("Non-Qualified
Stock Options") with respect to the $1.00 par value common stock of the Holding
Company ("Common Stock"). If such a program is established, Executive will be
eligible to participate in this program in accordance with the program's
requirements, and, at his sole discretion, may receive the value of the annual
incentive bonus in the form of Non-Qualified Stock Options or in cash (or in a
combination thereof); provided, however, that to the extent Executive receives
Non-Qualified Stock Options, he will not also be entitled to the cash bonus
described in Section 3(b) above. The number of stock options to be received by
Executive shall be determined by the Board of Directors of the Holding Company
(or Compensation Committee thereof), based on the difference between $10.00 per
share and 150% of the book value of the Common Stock (as determined by such
Board or Compensation Committee). In no event shall Executive be entitled to
receive options to acquire more than 25,000 shares of Common Stock in lieu of
bonus pursuant to this Section 3(c). The form of the Non-Qualified Stock Option
agreement will be determined by the Board of Directors of the Holding Company
(or the Compensation Committee thereof), subject to the requirements of the
applicable stock option plan.
(d) Special Incentive. Executive will be eligible to receive a one-time
incentive for returning the Bank to "satisfactory" status with the Office of the
Comptroller of the Currency, currently defined as an overall "2" rating, during
the term of Executive's employment hereunder. The amount of this incentive
payment will be $10,000 and will be paid to Executive within thirty (30) days
after receipt of the final report from the regulators notifying Employer of the
requisite change of status.
(e) Withholding. All compensation paid to Executive will be subject to
state and federal income and employment tax withholding and any other
withholding requirements imposed by applicable law.
(f) Annual Review. Employer will review Executive's job performance,
base salary, and other compensation annually following the end of each fiscal
year, with the first review occurring in April 1998, or when 1997 final audit
results are available; provided, however, that Executive will receive no change
in the amount of Executive's base salary and eligibility for annual incentive
compensation under Section 3(b) hereof before May 2000.
4. Stock Options.
(a) Additional Non-Qualified Options. Holding Company will enter into
an agreement with Executive under which Holding Company will issue to Executive
Non-Qualified Stock Options to acquire 25,000 shares of Common Stock at an
option price of $10.00 per share. These Non-Qualified Stock Options will vest
over three (3) years (8,333 on December 31, 1997; 8,333 on December 31, 1998;
and 8,334 on December 31, 1999), shall be exercisable only if Executive is at
the time of exercise an Employee of the Holding Company (or within three months
thereafter), and shall be subject to such additional terms as are required
pursuant to the applicable option plan and option agreement under which such
options are granted. Each such Non-Qualified Stock Option shall expire seven (7)
years from its date of vesting.
<PAGE>
(b) Time Period for Adopting Stock Option Plan. Subject to compliance
with applicable legal requirements, the Board of Directors of the Holding
Company shall adopt a stock option plan that will facilitate the issuance of the
Non-Qualified Stock Options described in Sections 3(c) and 4(a). If the Holding
Company is not able to issue Non-Qualified Stock Options to Executive as
contemplated by Section 4(a) of this Agreement, then Employer agrees to pay
Executive $160,000.00 in cash in lieu of such Non-Qualified Stock Options (such
amount to be prorated to the extent that a portion of such 25,000 Non-Qualified
Stock Options are issued to Executive). This sum will be payable over three
years, $55,000.00 on December 31, 1997; $55,000.00 on December 31, 1998; and
$50,000.00 on December 31, 1999, subject to proration as set forth above.
(c) Notwithstanding any other provision of this Agreement, Executive's
right to receive Non-Qualified Stock Options will cease upon his termination of
employment.
(d) The total number of shares of Common Stock with respect to which
Non- Qualified Stock Options are issued to Executive under Sections 3(c) and
4(a) of this Agreement shall not exceed 50,000.
5. Benefits and Expenses.
(a) Benefit Plans. Subject to the eligibility requirements of the
various arrangements, Executive will participate in sick leave, life, health,
and disability insurance programs, and the 401(k) plan available through the
Bank to its employees. If there are "waiting periods" under the Bank's health
insurance plan on account of pre-existing conditions or other requirements, the
Bank will pay the cost of maintaining Executive's current health insurance
coverage pursuant to COBRA continuation coverage until the Bank is able to
provide Executive with coverage under its health insurance plan.
