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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, 1998
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, 1998 were
$4,701,165.
As of March 1, 1999, registrant had outstanding 411,173 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 were 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 29,592 in 1990 and was
estimated at 33,031 in 1996, an increase of almost 11.6% in six years. The
population is projected to be 35,880 by 2001. The population is well distributed
by age and is slightly more than 51% female. The median age of the population is
32.2 years.
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.
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.
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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 correspondent or area
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 Asset/Liability Committee 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, three local banks and one
savings bank. These include SunTrust, Citizens Security Bank, First Liberty,
Southtrust, Southeastern Bank and Colony Bank. The Bank encounters competition
from most of these financial institutions. There is only one savings institution
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 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 4.9% in commercial bank deposits in the
PSA over the last four 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, 1998, the Bank employed 27 full-time employees and 6
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 an 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.
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.
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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.
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.
11
<PAGE>
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.
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.
12
<PAGE>
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.
13
<PAGE>
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, 1998, the Company's bank subsidiary had the requisite
capital levels to qualify as well capitalized.
14
<PAGE>
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
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
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.
18
<PAGE>
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 Bank
building adds 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 1998.
19
<PAGE>
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, 1999, there were approximately 360 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."
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
The Company's 1998 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.
21
<PAGE>
Results of Operations For Years Ended December 31, 1998 and 1997
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 79 basis points or 17.63%
to 5.27% in 1998 as compared to 4.48% in 1997. The yield on average
interest-earning assets increased 53 basis points or 6.07% to 9.26% in 1998 as
compared to 8.73% in 1997. The interest rate paid on average interest-bearing
liabilities decreased four basis points to 4.99% in 1998 as compared to 5.03% in
1997. Net interest income on a taxable-equivalent basis was $2,339,000 in 1998
as compared to $1,736,000 in 1997, representing an increase of $603,000 or
34.74%. Although net interest income was favorably impacted by an increase of 53
basis points in yield on interest-earning assets and a decrease of four basis
points in interest rate paid on average interest-bearing liabilities, the
changes due to rate accounted for only $62,000 or 10.28% of the total increase
in net interest income. An increase of $5,663,000 or 14.61% in interest-earning
assets accounted for $541,000 or 89.72% of the total increase in net interest
income.
Average interest-earning assets increased $5,663,000 to $44,418,000 in
1998 from $38,755,000 in 1997, an increase of 14.61%. Average loans increased
$8,334,000; average Federal funds sold increased $814,000; and average
investments decreased $3,485,000. The increase in average interest-earning
assets was accompanied by an increase of $5,931,000, or 15.76%, in average
deposits to $43,578,000 in 1998 from $37,647,000 in 1997. Approximately 20% of
the average deposits were noninterest-bearing deposits in 1998 and approximately
19% of the average deposits were noninterest-bearing deposits in 1997.
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 is a charge to earnings in the current
period to replenish the allowance for loan losses and maintain it at a level
management has determined to be adequate. In 1996, the Company charged to
earnings a significant provision of $2,305,000 which was required to replenish
net loan charge-offs in 1996 of approximately 1,170,000 and to reserve for other
loans that had been classified by regulators. During 1997, the asset quality of
the loan portfolio improved and the Company recorded net loan charge-offs of
$391,000. With the improvement in the asset quality of loans, management reduced
the provision for loan losses to $30,000 in 1997. Based upon management's
evaluation of the loan portfolio and the potential loan risk associated with
specific loans and selected loan categories, management determined that no
provision was required to be charged to earnings in 1998. The allowance for loan
losses as a percentage of total loans outstanding amounted to 3.03% at December
31, 1998 as compared to 3.66% at December 31, 1997. 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, 1998 and 1997.
<TABLE>
<CAPTION>
--------------- --------------- ---------------
Increase
1998 1997 (Decrease)
--------------- --------------- ---------------
<S> <C> <C> <C>
Service charges on deposit accounts ..................... $ 447,000 $ 346,000 $ 101,000
Other service charges, commissions and fees ............. 26,000 18,000 8,000
Net realized gains on securities available for sale ..... - 1,000 (1,000)
Origination fees on mortgage loans ...................... 46,000 19,000 27,000
Other ................................................... 70,000 38,000 32,000
--------------- --------------- ---------------
$ 589,000 $ 422,000 $ 167,000
=============== =============== ===============
</TABLE>
The increase in service charges on deposit accounts of $101,000 is
attributable to an increase of approximately $5,931,000 in average deposits in
1998. Increase in other noninterest income was attributable primarily to the
collection of $28,000 in fees for referring two loans to another financial
institution.
23
<PAGE>
Following is an analysis of noninterest expense for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
----------------- ---------------- -----------------
Increase
1998 1997 (Decrease)
----------------- ---------------- -----------------
<S> <C> <C> <C>
Salaries and employee benefits ....................... $ 1,023,000 $ 805,000 $ 218,000
Equipment and occupancy expense ...................... 261,000 233,000 28,000
Accounting and auditing expenses ..................... 87,000 97,000 (10,000)
Advertising expense .................................. 36,000 40,000 (4,000)
Data processing expenses ............................. 106,000 62,000 44,000
Printing and office supplies ......................... 67,000 54,000 13,000
Other ................................................ 401,000 318,000 83,000
----------------- ---------------- -----------------
$ 1,981,000 $ 1,609,000 $ 372,000
================= ================ =================
</TABLE>
The increase in salaries and wages in 1998 is attributable to the fact
that the salaries for two executive officers employed in 1997 were incurred for
the entire year of 1998 whereas their salaries were incurred for only a portion
of the year in 1997. Also, approximately $71,000 was accrued for employee
bonuses in 1998, whereas no bonuses were accrued in 1997. The increase in
equipment and occupancy expense is attributable to normal increases in repairs
and maintenance, insurance and utilities. The increase in data processing
expenses is attributable to an increase of $15,000 in regular data processing
fees and $28,000 related to Year 2000 issues. Approximately 50% of the increase
in other noninterest expense is attributable to increase in travel expenses
resulting from increased emphasis on employee education and training programs
conducted at off-premise training centers or educational institutions.
Average total assets increased $5,238,000 or 12.04% to $48,727,000 in
1998 as compared to $43,489,000 in 1997. Average interest-earning assets
increased 14.61% in 1998 from 1997. Loan demand was much stronger in 1998 than
in 1997 as evidenced by a loan to deposit ratio of 81.85% in 1998 as compared to
72.61% in 1997. Average loans increased $8,334,000 or 30.49% in 1998 as compared
to 1997.
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 $65,000 at December 31, 1998 at
an average rate of 6.99%. 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, 1998 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 1998, the Company increased its capital by retaining earnings
of $602,000 and by $55,000 from proceeds upon exercise of stock options. After
recording an increase in capital of $4,000 for unrealized gains on securities,
net of taxes, total capital increased $661,000 to $3,944,000 from $3,283,000 at
December 31, 1996.
At December 31, 1998, there were no outstanding commitments for any
major capital expenditures. However, the Company estimates that approximately
$250,000 will be required for new premises in 1999.
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, 1998.
