10KSB 1 0001.txt ANNUAL REPORT 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, 2000 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: (229) 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, 2000 were $7,536,863. As of March 1, 2001, registrant had outstanding 414,886 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 PART I. ITEM 1. DESCRIPTION OF BUSINESS The Company FNC Bancorp, Inc. (the "Company") was incorporated as a Georgia business corporation on September 19, 1990, to serve as a bank holding company for First National Bank of Coffee County (the "Bank"). The Bank began operations on September 23, 1991, and is the sole subsidiary of the Company. The Company's offices are located at 420 South Madison Avenue, Douglas, Georgia and its telephone number is (229) 384-1100. The Company maintains its offices at the office of First National Bank of Coffee County at this address. The Company's principal business is the ownership and management of the Bank. The Company was 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 capital to the Bank. For example, we may assist the Bank in maintaining its required capital ratios by borrowing money and contributing the proceeds of that debt to the Bank as primary capital. The Bank General On August 15, 1990, the Organizers of the Company and the Bank filed an application with the Office of the Comptroller of the Currency 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 Bank was authorized to commence its banking business pursuant to the OCC's approval of a national bank charter for the Bank. Operations commenced on September 23, 1991. 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. 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 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. 1 Market Area The Bank's primary service area 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 Coffee County was approximately 29,592 in 1990 and was estimated at 34,958 in 1999, an increase of almost 18% in nine 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. 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 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. 2 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) SunTrust Bank (Atlanta, Georgia), Federal Reserve Bank (Atlanta, Georgia), and Federal Home Loan 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 85% of assets and an investment portfolio equal to approximately 10% of the assets, with the remaining 5% of the Bank's assets consisting of cash, fixed assets and other assets. Deposit accounts, including transaction accounts, time deposits and certificates of deposit, represent the majority of the liabilities of the Bank. The Bank does not seek brokered certificates of deposit or other types of brokered deposits. Efforts are made generally to match maturities and rates of the loan and investment portfolios with those deposits, although exact matching is not possible. Substantially all of the loans with maturities in excess of one year are negotiated on a variable interest rate basis or with a demand repayment provision. By pricing loans on a variable rate structure or by keeping the maturities of the loan and investment portfolios relatively short term, the Bank is able to negotiate loan rates or to reinvest securities proceeds at prevailing market rates, thereby helping maintain a generally consistent spread over the interest rates paid by the Bank on the deposits which are used to fund the loan and investment portfolios. The Bank has established policies and procedures designed to ensure that 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 $1,011,000 (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 $674,000 (10% of the bank's unimpaired capital and surplus), provided such additional loans and extensions of credit are fully secured by readily marketable collateral. 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. 3 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 Coffee County, other than the Bank, there are branches of six regional banks. These include SunTrust Bank, SouthTrust Bank, First Liberty Bank, Citizens Security Bank, Southeastern Bank and Colony Bank Southeast. The Bank encounters competition from most of these financial institutions. In the conduct of certain areas of its banking business, the Bank also competes with credit unions, consumer finance companies, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restrictions imposed upon the Bank. Many of the Bank's competitors have substantially greater resources and lending limits than the Bank has and offer certain services, such as trust services, that the Bank currently does not provide. Moreover, many of these competitors have numerous branch offices and other facilities in the PSA, a competitive advantage that the Bank initially does not have. Nevertheless, in evaluating the competition in the PSA, the management and the Board of Directors believe that there will be sufficient growth in banking activities for all of these institutions, including the Bank, to be successful, based in part on an average annual growth of approximately 5.1% 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, 2000, the Bank employed 36 full-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 Both the Company and the Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us. 