(b) Vacation. Executive will receive four (4) weeks of paid vacation
annually with the amount available in 1997 to be determined on a pro rata basis,
based on the date Executive's employment begins. Vacation will be administered
in accordance with the policies and procedures applicable to other officers of
the Bank.
(c) Holidays. Executive will be entitled to the following paid
holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, and any other Bank holidays.
(d) Automobile. The Bank will provide Executive with an automobile, of
a type to be determined by the Board of Directors of the Bank, suitable for
Executive's business use. During Executive's employment, the Bank will pay the
expenses associated with operating and maintaining this vehicle, including
without limitation lease (if any), maintenance, insurance, and fuel costs. Not
less frequently than once annually, Executive will make a good faith allocation
between business and personal use of such vehicle as required by Internal
Revenue Service guidelines, and neither Executive nor the Bank will take any
position on any income tax return, before any governmental agency, or in any
judicial or quasi-judicial proceeding that is inconsistent with such good faith
allocation.
(e) Club Membership. The Bank will provide Executive with a full family
golf and social membership at the Douglas Country Club. This includes payment by
the Bank of the required initiation fee and recurring monthly dues. Expenses
incurred by Executive at the Douglas Country Club for business entertainment and
verified by an appropriate receipt will be reimbursed.
<PAGE>
(f) Professional Associations. The Bank holds memberships in several
bank professional associations, among them the Community Bankers Association
(Georgia) and Georgia Bankers Association. Executive's recommendations regarding
his participation at conferences and on committee assignments for these and
other professional associations will be reviewed in terms of cost and benefit to
the Bank.
(g) Professional Licensing and Education. Employer recognizes the value
of Executive's continuing professional education and commits to his
participation in such education. Executive's recommendations regarding his
participation in courses and seminars to increase or stay current with technical
and management issues will be reviewed in terms of cost and benefit to the
Employer.
(h) Relocation.
(i) Moving. It is agreed that Executive will move his residence
to Coffee County, Georgia as soon as possible. Employer will pay $3,000.00 for
the cost of relocating Executive's household goods.
(ii) Temporary Housing. While Executive is in transition,
Employer will provide him with up to $3,600.00 to cover the cost of duplicate
housing in Douglas while Executive's home is for sale. This is separate from the
relocation allowance described in the preceding Section.
(iii) Other Expenses. During Executive's employment, Employer
will reimburse him for other reasonable and necessary business expenses incurred
by Executive at the request of, or on behalf of, Employer in the performance of
his duties pursuant to this Agreement, including without limitation expenses
associated with entertainment, a car phone, and a pager. These expenses will be
reimbursed upon approval by either of the Boards following submission of
appropriate receipts related to such expenses.
6. Termination of Employment.
(a) Resignation by Executive. Executive may terminate his employment
under this Agreement, with or without cause, at any time upon thirty (30) days'
prior written notice to the Boards.
(b) Termination by Employer Without Cause. Subject to the provisions of
Section 7(a) below, Employer may terminate Executive's employment under this
Agreement without cause, at any time upon thirty (30) days' prior written notice
to Executive.
(c) Termination by Mutual Consent. This Agreement, and Executive's
employment, may be terminated at any time, without prior notice, upon the
mutual, written consent of all parties.
(d) Death or Disability. Executive's employment will terminate
immediately upon Executive's death or Executive's becoming unable, due to a
disability as defined under the Americans With Disabilities Act, to perform the
essential functions of his position with or without reasonable accommodation.
<PAGE>
(e) Termination by Employer for Cause. Employer may terminate
Executive's employment under this Agreement for cause shown, immediately upon
written notice. For purposes of this Agreement, "cause" is limited to conduct by
Executive amounting to fraud, breach of fiduciary duty, dishonesty,
embezzlement, conviction of a felony or of any crime involving moral turpitude,
gross negligence, willful misconduct, violation of any applicable state or
federal banking statutes, rules or regulations, or persistent unsatisfactory
performance of assigned duties (without curing said unsatisfactory performance
twenty (20) days after receipt of written notice of such deficiency) that are
within the scope of those performed by a bank president and chief executive
officer in carrying out responsibility for the safety and soundness of the
Employer in the current regulatory environment.