<TABLE>
<CAPTION>
Actual Required Excess
------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
----------- ------------ ----------- ------------ -------------------------
(Dollars in Thousands)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ............. $ 4,369 8.02 % $ 2,177 4.00 % $ 2,192 4.02 %
Risk-based capital:
Core capital ............... 4,369 11.33 1,543 4.00 2,826 7.33
Total capital .............. 4,860 12.60 3,085 8.00 1,775 4.60
</TABLE>
25
<PAGE>
Year 2000 Issue Costs
Based on recently completed assessments, the Bank had determined that
it will be required to modify, upgrade and/or replace some portions of its
internal software and hardware to ensure that its computer systems will properly
utilize dates beyond December 31, 1999. The Bank's main core software, a
Kirchman Dimension 3000 product, has been externally tested and certified to be
year 2000 compliant. As of December 31, 1998, the Bank has commenced its year
2000 remediation program, has secured substantially all required resources, and
expects to substantially complete its internal year 2000 efforts by March 31,
1999.
In addition, the Bank has contacted its critical suppliers and other
entities to determine the extent to which the Bank's interface systems are
vulnerable to those third parties' failure to remediate their own year 2000
issues. While the Bank has not been informed of any material risks associated
with these entities, there is no guarantee that the systems of these critical
suppliers or other entities, including The Federal Reserve Bank, on which the
Bank relies, will be timely converted and will not have an adverse effect on the
Bank's systems or operations.
The Bank has expensed $20,000 of costs incurred to date related to the
year 2000 issue. The total remaining cost of the year 2000 project is presently
estimated at $20,000, which amount will be expensed as incurred. The costs of
the project and the date on which the Bank believes it will complete the year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
A formal contingency plan is in the process of development and it is
expected that the plan will be completed by March 31, 1999. Completion of the
contingency plan by March 31, 1999 meets the guidelines established by the Bank.
26
<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,
----------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- -------------------------------- -------------------------------
(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 . $ 35,670 $ 3,615 10.13 % $ 27,336 $ 2,698 9.87 % $ 31,848 $ 3,118 9.79 %
Investment
securities:
Taxable 4,806 291 6.05 8,291 511 6.16 5,770 325 5.63
Federal funds sold 3,942 206 5.23 3,128 173 5.53 5,068 275 5.43
----------- ---------- ---------- ---------- --------- ---------
Total interest-
earning assets 44,418 4,112 9.26 38,755 3,382 8.73 42,686 3,718 8.71
----------- ---------- ---------- ---------- --------- ---------
Noninterest-earning
assets:
Cash ................. 3,009 2,953 4,415
Allowance for loan
losses ............ (1,244) (1,201) (1,023)
Unrealized gain
(loss)
on available
for sale securities .. 19 (3) (7)
Other assets ...... 2,525 2,985 2,595
----------- ---------- ---------
Total
noninterest-
earning assets 4,309 4,734 5,980
----------- ---------- ---------
Total assets .... $ 48,727 $ 43,489 $ 48,666
=========== ========== =========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- -------------------------------- --------------------------------
(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 ... $ 9,732 $ 236 2.42% $ 8,198 $ 227 2.77% $ 9,479 $ 254 2.68%
Time deposits ........ 24,948 1,478 5.92 22,259 1,280 5.75 25,209 1,541 6.11
Other borrowings ..... 881 59 6.70 2,275 139 6.11 2,433 136 5.59
----------- ---------- -------------------- ---------- -----------
Total
interest-bearing
liabilities ..... 35,561 1,773 4.99 32,732 1,646 5.03 37,121 1,931 5.20
----------- ---------- -------------------- ---------- -----------
Noninterest-bearing liabilities
and stockholders' equity:
Demand deposits ... 8,898 7,190 7,929
Other liabilities . 615 458 570
Stockholders' equity 3,653 3,109 3,046
----------- ----------- ----------
Total
noninterest-bearing
liabilities and
stockholders' ... 13,166 10,757 11,545
equity
----------- ----------- ----------
Total liabilities and
stockholders'
equity ............... $ 48,727 $ 43,489 $ 48,666
=========== =========== ==========
Interest rate spread .... 4.27% 3.70% 3.51%
========== =========== =========
Net interest income ..... $ 2,339 $ 1,736 $ 1,787
========== ========= ===========
Net interest margin ..... 5.27% 4.48% 4.19%
========== =========== =========
</TABLE>
28
<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,
----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------------- ----------------------------------------
(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 ......... $ 917 $ 94 $ 823 $ (420) $ 22 $ (442)
Interest on securities:
Taxable ............................ (220) (5) (215) 186 44 142
Interest on Federal funds ............. 33 (12) 45 (102) 3 (105)
------------- ------------- ------------ ------------ ------------ ------------
Total interest income ............ 730 77 653 (336) 69 (405)
------------- ------------- ------------ ------------ ------------ ------------
Expense from interest-bearing liabilities:
Interest on savings and interest-
bearing demand deposits ............ 9 (33) 42 (27) 7 (34)
Interest on time deposits ............. 198 43 155 (261) (81) (180)
Interest on other borrowings .......... (80) 5 (85) 3 12 (9)
------------- ------------- ------------ ------------ ------------ ------------
Total interest expense ........... 127 15 112 (285) (62) (223)
------------- ------------- ------------ ------------ ------------ ------------
Net interest income ......... $ 603 $ 62 $ 541 $ (51) $ 131 $ (182)
============= ============= ============ ============ ============ ============
</TABLE>
29
<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, 1998, the Company's cumulative one-year interest
rate sensitivity gap ratio was 1.15%. 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.
30
<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,
1998, 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, 1998
--------------------------------------------------------------------
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 ............................ $ 25 $ - $ - $ - $ 25
Federal funds sold ................................... 5,966 - - - 5,966
Investment securities ................................ 1,474 1,527 501 1,252 4,754
Loans ................................................ 14,720 6,355 7,673 13,242 41,990
------------ ------------ ------------ ------------- -------------
22,185 7,882 8,174 14,494 52,735
------------ ------------ ------------ ------------- -------------
Interest-bearing liabilities:
Interest-bearing demand deposits (1) ................. - 2,830 8,877 - 11,707
Savings (1) .......................................... - - 1,973 - 1,973
Certificates less than $100,000 ...................... 5,280 10,309 1,918 1,165 18,672
Certificates, $100,000 and over ...................... 2,480 5,194 1,139 440 9,253
Other borrowings ..................................... - 10 20 35 65
------------ ------------ ------------ ------------- -------------
7,760 18,343 13,927 1,640 41,670
------------ ------------ ------------ ------------- -------------
Interest rate sensitivity gap ........................... $ 14,425 $ (10,461) $ (5,753) $ 12,854 $ 11,065
============ ============ ============ ============= =============
Cumulative interest rate sensitivity gap ................ $ 14,425 $ 3,964 $ (1,789) $ 11,065
============ ============ ============ =============
Interest rate sensitivity gap ratio ..................... 2.86 0.43 0.59 8.84
============ ============ ============ =============
Cumulative interest rate sensitivity gap ratio .......... 2.86 1.15 0.96 1.27
============ ============ ============ =============
</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.