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. The Company 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 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 the Bank. The Federal Reserve has established a risk-based and leverage measure of capital adequacy for bank holding companies that is similar to that adopted by the OCC for banks. 4 The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common shareholders' equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock and hybrid capital and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating and implementing the Federal Reserve's risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities. If the capital of a bank holding company falls below minimum required levels, the bank holding company may be denied approval to acquire or establish additional banks or non-bank businesses, as discussed below. Bank holding companies may be compelled by bank regulatory authorities to invest additional capital in the event a subsidiary bank experiences either significant loan losses or rapid growth of loans or deposits. In addition, the company may be required to provide additional capital to any additional banks it acquires as a condition to obtaining the approvals and consents of regulatory authorities in connection with such acquisitions. Bank holding companies are required by the BHCA to obtain approval from the Federal Reserve prior to acquiring, directly or indirectly, ownership or control of more than 5% of the outstanding shares of any class of voting stock of any bank or bank holding company. Bank holding companies and their subsidiaries also are prohibited from acquiring any voting shares of, or interest in, any banks located outside of the state in which the operations of the bank holding company's subsidiaries are located unless the acquisition is authorized specifically by the statutes of the state in which the target is located. Several southeastern states, including Georgia, have enacted reciprocal legislation that authorizes interstate acquisitions of banking organizations by bank holding companies within the southeastern United States, subject to certain conditions and restrictions. As a result of this legislation, the Company may become a candidate for acquisition by, or may itself seek to acquire, banking organizations located in those states that have enacted reciprocal legislation. (See, however, certain restrictions on acquisitions imposed by the GBHCA discussed below). Additionally, under the BHCA, as amended pursuant to FIRREA and as implemented by 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. 5 The Federal Reserve has enforcement powers over bank holding companies and nonbanking subsidiaries to forestall activities that represent unsafe or unsound practices or constitute violations of law. These powers may be exercised through the issuance of cease-and-desist orders or other actions. The Federal Reserve also is empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Certain violations may also result in criminal penalties. The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. The Bank and the Company is "affiliated" within the meaning of the Federal Reserve Act. Certain provisions of the Federal Reserve Act establish standards for the terms of, limit the amount of and establish collateral requirements with respect to any loans or extensions of credit to, and investments in, affiliates by the Bank as well as set arms-length criteria for such transactions and for certain other transactions (including payment by the Bank for services and under any contract) between the Bank and its affiliates. In addition, related provisions of the Federal Reserve Act and the Federal Reserve regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the Company and any subsidiary of the Company, and to related interests of such persons. Under Section 106(b) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C. 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. On November 12, 1999, then-President Clinton signed into law the Gramm-Leach-Bliley Act (the "GLB Act"), which significantly changed the regulatory structure and oversight of the Company and the Bank. The GLB Act revises the Bank Holding Company Act and repeals the affiliation provisions of the Glass-Steagall Act of 1933, permitting a qualifying holding company, called a "financial holding company", to engage in a full range of financial activities, including banking, insurance and securities activities, as well as merchant banking and additional activities that are "financial in nature" or "incidental" to such financial activities. The GLB Act thus provides expanded financial affiliation opportunities for existing bank holding companies by allowing bank holding companies to engage in activities such as securities underwriting and the underwriting and brokering of insurance products. The GLB Act also expands passive investments by financial holding companies in any type of company, financial or nonfinancial, through merchant banking and insurance company investments. In order for a bank holding company to qualify as a financial holding company, its subsidiary depository institutions must be "well-capitalized" and "well-managed" and have at least a "satisfactory" rating under the Community Reinvestment Act. 6 The GLB Act also reforms the regulatory framework of the financial services industry. Under the GLB Act, financial holding companies are subject to primary supervision by the FRB, while current federal and state regulators of financial