7. Payment upon Termination of Employment.
(a) Termination By Employer Without Cause. In the event that
Executive's employment is terminated pursuant to Section 6(b) above, Executive
will be entitled to a severance payment equal to twelve (12) months of
Executive's then-current base compensation, to be paid, in the Employer's
discretion, (i) as a lump sum payment within thirty (30) days of the date of
termination, or (ii) in equal monthly installments over a period not to exceed
twelve (12) months.
(b) Termination By Employer for Cause. Termination of Executive's
employment for "cause" pursuant to Section 6(e) above will result in the
termination of all salary, incentive payments, stock options not already earned
or issued as of the date of termination. Unused, accrued vacation will not be
paid in the event of termination for cause.
(c) Termination by Resignation, Mutual Consent, Death, Disability. In
the event that Executive's employment is terminated pursuant to Sections 6(a),
(c) or (d), Executive will not be entitled to any compensation other than base
salary earned but not yet paid through the date of termination, pro-rata bonuses
and incentives (if applicable under and as calculated in Section 7(d) below),
and any unused vacation benefits (accrued on a pro-rata basis). In the event of
Executive's death, these amounts will be paid to Executive's estate.
(d) Pro Rata Payment of Bonuses/Incentives. For purposes of Section
7(a) and 7(c) above, bonuses and incentive payments will be calculated and paid
on a pro rata basis based on the number of days during which the Executive
served as President and Chief Executive Officer during the particular calendar
year, provided Executive is employed by Employer through June 30 of the calendar
year in question. Notwithstanding the foregoing, no bonuses and incentive
payments shall be payable in the event of termination for cause under Section
6(e).
(e) Benefit Eligibility in the Event of Disability or Death. In the
event that Executive's employment is terminated as a result of disability,
Executive will be entitled to long- term disability benefits as provided
pursuant to any group disability insurance policy maintained by Employer in
which Executive is a participant and which is in effect at the time of
termination. Normal base salary will be paid during any "waiting period" called
for by the policy before long-term disability benefits begin to be paid. In the
event that Executive's employment is terminated as a result of his death
pursuant to Section 6(d) above, Executive's eligible dependents will be entitled
to continue health insurance coverage in accordance with any applicable plan
documents and/or by operation of law.
<PAGE>
(f) Change in Control. In the event of a "change in control" (as
defined below) in which Executive is not retained by the acquiring party in a
position of materially similar or greater authority, duties or responsibilities
for at least six (6) months following the change of control, Executive, at his
election, may (i) negotiate a new employment agreement with the acquiring party,
or (ii) terminate his employment and receive a lump sum payment equal to two (2)
times his annual base salary in full and final settlement of all amounts due
under this Agreement; provided, however, that any action taken with the consent
of Executive and any action which is promptly remedied after notice given by
Executive shall not give rise to Executive's rights under clauses (i) or (ii) of
this Section. For purposes of this Section, "change in control" shall mean: the
acquisition by any person, entity or "group," within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") of (a) beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of 50% or more of the then outstanding voting securities
of the Holding Company or the Bank (including an acquisition by merger), or (b)
all or substantially all of the assets of the Holding Company or the Bank, in
each case other than an acquisition of voting securities or assets of the Bank
by an entity controlled by or under common control with the Holding Company (as
"control" is defined for purposes of the Exchange Act).
8. Compliance with Applicable Law.
Executive will comply with all federal, state, and local laws,
statutes, regulations, rules, and ordinances applicable to his employment under
this Agreement, including but not limited to applicable federal and state
banking laws.
9. Non-Competition, Non-Solicitation, and Non-Disclosure Agreement.
(a) Non-Competition. Executive covenants and agrees that, during his
employment by the Employer and for a period of one (1) year after termination of
such employment for any reason, Executive will not, without prior written
consent of the Boards, directly or indirectly within the Territory, (i) for
himself, (ii) as a consultant, manager, supervisor, employee or owner of a
competing bank or financial institution, or (iii) as an independent contractor
for a competing bank or financial institution, perform any duties which are the
same or substantially similar to his duties for the Employer as are assigned to
him from time to time by the Boards. "Territory" is defined as the geographical
area consisting of the city of Douglas, Georgia and the area within a 50-mile
radius of Douglas, Georgia, which all parties acknowledge comprise the service
area of the Employer.