31
<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,
----------------------------------
1998 1997
--------------- ---------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C>
Commercial and financial ........................................................ $ 6,345 $ 4,559
Agricultural .................................................................... 1,214 2,369
Real estate - construction ...................................................... 1,210 1,658
Real estate - mortgage, farmland ................................................ 7,916 4,683
Real estate - mortgage, other ................................................... 21,156 14,451
Consumer instalment ............................................................. 4,149 3,960
--------------- ---------------
41,990 31,680
Allowance for loan losses ....................................................... (1,274) (1,159)
--------------- ---------------
Loans, net ...................................................................... $ 40,716 $ 30,521
=============== ===============
</TABLE>
Maturities and Sensitivity of Loans to Changes in Interest Rates
The Company's loan portfolio, as of December 31, 1998 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, 1998 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.
<TABLE>
<CAPTION>
December 31,
1998
(Dollars in
Thousands)
----------------
<S> <C>
Maturity:
One year or less ............................ $ 13,179
After one year through five years ........... 22,715
After five years ............................ 6,096
----------------
$ 41,990
================
</TABLE>
Following is a summary of loans which presents separately the amount
of loans outstanding as of December 31, 1998 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 ...................... $ 4,019 $ 1,889 $ 1,651 $ 7,559
Real estate - construction .................................. 955 155 101 1,211
Real estate - mortgage ...................................... 6,512 18,258 4,282 29,052
Consumer instalment ......................................... 1,693 2,413 62 4,168
------------ ------------- ------------- -------------
Total ............................................... $ 13,179 $ 22,715 $ 6,096 $ 41,990
============ ============= ============= =============
</TABLE>
32
<PAGE>
The following table summarizes loans at December 31, 1998 with the due
dates after one year which (i) have predetermined interest rates and (ii) have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
December 31,
1998
(Dollars in
Thousands)
----------------
<S> <C>
Predetermined interest rates .......................... $ 20,735
Floating or adjustable interest rates ................. 8,076
----------------
$ 28,811
================
</TABLE>
Nonperforming Loans
The following table presents, at the dates indicated, the aggregate of
nonperforming loans for the categories indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- ----------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis ......................................... $ 448 $ 801
Instalment loans and term loans contractually past due ninety
days or more as to interest or principal payments and still accruing ........... 4 6
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
</TABLE>
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.
33
<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 $1,274,000 at December 31,
1998, representing 3.03% of year-end total loans outstanding compared with
approximately $1,159,000 at December 31, 1997, which represented 3.66% 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,
-------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
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 ............ $ 325 18 % $ 256 22 %
Real estate ................................................... 303 72 325 66
Consumer ...................................................... 455 10 404 12
Unallocated ................................................... 191 - 174 -
---------------- ------------- ---------------- ------------
$ 1,274 100 % $ 1,159 100 %
================ ============= ================ ============
</TABLE>
34
<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,
---------------------------------
1998 1997
--------------- ---------------
(Dollars in Thousands)
---------------------------------
<S> <C> <C>
Average amount of loans outstanding ............................................... $ 35,670 $ 27,336
=============== ===============
Balance of reserve for possible loan losses at beginning of period ................ 1,159 1,520
--------------- ---------------
Charge-offs:
Commercial, financial and agricultural ......................................... (67) (152)
Real estate .................................................................... (7) (250)
Consumer ....................................................................... (62) (270)
Recoveries:
Commercial, financial and agricultural ......................................... 33 60
Real estate .................................................................... 126 127
Consumer ....................................................................... 92 94
--------------- ---------------
Net (charge-offs) recoveries .............................................. 115 (391)
--------------- ---------------
Additions to reserve charged to operating expenses ................................ - 30
--------------- ---------------
Balance of reserve for possible loan losses ....................................... $ 1,274 $ 1,159
=============== ===============
Ratio of net loan (charge-offs) recoveries to average loans ....................... .32% (1.43)%
=============== ===============
</TABLE>
35
<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 earning assets. In particular, approximately 50% 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, 63% of the investment portfolio matures or reprices 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
--------------- -------------- -------------- ---------------
(Dollars in Thousands)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1998:
U. S. Government and agency
securities ......................... $ 4,259 $ 21 $ - $ 4,280
Other investments ..................... 474 - - 474
--------------- -------------- -------------- ---------------
$ 4,733 $ 21 $ - $ 4,754
=============== ============== ============== ===============
December 31, 1997:
U. S. Government and agency
securities ......................... $ 6,010 $ 17 $ (2) $ 6,025
Other investments ..................... 474 - - 474
--------------- -------------- -------------- ---------------
$ 6,484 $ 17 $ (2) $ 6,499
=============== ============== ============== ===============
</TABLE>
36
<PAGE>
Maturities
The amounts of investment securities in each category as of December
31, 1998 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 .......................................... $ 2,486 5.78 % $ - - %
After one year through five years ......................... 2,268 5.87 - -
After five years through ten years ........................ - - - -
After ten years ........................................... - - - -
------------ ------------ ------------ ------------
$ 4,754 5.82 % $ - - %
============ ============ ============ ============
</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%.
37
<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,
------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
Amount Rate Amount Rate
--------------- ------------ --------------- ------------
(Dollars in Thousands)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits ............................. $ 8,898 - % $ 7,190 - %
Interest-bearing demand and savings deposits .................... 9,732 2.42 8,198 2.77
Time deposits ................................................... 24,948 5.92 22,259 5.75
--------------- ---------------
Total deposits .................................... $ 43,578 $ 37,647
=============== ===============
</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, 1998, 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.
<TABLE>
<CAPTION>
December 31,
1998
---------------
(Dollars in
Thousands)
---------------
<S> <C>
Three months or less ...................... $ 2,480
Over three through twelve months .......... 5,194
Over twelve months ........................ 1,579
---------------
Total ....................... $ 9,253
===============
</TABLE>
38
<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,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Return on assets ......................................................................... 1.24 % 0.78 %
Return on equity ......................................................................... 16.48 10.97
Dividends payout ......................................................................... - -
Equity to assets ratio ................................................................... 7.50 7.15
</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,
1998 and 1997.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- ---------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C>
Commitments to extend credit .................................................. $ 4,959 $ 4,746
Standby letters of credit ..................................................... 120 12
--------------- ---------------
$ 5,079 $ 4,758
=============== ===============
</TABLE>
39
<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, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31, 1998
and 1997
Consolidated Statements of Comprehensive Income - Years Ended
December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1998
and 1997
Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During 1998, the Company did not change its accountants and there was
no disagreement on any matter of accounting principles or practices for
financial statement disclosure that would have required the filing of a current
report on Form 8-K.
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.
40
<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, 1998.
<TABLE>
<CAPTION>
Director's
Director Term
Name Age Position Since Expires
----------------------------------- ------------- ------------------------------------- ------------- --------------
<S> <C> <C> <C> <C>
Board Nominees:
A. Curtis Farrar, Jr. 54 Director 1990 1999
Norman E. Fletcher 61 Director 1990 1999
Directors Continuing in Office:
Milton G. Clements 50 Director 1990 2000
Robert L. Cation 54 Chairman of the Board of Directors 1990 2000
Jeffery W. Johnson 49 Director 1997 2000
William C. Ellis, Jr. 54 Director 1990 2001
Ralph G. Evans 42 Director 1990 2001
</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 54 Chairman of the Board of FNC Bancorp, Inc.
Chairman of the Board of First National Bank of Coffee County
Jeffery W. Johnson 49 President and CEO of FNC Bancorp, Inc.