holding company regulated subsidiaries such as insurers, broker-dealers, investment companies and banks generally retain their jurisdiction and authority. In order to implement its underlying purposes, the GLB Act preempts state laws that restrict the establishment of financial affiliations authorized or permitted under the GLB Act, subject to specified exceptions for state insurance regulators. The GLB Act also removes the current blanket exemption for banks from the broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended, amends the Investment Company Act of 1940, as amended, with respect to bank common trust fund and mutual fund activities, and amends the Investment Advisers Act of 1940, as amended, to require registration of banks that act as investment advisers to mutual funds. The provisions of the GLB Act relating to financial holding companies became effective on March 15, 2000. Financial holding companies have the authority to engage in activities that are "financial in nature" that are not permitted for other bank holding companies. Some of the activities that the G-L-B Act provides are financial in nature are: (a) lending, exchanging, transferring, investing for others or safeguarding money or securities; (b) insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or providing and issuing annuities and acting as principal, agent or broker with respect thereto; (c) providing financial, investment or economic advisory services, including advising an investment company; (d) issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and (e) underwriting, dealing in or making a market in securities. A bank holding company that qualifies as a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature. A bank holding company may qualify to become a financial holding company if: (a) each of its depository institution subsidiaries is "well capitalized"; (b) each of its depository institution subsidiaries is "well managed"; (c) each of its depository institution subsidiaries has at least a "satisfactory" Community Reinvestment Act rating at its most recent examination; and (d) it has filed a certification with the FRB that it elects to become a financial holding company. As of December 31, 2000, FNC has not registered as a financial holding company with the FRB. The Georgia Department has established a minimum level of capital to total assets of 5%, with certain adjustments, on a consolidated basis for bank holding companies. The capital guidelines assume adequate liquidity and a moderate degree of risk in the loan and investment portfolios as well as any off balance sheet activities. In assessing compliance with the guidelines, therefore, the Georgia Department reviews the relationship of on and off balance sheet risks to capital and requires those institutions with high or inordinate levels of risk to adhere to higher capital standards. Bank holding companies whose operations involve, or are exposed to high or inordinate degrees of risk are expected to hold additional capital to compensate for such risks. In addition, bank holding companies engaging in significant nonbanking activities typically require higher capital ratios than do banks alone. The BHCA, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act", 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. 7 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 Bank is subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"), which as of December 31, 2000, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment. On September 30, 1996, then-President Clinton signed the Deposit Insurance Fund Act of 1996 ("DIFA") which was part of the omnibus spending bill enacted by Congress at the end of its 1996 session. DIFA provides that the FDIC may not set semi-annual assessments with respect to the BIF in excess of the amount needed to maintain the 1.25% designated reserve ratio or, if the reserve ratio is less than the designated reserve ratio, to increase the reserve ratio to the designated reserve ratio. In addition, DIFA mandates the merger of BIF and the Savings Association Insurance Fund (the "SAIF"), effective January 1, 1999, only if no insured depository institution is a savings association on that date. The combined deposit insurance fund would be called the "deposit insurance fund" or "DIF". DIFA also imposes assessments against both SAIF and BIF deposits to avoid predicted default on the bonds issued by the Financing Corporation ("FICO") as deposits in savings institutions continue to decline. DIFA amends the Federal Home Loan Bank Act to impose the FICO assessment against both SAIF and BIF deposits beginning after December 31, 1996. The assessment imposed on insured depository institutions with respect to any BIF-assessable deposit will be assessed at a range equal to one-fifth of the rate (approximately 1.3 basis points) of the assessments imposed on insured depository institutions with respect to any SAIF-assessable deposit (approximately 6.7 basis points). The FICO assessment for 1996 was paid entirely by SAIF-insured institutions, but BIF-insured banks will pay the same FICO assessment as SAIF-insured institutions beginning as of the earlier of December 31, 2000, or the date as of which the last savings association ceases to exist. 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 capital requirements applicable to the Company, 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 8%. 