(b) Non-Solicitation of Customers. Executive covenants and agrees that,
during his employment by the Employer and for a period of one (1) year after
termination of such employment for any reason, Executive will not, without prior
written consent of the Boards, directly or indirectly within the Territory, (i)
for himself, (ii) as a consultant, manager, supervisor, employee or owner of a
competing bank or financial institution, or (iii) as an independent contractor
for a competing bank or financial institution, solicit or attempt to divert or
appropriate to a competing business, any customer of the Bank to whom the Bank
provided any commercial banking services within the twelve (12) month period
prior to Executive's termination of employment.
<PAGE>
(c) Non-Solicitation of Employees and Others. Executive covenants and
agrees that, during his employment by the Employer and for a period of one (1)
year after termination of such employment for any reason, Executive will not,
without prior written consent of the Boards, directly or indirectly, (i) for
himself, (ii) as a consultant, manager, supervisor, employee or owner of a
competing bank or financial institution, or (iii) as an independent contractor
for a competing bank or financial institution, solicit or attempt to divert or
appropriate to a competing business, any person who is employed by or associated
with the Employer as of the date of termination of Executive's employment or
within sixty days prior to such termination (including, but not limited to, any
organizations with whom the Employer has a contractual, agency, employment or
independent contractor relationship).
(d) Non-Disclosure. For a period of one (1) year from Executive's
termination for any reason, Executive will not directly or indirectly disclose
or give to others any confidential or proprietary fact or information not
generally available to the public concerning the Employer's financial operations
and businesses. Such trade secret or confidential or proprietary fact or
information includes but is not limited to business plans, financial
information, financial systems, financing arrangements, customer lists and any
other secret or confidential information relating to customer accounts, customer
needs, organization, strategy, research and development, design, drawings,
specifications, techniques, processes, procedures, "know-how," marketing
techniques and materials, marketing and development plans, fee lists, fee
policies or any other confidential information relating to customers.
(e) Modification of "Territory". Executive acknowledges that from time
to time Executive and Employer may agree to change the definition of "Territory"
as defined above. Any such changes will be binding upon Executive.
10. Contingency.
This Agreement is subject to and contingent upon Executive's
securing all required approvals by bank regulatory agencies and Employer's
obtaining satisfactory reports on checks of Executive's background.
11. Damages and Injunctive Relief.
(a) Acknowledgment. Executive acknowledges that compliance with the
obligations under the non-competition, non-solicitation and non-disclosure
provisions of this Agreement is necessary to protect the business and goodwill
of Employer and that a breach of these provisions may cause irreparable and
continual injury to Employer, entitling Employer to seek and obtain (i)
compensation and damages; and (ii) injunctive relief against the breach or
threatened breach of those provisions, in addition to other remedies at law or
in equity which may be available. Executive further acknowledges that the
non-competition, non-solicitation and non-disclosure provisions of this
Agreement are reasonable in scope and restriction, in light of his duties for
the Employer, the information and customers to which Executive will have access,
and the territory in which the Bank serves its customers. Executive further
acknowledges that the non- competition, non-solicitation and non-disclosure
provisions of this Agreement are intended to be separate covenants, and the
enforcement or validity of one is not in any way dependent upon the enforcement
of validity of the others. Finally, Executive acknowledges that the employment,
compensation and severance payments contemplated by this Agreement are
consideration for the non-competition, non-solicitation and non-disclosure
agreements, and that his failure to comply strictly with any of these covenants
shall be a basis for immediate termination of any further payments following the
date of noncompliance.
<PAGE>
(b) Waiver. The obligations or requirements of this Section may be
waived by Employer in writing.
(c) Survival. The obligations contained in this Section shall survive
the termination of this Agreement or the employment relationship.