President and CEO of First National Bank of Coffee County
Leonard W. Thomas 38 Senior Vice President and CFO of First National Bank of Coffee County
Ralph G. Evans 42 Secretary of FNC Bancorp, Inc.
</TABLE>
41
<PAGE>
Business Experience
Effective April 2, 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 director of the Small Business Administration's Advisory
Board, is a past President of the Cordele Chamber of Commerce and was a delegate
to the 1998 Congressional Conference on Small Business.
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 13 years of bank
audit and management experience, is a CPA and has completed the AICPA's National
Banking School in Charlottesville, Virginia.
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 Chairman and
President of Clements, Purvis & Stewart, P.C., a Certified Public Accounting
firm in Douglas, Georgia. He is a past President and director of the
Douglas-Coffee County Chamber of Commerce as well as a past director of the
Douglas Downtown Development Authority. Mr. Clements is a former member of the
Douglas Lions Club where he has held all the primary officer positions and is a
current 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 Douglas Georgia based manufacturing
corporation with branch locations in Asheboro, North Carolina, Lakeland,
Florida, Waco, Texas and Hartselle, Alabama. In addition, Mr. Ellis serves as
President of Ellis & Ellis, Inc., Douglas, Georgia and 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 of Trust Company
Bank of Coffee County.
42
<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 and deacon of the First Baptist
Church in Douglas, and since January 1990, has served as 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.
43
<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 $100,000 during 1998.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------------ -------------------------- ---------
Other Restricted Securities
Name Annual Stock Underlying LTP All Other
Principal Salary Bonus Compensation Award(S) Options Payouts Compensation
Position Year ($) ($) ($) (1) ($) SARS (#) ($) ($)
- ------------------------ -------- ------------ ---------- --------------- ------------ ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffery W. Johnson (2) 1998 $ 96,000 $ - $ - $ - 18,593 $ - $ -
President and CEO 1997 72,000 $ - $ - $ - 14,640 $ - $ 772
of FNC Bancorp, Inc.
and First National
Bank of Coffee
County
Timothy J. Palmer (3) 1996 71,186 - - - - - -
President and 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) Jeffery W. Johnson began employment April 2, 1997 and was elected
President and CEO of the Bank and the Company on May 15, 1997.
(3) Timothy J. Palmer terminated his employement with the Company on
May 19, 1996.
44
<PAGE>
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 vesting
8,333 shares per year 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 bringing the Bank to an overall "2" rating with the Office of
the Comptroller of the Currency.
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.
45
<PAGE>
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.
46
<PAGE>
The following table sets forth certain information concerning each
grant of options to purchase the Company's common stock made during the 1998
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
Granted (#) Year ($/SH) Date
-------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Jeffery W. Johnson
1998 10,259 49.42% $ 10 2008
============== ================ ==============
</TABLE>
The following table sets forth certain information regarding the
exercise of stock options in the 1998 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 5,463 $ - 47,028 8,334 $ - $ -
=============== ============== =============== =============== ================ ===============
</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.
47
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Shareholders
The following table presents as of December 31, 1998, 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 25,000 (5) 6.08%
Rt. 2, Box 777
Broxton, Georgia 31519
Common Robert L. Cation 26,750 6.51
1008 Golf Club Road
Douglas, Georgia 31533
Common William C. Ellis, Jr. 27,001 6.57
Post Office Box 270
Douglas, Georgia 31534
Common Ralph G. Evans 31,550 (6) 7.67
Post Office Box 1264
Douglas, Georgia 31534
Common A. Curtis Farrar, Jr. 26,751 6.51
Post Office Box 770
Douglas, Georgia 31534
Common Norman E. Fletcher 26,399 (7) 6.42
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.
48
<PAGE>
Stock Ownership by Management
The following table presents as of December 31, 1998, 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 26,750 6.51%
1008 Golf Club Road
Douglas, Georgia 31533
Common Milton G. Clements 17,600 (8) 4.28
Common William C. Ellis, Jr. 27,001 6.57
Post Office Box 270
Douglas, Georgia 31534
Common Ralph G. Evans 31,550 (9) 7.67
Post Office Box 1264
Douglas, Georgia 31534
Common A. Curtis Farrar, Jr. 26,751 6.51
Post Office Box 770
Douglas, Georgia 31534
Common Norman E. Fletcher 26,399 (10) 6.42
401 Shirley Avenue
Douglas, Georgia 31533
Common Jeffery W. Johnson 11,462 2.79
Common Leonard W. Thomas 100 -
---------------- -----------------
All directors and executive officers as a group (8 persons) 167,613 40.76%
================ =================
</TABLE>
(8) Includes 1,000 shares held in the name of Laura B. Clements, wife of
Milton G. Clements, 2,000 shares held in the name of Milton Bryan
Clements, son of Milton G. Clements, 2,000 shares held in the name
of Steven Griffin Clements, son of Milton G. Clements, 2,000
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.
49
<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 26,750 25,000 - 51,750 11.86%
Milton G. Clements 17,600 12,500 - 30,100 6.08
William C. Ellis, Jr. 27,001 25,000 - 52,001 11.92
Ralph G. Evans 31,550 25,000 - 56,550 12.97
A. Curtis Farrar, Jr. 26,751 25,000 - 51,751 11.86
Norman E. Fletcher 26,399 25,000 - 51,399 11.78
Jeffery W. Johnson 11,462 - 47,029 58,491 12.77
Leonard W. Thomas 100 - - 100 -
--------------- ------------- -------------- ------------------ --------------
All directors and executive officers
as a group (8 persons) 167,613 137,500 47,029 352,142 59.11%
=============== ============= ============== ================== ==============
</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 58,491 shares of the
Company's stock which would represent 12.77% 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 137,500
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 411,173 shares outstanding as of the record date and as adjusted
for warrants or stock options exercisable within sixty (60) days of the
record date.
50
<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.
51
<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' Form S-18
(File Number 33-37078), as amended.)
10.3 1997 Incentive Stock Option Plan (filed as
Exhibit 10.3 to the Registrant's Annual Report
on Form 10-KSB (File Number 33-37078), filed
with the Commission for the year ended
December 31, 1997 and incorporated herein by
reference).
10.4 Executive Employment Agreement with Jeffery
W. Johnson (filed as Exhibit 10.4 to the
Registrant's Annual Report on Form 10-KSB
(File Number 33-37078), filed with the
Commission for the year ended December 31,
1997 and incorporated herein by reference).
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 page to this Annual Report.
27 Financial Data Schedule
</TABLE>
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this Report.
52
<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 25, 1999 By: /s/ Jeffrey 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 25, 1999 /s/ Jeffrey W. Johnson
------------------------- ---------------------------------------
Jeffery W. Johnson, President
Chief Executive Officer and Director
Date: March 25, 1999 /s/ Robert L. Cation
------------------------- ---------------------------------------
Robert L. Cation, Director
Date: March 25, 1999 /s/ Milton G. Clements
------------------------- ---------------------------------------
Milton G. Clements, Director
Date: March 25, 1999 /s/ William C. Ellis, Jr.
------------------------- ---------------------------------------
William C. Ellis, Jr., Director
Date: March 25, 1999 /s/ Ralph G. Evans
------------------------- ---------------------------------------
Ralph G. Evans, Director
Date: March 25, 1999 /s/ A. Curtis Farrar, Jr.