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. 8 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, the federal banking regulators have established five capital categories; well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The federal banking regulators have specified by regulation the relevant capital level for each category. Under the prompt corrective action provisions an institution that (i) has a Total Risk-Based Capital Ratio of 10% or greater, a Tier 1 Risk-Based Capital Ratio of 6% or greater, and a Leverage Ratio of 5% or greater and (ii) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the appropriate federal banking regulator is deemed to be well capitalized. An institution with a Total Risk-Based Capital Ratio of 8% or greater, a Tier 1 Risk-Based Capital Ratio of 4% or greater, an a Leverage Ratio of 4% or greater is considered to be adequately capitalized. A depository institution that has a Total Risk-Based Capital Ratio of less than 8%, a Tier 1 Risk-Based Capital Ratio of less than 4%, or a Leverage Ratio of less than 4% is considered to be undercapitalized. A depository institution that has a Total Risk-Based Capital Ratio of less than 6%, a Tier 1 Risk-Based Capital Ratio of less than 3%, or a Leverage Ratio of less than 3%, is considered to be significantly undercapitalized, and an institution that has a tangible equity capital to assets ratio equal to or less than 2% is deemed to be critically undercapitalized. For purposes of the regulation, the term "tangible equity" includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. A depository institution may be deemed to be in a capitalized category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking regulator. Under FDICIA, a bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The obligation of a controlling holding company under FDICIA to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal banking regulator is given authority with respect to any undercapitalized depository institution to take any of the actions it is required to or may take with respect to a significantly undercapitalized institution as described below if it determines "that those actions are necessary to carry out the purpose" of FDICIA. 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, 2000, the Bank had the requisite capital levels to qualify as well capitalized. 9 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 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. Community Reinvestment Act The Community Reinvestment Act requires the appropriate federal regulator, in connection with their examinations of financial institutions within their jurisdiction, to evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Under the Gramm-Leach-Bliley Act, banks with aggregate assets of not more than $250 million are subject to a Community Reinvestment Act examination only once every 60 months if the bank receives an outstanding rating, once every 48 months if it receives a satisfactory rating and as needed if the rating is less than satisfactory. Additionally, under the Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of various Community Reinvestment Act-related agreements. 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. 10 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. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank's loan operations are also subject to federal laws applicable to credit transactions, such as: o The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; o The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; o The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; o The Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; o The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and o The rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. The deposit operations of the Bank are subject to: o The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and o The Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. Taxation General. In general, the Company and the Bank are taxed in the same manner as other corporations under the Internal Revenue Code of 1986, as amended (the "Code"), although the Code contains certain rules which may affect the taxation of banks to a greater degree than other corporations. The general rate structure and certain of these special rules are discussed below. Rates. Corporation income is subject to graduated federal income tax rates, beginning at 15% of the corporation's first $50,000 of taxable income, and increasing to a maximum rate of 34% with respect to taxable income in excess of $75,000. However, taxable income that falls between $100,000 and $335,000 is subject to an additional 5% surcharge, up to a maximum surcharge of $11,750. Bad Debt Reserves. The use of the reserve method of computing the bad debt deduction is no longer available to any bank which, either alone or in combination with all members of its parent-subsidiary controlled group, has an average adjusted basis in its total combined assets of in excess of $500 million. Such a bank must use the specific charge-off method of deducting bad debts. Because the company has assets of less than $500 million, it is eligible to use the reserve method, but is limited to the experience method of calculating additions to its bad debt reserve. The experience method measures the ratio of actual bad debts to total outstanding loans based on a six-year moving average. 