12. Arbitration.
Any dispute, controversy, or claim arising out of or in
connection with, or relating to, this Agreement or any breach or alleged breach
of this Agreement will, upon the request of any party involved, be submitted to,
and settled by, arbitration in the State of Georgia, pursuant to the commercial
arbitration rules then in effect of the American Arbitration Association (or at
any time or at any other place or under any other form of arbitration mutually
acceptable to the parties involved). Any award rendered will be final and
conclusive upon the parties and a judgment on such award may be entered in the
highest court of the forum, state or federal, having jurisdiction. The expenses
of the arbitration will be borne equally by the parties to the arbitration,
provided that each party will pay for and bear the cost of its own experts,
evidence, and counsel's fees, except that in the discretion of the arbitrator,
any award may include the cost of a party's counsel if the arbitrator expressly
determines that the party against whom such award is entered has caused the
dispute, controversy, or claim to be submitted to arbitration in bad faith or as
a delaying tactic.
13. Miscellaneous.
(a) Modification. Should any portion, provision, or clause of this
Agreement be deemed too broad to permit enforcement to its full extent, then it
will be enforced to the maximum extent permitted by law, and Executive agrees
that such scope may be modified in any proceeding brought to enforce such
restriction.
(b) Nonassignability; Binding Agreement. Neither this Agreement nor any
right, duty, obligation, or interest in it is assignable or delegable by
Executive without Employer's prior written consent; provided, however, that any
obligations of the parties will terminate upon Executive's death (except as to
vested benefits or amounts due under any insurance policies upon death).
(c) Binding Effect. This Agreement is binding upon, and inures to the
benefit of, the parties, any successors to or assigns of Employer, and
Executive's heirs and the personal representatives of Executive's estate.
(d) Severability. It is expressly agreed that each section, covenant,
or provision of this Agreement is separate, distinct, and severable from the
other sections, covenants, or provisions of this Agreement and that the
unenforceability of any section, covenant, or provision will not affect the
validity or enforceability of the remainder of this Agreement.
(e) Complete Understanding. This Agreement reflects the complete
understanding between Executive and Employer, and supersedes all previous
agreements, if any, between the parties concerning the matters addressed in this
Agreement.
(f) Amendment; Waiver. No alteration or modification to any of the
provisions contained in this Agreement will be valid unless made in writing and
signed by the parties to the Agreement.
<PAGE>
(g) Applicable Law. It is agreed that all aspects of the employment
relationship, including the terms outlined in this Agreement will be governed by
and construed and enforced in accordance with the laws of the State of Georgia.
(h) Headings. The section headings in this Agreement are inserted for
convenience only and are not a part of the Agreement.
(i) Notices. Any notice required or permitted by this Agreement will be
given in writing, by personal delivery, certified mail (return receipt
requested), or overnight or special courier, to the address specified below the
parties' respective signatures to this Agreement, or to such other address as
may be specified by notice from time to time by Executive or Employer. A notice
is deemed given, if by personal delivery or overnight or special courier, on the
date of such delivery or, if by certified mail, on the date shown on the
applicable return receipt.
(j) Counterparts. This Agreement may be executed by the parties in
counterpart, each of which shall be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
_______ day of ______________, 1997, effective as set forth above.
FIRST NATIONAL BANK OF COFFEE COUNTY and FNC
BANCORP, INC.
Signature:
Robert L. Cation, Chairman
Address: 420 South Madison Avenue
Douglas, Georgia 31533
-------------------------------------------------
Jeffery W. Johnson
Address:
----------------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,891,336
<INT-BEARING-DEPOSITS> 32,864
<FED-FUNDS-SOLD> 34,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,499,422
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<ALLOWANCE> 1,159,173
<TOTAL-ASSETS> 44,802,734
<DEPOSITS> 39,047,999
<SHORT-TERM> 1,505,000
<LIABILITIES-OTHER> 466,537
<LONG-TERM> 500,000
<COMMON> 405,710
0
0
<OTHER-SE> 2,877,488
<TOTAL-LIABILITIES-AND-EQUITY> 44,802,734
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<INTEREST-TOTAL> 3,381,626
<INTEREST-DEPOSIT> 1,506,970
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<INTEREST-INCOME-NET> 1,735,396
<LOAN-LOSSES> 30,450
<SECURITIES-GAINS> 900
<EXPENSE-OTHER> 1,609,348
<INCOME-PRETAX> 517,990
<INCOME-PRE-EXTRAORDINARY> 341,310
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341,310
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<YIELD-ACTUAL> 4.48
<LOANS-NON> 801,000
<LOANS-PAST> 6,000
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<CHARGE-OFFS> 672,363
<RECOVERIES> 280,701
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</TABLE>