------------------------- ---------------------------------------
A. Curtis Farrar, Jr., Director
Date: March 25, 1999 /s/ Norman E. Fletcher
------------------------- ---------------------------------------
Norman E. Fletcher, Director
53
<PAGE>
<TABLE>
<CAPTION>
FNC BANCORP, INC.
EXHIBIT INDEX
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 as
Exhibit 10.3 to the Registrant's Annual
Report on Form 10-KSB (File Number 33-37078),
(filed with the Commission for the year
ended December 31, 1997 and incorporated
herein by reference).
10.4 Executive Employment Agreement with Jeffery
W. Johnson (filed as Exhibit 10.4 to the
Registrant's Annual Report on Form 10-KSB
(File Number 33-37078), (filed with the
Commission for the year ended December 31,
1997 and incorporated herein by reference).
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>
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this Report.
54
<PAGE>
<TABLE>
<CAPTION>
FNC BANCCORP, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Consolidated financial statements: Page
----
<S> <C>
Independent Auditor's Report ................................................................... F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 ................................... F-2
Consolidated Statements of Income - Years ended December 31, 1998 and 1997 .................... F-3
Consolidated Statements of Comprehensive Income - Years ended December 31, 1998 and 1997 ....... F-4
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998 and 1997 ..... F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1998 and 1997 ................ F-6
Notes to Consolidated Financial Statements ..................................................... F-8
</TABLE>
All schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related notes.
55
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
FNC Bancorp, Inc. and Subsidiary
Douglas, Georgia
We have audited the accompanying consolidated balance sheets
of FNC Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
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 audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of FNC
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Albany, Georgia /s/ Mauldin & Jenkins, LLC
January 28. 1999
F-1
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------
--------------------- ---------------------
<S> <C> <C>
Cash and due from banks ...................................................... $ 5,617,359 $ 4,924,600
Federal funds sold ........................................................... 5,966,000 34,000
Securities available for sale, at fair value ................................. 4,753,962 6,499,422
Loans ........................................................................ 41,989,950 31,679,747
Less allowance for loan losses ............................................... 1,274,285 1,159,173
--------------------- ---------------------
Loans, net ......................................................... 40,715,665 30,520,574
--------------------- ---------------------
Premises and equipment, net .................................................. 1,613,025 1,655,030
Other assets ................................................................. 914,391 1,169,108
--------------------- ---------------------
$ 59,580,402 $ 44,802,734
===================== =====================
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand ............................................... $ 12,695,085 $ 7,708,349
Interest-bearing demand .................................................. 11,707,125 6,819,767
Savings .................................................................. 1,973,434 1,832,359
Time, $100,000 and over .................................................. 9,252,893 6,116,839
Other time ............................................................... 18,671,816 16,570,685
--------------------- ---------------------
Total deposits ................................................. 54,300,353 39,047,999
Notes payable, directors ................................................. 500,000 500,000
Federal funds purchased .................................................. - 430,000
Other borrowings ......................................................... 65,000 1,075,000
Other liabilities ........................................................ 771,509 466,537
--------------------- ---------------------
Total liabilities .................................................. 55,636,862 41,519,536
--------------------- ---------------------
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; issued 1998 411,173 shares;
1997 405,710 shares .................................................. 411,173 405,710
Capital surplus ......................................................... 3,659,708 3,610,541
Accumulated deficit ...................................................... (141,341) (743,019)
Accumulated other comprehensive income ................................... 14,000 9,966
--------------------- ---------------------
Total stockholders' equity ......................................... 3,943,540 3,283,198
--------------------- ---------------------
$ 59,580,402 $ 44,802,734
===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------- ----------------------
<S> <C> <C>
Interest income
Interest and fees on loans ................................................... $ 3,614,790 $ 2,697,495
Interest on taxable securities ............................................... 290,683 511,038
Interest on Federal funds sold ............................................... 206,364 173,093
------------------- ----------------------
4,111,837 3,381,626
------------------- ----------------------
Interest expense
Interest on deposits ......................................................... 1,713,903 1,506,970
Interest on other borrowings ................................................. 59,358 139,260
------------------- ----------------------
1,773,261 1,646,230
------------------- ----------------------
Net interest income .................................................... 2,338,576 1,735,396
Provision for loan losses ........................................................ - 30,450
------------------- ----------------------
Net interest income after provision for loan losses .................... 2,338,576 1,704,946
------------------- ----------------------
Other income
Service charges on deposit accounts .......................................... 446,728 346,136
Other service charges, commissions and fees .................................. 26,545 18,031
Net realized gains on securities available for sale .......................... - 900
Origination fees on mortgage loans ........................................... 45,851 19,291
Other ........................................................................ 70,204 38,034
------------------- ----------------------
589,328 422,392
------------------- ----------------------
Other expenses
Salaries and employee benefits ............................................... 1,023,104 805,041
Equipment expense ............................................................ 161,111 140,235
Occupancy expense ............................................................ 100,195 92,868
Accounting expenses .......................................................... 87,012 96,885
Advertising expense .......................................................... 36,039 39,613
Data processing expenses ..................................................... 106,459 62,403
Printing and office supplies ................................................. 67,138 54,077
Other operating expenses ..................................................... 400,557 318,226
------------------- ----------------------
1,981,615 1,609,348
------------------- ----------------------
Income before income taxes ............................................. 946,289 517,990
Applicable income taxes .......................................................... 344,611 176,680
------------------- ----------------------
Net income ............................................................. $ 601,678 $ 341,310
------------------- ----------------------
Income per common share - basic and diluted ...................................... $ 1.47 $ 0.84
=================== ======================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------- --------------------
<S> <C> <C>
Net income ...................................................................... $ 601,678 $ 341,310
Other comprehensive income:
Net unrealized holding gains arising during
period, net of tax of $1,866 and $4,590 ................................. 4,034 8,910
Reclassification adjustment for gains included in
net income, net of tax of $- - and $306 ................................. - (594)
------------------- --------------------
Total other comprehensive income ...................................... 4,034 8,316
------------------- --------------------
Comprehensive income ............................................................ $ 605,712 $ 349,626
=================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
-------------------- Capital Accumulated Comprehensive Stockholders'
Shares Par Value Surplus Deficit Income Equity
-------- ---------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
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
Other comprehensive income ...... - - - - 8,316 8,316
-------- ---------- ---------- ----------- ----------- ---------------
Balance, December 31, 1997 .......... 405,710 405,710 3,610,541 (743,019) 9,966 3,283,198
Exercise of options by
officer ..................... 5,463 5,463 49,167 - - 54,630
Net income ...................... - - - 601,678 - 601,678
Other comprehensive income ...... - - - - 4,034 4,034
-------- ----------- ---------- ----------- ----------- ---------------
Balance, December 31, 1998 .......... 411,173 $ 411,173 $3,659,708 $ (141,341) $ 14,000 $ 3,943,540
======== =========== ========== =========== =========== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 601,678 $ 341,310
----------------------- ----------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ......................................................... 133,926 134,383
Provision for loan losses ............................................ - 30,450
Provision for deferred income taxes .................................. 173,529 176,680
Net realized gains on securities available for sale .................. - (900)
(Increase) decrease in interest receivable ........................... (28,792) 174,393
Increase (decrease) in interest payable .............................. 189,052 (154,199)
Decrease in prepaid taxes ............................................ - 66,360
Other prepaids, deferrals and accruals, net .......................... 224,034 (28,785)
----------------------- ----------------------
Total adjustments .............................................. 691,749 398,382
----------------------- ----------------------
Net cash provided by operating activities ...................... 1,293,427 739,692
----------------------- ----------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale ..................... - 1,123,667
Purchases of securities available for sale ............................... (1,750,000) (4,538,046)
Proceeds from maturities of securities available for sale ................ 3,501,360 4,776,365
(Increase) decrease in Federal funds sold ................................ (5,932,000) 7,215,000
Increase in loans, net ................................................... (10,195,091) (4,725,766)
Purchase of premises and equipment ....................................... (91,921) (107,332)
----------------------- ----------------------
Net cash provided by (used in) investing activities ............ (14,467,652) 3,743,888
----------------------- ----------------------
FINANCING ACTIVITIES
Increase (decrease) in deposits .......................................... 15,252,354 (3,496,602)
Increase (decrease) in Federal funds purchased ........................... (430,000) 430,000
Decrease in other borrowings ............................................. (1,010,000) (1,410,000)
Proceeds from issuance of common stock ................................... 54,630 -
----------------------- ----------------------
Net cash provided by (used) in financing activities ............ 13,866,984 (4,476,602)
----------------------- ----------------------
</TABLE>
F-6
<PAGE>
FNC BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------- ----------------------
<S> <C> <C>
Net increase in cash and due from banks ......................................... $ 692,759 $ 6,978
Cash and due from banks at beginning of year .................................... 4,924,600 4,917,622
------------------- ----------------------
Cash and due from banks at end of year .......................................... $ 5,617,359 $ 4,924,600
------------------- ----------------------
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the year for:
Interest ................................................................ $ 1,584,209 $ 1,800,429
Income taxes ............................................................ $ 171,082 $ (66,360)
NONCASH TRANSACTION
Net change in unrealized gains on securities
available for sale ...................................................... $ 5,900 $ 12,600
</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. The Company and the Bank are subject
to the regulations of certain Federal and state agencies
and are periodically examined by those regulatory
authorities.
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
For purposes of reporting cash flows, cash and due from
banks includes cash on hand and amounts due from banks
(including cash items in process of clearing). Cash flows
from loans originated by the Bank, deposits,
interest-bearing deposits and Federal funds purchased and
sold are reported 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)
Investment Securities
Securities are classified based on management's intention
on the date of purchase. All of the Company's securities
are classified as available for sale and carried 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.
A decline in the fair value below cost of any security that
is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
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. Interest income is subsequently recognized only
to the extent cash payments are received.
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. OREO is reported net of allowance for losses in
the Bank's financial statements.
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 Per Common Share
Basic earnings 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 by the sum of the weighted average number of common
shares outstanding and potential common shares that have a
dilutive effect on earnings. Because the fair market value
of the Company's stock did not exceed the exercise price of
the stock options at December 31, 1998 or at December 31,
1997, stock options had no dilutive effect on earnings.
Recent Accounting Pronouncements
In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income". This statement establishes standards
for reporting and display of comprehensive income and its
components in the 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 in equal prominence with the other
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
financial statements. The Company has elected to report
comprehensive income in a separate financial statement
titled "Consolidated Statements of Comprehensive Income".
SFAS No. 130 describes comprehensive income as the total of
all components of comprehensive income, including net
income. This statement uses other comprehensive income to
refer to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in
comprehensive income but excluded from net income.
Currently, the Company's other comprehensive income
consists of items previously reported directly in equity
under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". As required by SFAS No. 130,
the financial statements for the prior year have been
reclassified to reflect application of the provisions of
this statement. The adoption of this statement did not
affect the Company's financial position, results of
operations or cash flows.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments
and Hedging Activities". This statement is required to be
adopted for fiscal years beginning after June 15, 1999.
However, the statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The
Company expects to adopt this statement effective January
1, 2000. SFAS 133 requires the Company to recognize all
derivatives as either assets or liabilities in the balance
sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized
in earnings in the period of change. For derivatives that
are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be
recognized in earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings,
depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be
recognized in earnings immediately.
Management has not yet determined what effect the adoption
of SFAS 133 will have on the Company's earnings or
financial position.
Reclassifications
Certain reclassifications have been made in the 1997
consolidated financial statements to conform to the
presentation used in 1998.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INVESTMENT SECURITIES
The amortized cost and approximate fair values of investments
in securities at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1998:
U. S. Government and agency
securities ................... $ 4,259,362 $ 21,000 $ - $ 4,280,362
Other investments ............... 473,600 - - 473,600
---------------- -------------- -------------- ----------------
$ 4,732,962 $ 21,000 $ - $ 4,753,962
================ ============== ============== ================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ----------------
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>
The amortized cost and fair value of securities as of December
31, 1998 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 .......................................... $ 2,001,708 $ 2,011,719
Due from one year to five years .................................. 2,257,654 2,268,643
Other investments ................................................ 473,600 473,600
---------------- ----------------
$ 4,732,962 $ 4,753,962
================ ================
</TABLE>
Securities with a carrying value of $2,824,141 and $3,524,698
at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits and for other purposes.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INVESTMENT SECURITIES (Continued)
Gains and losses on sales of securities available for sale
consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Gross realized gains on sales of securities ....................... $ - $ 2,194
Gross realized losses on sales of securities ...................... - (1,294)
--------------- ---------------
Net realized gains on sales of securities available for sale ...... $ - $ 900
=============== ===============
</TABLE>
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Commercial and financial .................................. $ 6,344,841 $ 4,558,964
Agricultural .............................................. 1,213,970 2,368,981
Real estate - construction ................................ 1,209,970 1,657,987
Real estate - mortgage, farmland .......................... 7,915,802 4,682,963
Real estate - mortgage, other ............................. 21,156,471 14,450,885
Consumer instalment ....................................... 4,148,896 3,959,967
------------------- -------------------
41,989,950 31,679,747
Allowance for loan losses ................................. (1,274,285) (1,159,173)
------------------- -------------------
Loans, net ................................................ $ 40,715,665 $ 30,520,574
=================== ===================
</TABLE>
The total recorded investment in impaired loans was $332,587
and $772,654 at December 31, 1998 and 1997, respectively.
Included in these loans were $332,587 and $654,438 that had a
related allowance for loan loss of $68,762 and $139,461 at
December 31, 1998 and 1997, respectively. The average recorded
investment in impaired loans for 1998 and 1997 was $ 569,101
and $1,365,746, respectively. Interest income on impaired
loans of $- - and $7,987 was recognized for cash payments
received for the years ended December 31, 1998 and 1997,
respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION> December 31,
------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Balance, beginning of year ................................ $ 1,159,173 $ 1,520,385
Provision charged to operations ........................ - 30,450
Loans charged off ...................................... (135,693) (672,363)
Recoveries ............................................. 250,805 280,701
------------------- -------------------
Balance, end of year ...................................... $ 1,274,285 $ 1,159,173
=================== ===================
</TABLE>
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, 1998 and 1997 was
$175,228 and $176,987, respectively. During 1998 and 1997, new
loans to such related parties amounted to $252,736 and
$380,880 and repayments amounted to $254,495 and $122,100,
respectively.
NOTE 4. PREMISES AND EQUIPMENT, NET
Major classifications of these assets are summarized as
follows:
<TABLE>
<CAPTION> December 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Land ........................................................... $ 372,676 $ 372,676
Buildings and improvements ..................................... 1,064,078 1,064,078
Equipment ...................................................... 882,757 811,389
----------------- -----------------
2,319,511 2,248,143
Accumulated depreciation ....................................... (706,486) (593,113)
----------------- -----------------
$ 1,613,025 $ 1,655,030
================= =================
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. DEPOSITS
At December 31, 1998, the scheduled maturities of time
deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
Due in one year or less ............................... $ 23,262,758
Due from one year to three years ...................... 3,056,968
Due from three years to five years .................... 902,991
Due after five years .................................. 701,992
----------------
$ 27,924,709
================
</TABLE>
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1997
----------------- -----------------
<S> <C> <C>
Advances from the Federal Home Bank with interest $ 65,000 $ 1,075,000
at a fixed rate of 6.99% at December 31, 1998 (average ================= ==================
fixed rates of 5.67% in 1997), various repayment
options, maturity date of May 16, 2005.
</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, 1998 have maturities for the
succeeding five years as follows:
Year ending December 31,
1999 $ 10,000
2000 10,000
2001 10,000
2002 10,000
2003 10,000
Later years 15,000
----------------
$ 65,000
================
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. 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.
NOTE 8. 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 $16,015 and $10,813 in 1998 and
1997, respectively.
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Current ........................................................ $ 171,082 $ -
Deferred ....................................................... 173,529 176,680
----------------- -----------------
$ 344,611 $ 176,680
================= =================
</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,
-------------------------------------------------------
1998 1997
------------------------- --------------------------
Amount Percent Amount Percent
------------ ---------- -------------- ----------
<S> <C> <C> <C> <C>
Tax provision at statutory rate ............... $ 321,738 34 % $ 176,117 34 %
Increase resulting from:
Other items, net ........................... 22,873 2 563 -
------------ ---------- -------------- ----------
Provision for income taxes .................... $ 344,611 36 % $ 176,680 34 %
============ ========== ============== ==========
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves .......................................... $ 256,143 $ 256,143
Net operating loss carryover ............................... - 200,795
Nonaccrual interest ......................................... 26,381 -
----------------- -----------------
282,524 456,938
----------------- -----------------
Deferred tax liabilities:
Depreciation ................................................ 80,192 83,377
Other ....................................................... 2,300 -
Unrealized gain on securities available for sale ............ 7,000 5,134
----------------- -----------------
89,492 88,511
----------------- -----------------
Net deferred tax assets ........................................ $ 193,032 $ 368,427
================= =================
</TABLE>
NOTE 10. 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-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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 non-qualified stock options up
to 125,000 shares of common stock to key employees. 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. 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 will be
exercisable no later than ten years after the date of
grant.
A summary of the status of the plan at December 31, 1998
and 1997 and changes during the years ended on those
dates is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Under option, beginning of year ......... 188,066 $ 10.00 148,426 $ 10.00
Granted .............................. 20,759 10.00 39,640 10.00
Exercised ............................ (5,463) 10.00 - -
----------- -----------
Under option, end of year ............... 203,362 10.00 188,066 10.00
=========== ===========
Exercisable at end of year .............. 184,978 171,399
=========== ===========
Available for grant at end of year ...... 64,601 85,360
=========== ===========
Weighted-average fair value per option
of options granted during the year ... $ 3.97 $ 4.53
=========== ===========
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK WARRANTS AND STOCK OPTION PLAN (Continued)
Stock Option Plan (Continued)
A further summary about options outstanding at December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------------------------------
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> <C>
$ 10.00 142,963 2.9 $ 10.00 142,963 $ 10.00
10.00 25,000 8.3 10.00 16,666 10.00
10.00 14,640 9.0 10.00 14,640 10.00
10.00 10,259 10.0 10.00 10,259 10.00
10.00 4,500 9.5 10.00 450 10.00
10.00 6,000 10.0 10.00 - 10.00
---------------- ---------------
203,362 4.72 10.00 184,978 10.00
================ ===============
December 31, 1997
------------------------------------------------------------------------------------------------------
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
-------------- ---------------- -------------- -------------- --------------- --------------
$ 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>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK WARRANTS AND STOCK OPTION PLAN (Continued)
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,
1998 and 1997. 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,
-------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
Basic Basic and
and Diluted Diluted Net
Net Net Income Net Income
Income Per Share Income Per Share
--------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
As reported $ 601,678 $ 1.47 $ 341,310 $ 0.84
Stock based compensation,
net of related tax effect (52,976) (0.13) (68,725) (0.17)
--------------- --------------- ---------------- -------------
As adjusted $ 548,702 $ 1.34 $ 272,585 $ 0.67
=============== =============== ================ =============
</TABLE>
The fair value of the options granted in 1998 was based upon
the discounted value of future cash flows of the options using
the following assumptions:
Risk-free interest rate 5.12%
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%
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank 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 Bank'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 Bank 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
Bank's commitments is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Commitments to extend credit .................................. $ 4,959,000 $ 4,746,000
Standby letters of credit ..................................... 120,000 12,300
----------------- -----------------
$ 5,079,000 $ 4,758,300
================= =================
</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 Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank 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-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Standby letters of credit are conditional commitments issued
by the Bank 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 Bank 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 Bank originates primarily commercial, residential, and
consumer loans to customers in the Coffee County and
surrounding counties. The ability of the majority of the
Bank'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 Bank'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 Bank's primary market
area. The other significant concentrations of credit by type
of loan are set forth in Note 3.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CONCENTRATIONS OF CREDIT (Continued)
The Bank has a concentration of funds on deposit at its
primary correspondent bank, Georgia Bankers Bank, at December
31, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
Federal funds sold ............................................. $ 5,930,000 $ -
Correspondent commercial checking account ...................... 4,382,000 3,524,698
------------------- ------------------
$ 10,312,000 $ 3,524,698
=================== ==================
</TABLE>
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 Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on
the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum 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, 1998, the Bank meets all capital adequacy
requirements to which it is subject.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. REGULATORY MATTERS (Continued)
As of December 31, 1998, 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.
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, 1998
Total Capital
(to Risk Weighted
Assets):
Consolidated $ 4,421,388 11.46% $ 3,085,233 8.00% $ 3,856,542 10.00%
FNB of Coffee County $ 4,860,365 12.60% $ 3,085,233 8.00% $ 3,856,542 10.00%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated $ 3,929,540 10.19% $ 1,542,617 4.00% $ 2,313,925 6.00%
FNB of Coffee County $ 4,368,517 11.33% $ 1,542,617 4.00% $ 2,313,925 6.00%
Tier I Capital
(to Average Assets):
Consolidated $ 3,929,540 7.22% $ 2,177,480 4.00% $ 2,721,850 5.00%
FNB of Coffee County $ 4,368,517 8.02% $ 2,177,480 4.00% $ 2,721,850 5.00%
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. REGULATORY MATTERS (Continued)
<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):
Consolidated $ 3,659,147 12.16% $ 2,407,998 8.00% $ 3,009,998 10.00%
FNB of Coffee County $ 4,114,175 13.68% $ 2,405,746 8.00% $ 3,007,183 10.00%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated $ 3,273,232 10.87% $ 1,203,999 4.00% $ 1,805,999 6.00%
FNB of Coffee County $ 3,728,607 12.40% $ 1,202,873 4.00% $ 1,804,310 6.00%
Tier I Capital
(to Average Assets):
Consolidated $ 3,273,232 7.23% $ 1,810,040 4.00% $ 2,262,550 5.00%
FNB of Coffee County $ 3,728,607 8.24% $ 1,810,040 4.00% $ 2,262,550 5.00%
</TABLE>
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, 1998 and 1997. 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.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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.
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.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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.
The carrying value and estimated fair value of the
Company's financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 11,583,359 $ 11,583,359 $ 4,958,600 $ 4,958,600
================ =============== ================= ===============
Investments in securities ...... $ 4,753,962 $ 4,753,962 $ 6,499,422 $ 6,499,422
================ =============== ================= ===============
Loans .......................... $ 41,989,950 $ 40,869,961 $ 31,679,747 $ 31,458,423
Allowance for loan losses ...... 1,274,285 - 1,159,173 -
---------------- --------------- ----------------- ---------------
Loans, net .......... $ 40,715,665 $ 40,869,961 $ 30,520,574 $ 31,458,423
================ =============== ================= ===============
Financial liabilities:
Noninterest-bearing demand ..... $ 12,695,085 $ 12,695,085 $ 7,708,349 $ 7,708,349
Interest-bearing demand ........ 11,707,125 11,707,125 6,819,767 6,819,767
Savings ........................ 1,973,434 1,973,434 1,832,359 1,832,359
Time deposits .................. 27,924,709 28,070,996 22,687,524 22,994,718
---------------- --------------- ----------------- ---------------
Total deposits ...... $ 54,300,353 $ 54,446,640 $ 39,047,999 $ 39,355,193
================ =============== ================= ===============
Federal funds purchased ........... $ - $ - $ 430,000 $ 430,000
================ =============== ================= ===============
Other borrowings .................. $ 65,000 $ 65,000 $ 1,075,000 $ 1,075,000
================ =============== ================= ===============
Notes payable, director ........... $ 500,000 $ 500,000 $ 500,000 $ 500,000
================ =============== ================= ===============
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. YEAR 2000
The Company is currently working to resolve the potential
impact of the Year 2000 on the processing of date-sensitive
information by the Company's computerized information systems.
The Year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. Due to the fact
that the Company is heavily dependent on computer processing
and telecommunication systems in their daily business
activities, this could result in a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions or engage in normal business activities.
In response to the Year 2000 issue, the Company created a Year
2000 Task Force to coordinate and monitor the Company's
progress in their Year 2000 remediation efforts. The Task
Force reports directly to the Company's executive management
and also provides regular reports to the Board of Directors.
The Task Force has conducted a comprehensive review of the
Company's computer systems and software to identify the
systems and software that could be effected by the Year 2000
issue. Although absolute assurance cannot be given, the
Company presently believes that with the modifications to
existing systems and software and converting to new software,
the Year 2000 problem will not pose a significant operational
problem to the Company or have a material adverse effect on
future operating results.
The Company has also conducted formal communications with its
significant suppliers and large customers to determine their
plans to address the Year 2000 issue. While the Company
expects a successful resolution of all issues, there can be no
guarantee that the systems of other companies on which the
Company's systems rely will be converted in a timely manner,
or that a failure to convert by a supplier or customer, would
not have a material adverse effect on the Company.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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, 1998 and
1997.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1998 1997
------------------ -----------------
<S> <C> <C>
Assets
Cash ........................................................... $ 136,439 $ 55,294
Investment in subsidiary ....................................... 4,382,517 3,738,573
Other assets ................................................... - 27,876
------------------ -----------------
Total assets ........................................... $ 4,518,956 $ 3,821,743
================== =================
Liabilities:
Notes payable, directors ....................................... $ 500,000 $ 500,000
Other liabilities .............................................. 75,416 38,545
------------------ -----------------
Total liabilities ...................................... 575,416 538,545
------------------ -----------------
Stockholders' equity .............................................. 3,943,540 3,283,198
------------------ -----------------
Total liabilities and stockholders' equity ............. $ 4,518,956 $ 3,821,743
================== =================
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
1998 1997
------------------ -----------------
<S> <C> <C>
Income, interest ................................................. $ 2,467 $ 2,522
------------------ -----------------
Expense
Interest ...................................................... 36,872 38,545
Other expense ................................................. 20,674 13,819
------------------ -----------------
57,546 52,364
------------------ -----------------
Loss before income tax benefits and
equity in undistributed earnings
of subsidiary .................. (55,079) (49,842)
Income tax benefits .............................................. (16,847) (16,950)
------------------ -----------------
Loss before equity in undistributed
earnings of subsidiary ........................... (38,232) (32,892)
Equity in undistributed earnings of subsidiary .................. 639,910 374,202
------------------ -----------------
Net income ............................................ $ 601,678 $ 341,310
================== =================
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1998 1997
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 601,678 $ 341,310
------------------- -------------------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Undistributed earnings of subsidiary .................... (639,910) (374,202)
(Increase) decrease in deferred tax assets ............. 27,876 (16,950)
Increase in interest payable ........................... 36,871 38,545
------------------- -------------------
Total adjustments ..................................... (575,163) (352,607)
------------------- -------------------
Net cash provided by (used in) operating activities ... 26,515 (11,297)
------------------- -------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ..................... 54,630 -
------------------- -------------------
Net cash provided by financing activities ............. 54,630 -
------------------- -------------------
Net increase (decrease) in cash ............................... 81,145 (11,297)
Cash at beginning of year ..................................... 55,294 66,591
------------------- -------------------
Cash at end of year ........................................... $ 136,439 $ 55,294
=================== ===================
</TABLE>
F-32
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,617,359
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,966,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,753,962
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 41,989,950
<ALLOWANCE> 1,274,285
<TOTAL-ASSETS> 59,580,402
<DEPOSITS> 54,300,353
<SHORT-TERM> 65,000
<LIABILITIES-OTHER> 771,509
<LONG-TERM> 500,000
0
0
<COMMON> 411,173
<OTHER-SE> 3,532,367
<TOTAL-LIABILITIES-AND-EQUITY> 59,580,402
<INTEREST-LOAN> 3,614,790
<INTEREST-INVEST> 290,683
<INTEREST-OTHER> 206,364
<INTEREST-TOTAL> 4,111,837
<INTEREST-DEPOSIT> 1,713,903
<INTEREST-EXPENSE> 1,773,261
<INTEREST-INCOME-NET> 2,338,576
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,981,615
<INCOME-PRETAX> 946,289
<INCOME-PRE-EXTRAORDINARY> 601,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601,678
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 5.27
<LOANS-NON> 448,000
<LOANS-PAST> 4,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 452,000
<ALLOWANCE-OPEN> 1,159,173
<CHARGE-OFFS> 135,693
<RECOVERIES> 250,805
<ALLOWANCE-CLOSE> 1,274,285
<ALLOWANCE-DOMESTIC> 1,083,285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 191,000
</TABLE>