11 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 the Company or the Bank may be affected by such statute or regulation. 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. At December 31, 2000, the Company had no binding commitments for capital expenditures. 12 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 2000. 13 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, 2001, there were approximately 360 holders of record of the Common Stock. (c) The Company paid a cash dividend of $.23 on its common stock during the fiscal year ended December 31, 2000. The payment of dividends by national banks is restricted by statute and regulation. See "Item 1. Description of Business - Supervision and Regulation." 14 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Information The Company's 2000 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 results 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. 15 Results of Operations For Years Ended December 31, 2000 and 1999 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 present this income on a taxable-equivalent basis. The Company's net interest margin increased 12 basis points or 2.35% to 5.22% in 2000, as compared to 5.10% in 1999. The yield on average interest-earning assets increased 85 basis points or 9.66% to 9.65% in 2000, as compared to 8.80% in 1999. The interest rate paid on average interest-bearing liabilities increased 60 basis points or 12.58% to 5.37% in 2000, as compared to 4.77% in 1999. Net interest income on a taxable-equivalent basis was $3,672,000 in 2000 as compared to $3,093,000 in 1999, representing an increase of $579,000 or 18.72%. The increase in the yield on interest-earning assets was partially offset by an increase in the rate paid on interest-bearing liabilities. As a result, only $167,000 of the increase in net interest income was attributable to changes in interest rate. Due primarily to a significant increase of $10,665,000 or 21.67% in average loans in 2000 as compared to 1999, $412,000 of the increase in net interest income was attributable to increase in volume. Average interest-earning assets increased $9,734,000 or16.06% to $70,349,000 in 2000 from $60,615,000 in 1999. Average loans increased $10,665,000; average Federal funds sold decreased $2,516,000; and average investments increased $1,585,000. The increase in average interest-earning assets was accompanied by an increase of $9,062,000 or 15.65% in average deposits to $66,951,000 in 2000 from $57,889,000 in 1999. Approximately 16% of the average deposits were noninterest-bearing deposits in 2000 as compared to approximately 20% in 1999. Average total assets increased $11,480,000 or 17.95% to $75,434,000 in 2000 as compared to $63,954,000 in 1999. Loan demand was strong again in 2000 as evidenced by average loan to deposit ratio of 89.44 % in 2000 as compared to 85.02% in 1999. 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. 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 2000 or in 1999. The allowance for loan losses as a percentage of total loans outstanding amounted to 2.18% at December 31, 2000 as compared to 2.63% at December 31, 1999. Management considers the year-end allowances adequate to cover potential losses in the loan portfolio. 16 Following is a comparison of noninterest income for the years ended December 31, 2000 and 1999.
Increase 2000 1999 (Decrease) ---------------- -------------- ---------------- Service charges on deposit accounts ..................... $ 609,000 $ 524,000 $ 85,000 Other commissions and fees .............................. 36,000 37,000 (1,000) Origination fees on mortgage loans ...................... 20,000 34,000 (14,000) Other ................................................... 87,000 75,000 12,000 ---------------- -------------- ---------------- $ 752,000 $ 670,000 $ 82,000 ================ ============== ================
Total noninterest income increased $82,000 or 12.24%, in 2000. However, as a percentage of average assets, noninterest income decreased from 1.05% in 1999 to 1.00% in 2000, a 4.76% decrease. The increase in service charges on deposit accounts of $85,000 or 16.22% is partly attributable to an increase of approximately $1,303,000 or 5.17% in average demand deposits and savings in 2000. Other commissions and fees decreased $1,000 or 2.70%. Origination fees on mortgage loans decreased $14,000 or 41.18% in 2000 as compared to a decrease of $12,000 or 26.09% in 1999 from 1998. The Bank continues to fund and retain more new mortgage loans as opposed to originating such loans for other financial institutions. Other income increased $12,000 in 2000 due primarily to an increase of $15,000 in ATM fees. Following is an analysis of noninterest expense for the years ended December 31, 2000 and 1999.
Increase 2000 1999 (Decrease) ----------------- ---------------- ------------------ Salaries and employee benefits ....................... $ 1,457,000 $ 1,251,000 $ 206,000 Equipment and occupancy .............................. 343,000 279,000 64,000 Data processing ...................................... 113,000 89,000 24,000 Printing and office supplies ......................... 71,000 72,000 (1,000) Legal and professional ............................... 98,000 80,000 18,000 Advertising and business development ................. 56,000 68,000 (12,000) Training and travel .................................. 132,000 148,000 (16,000) Other ................................................ 393,000 334,000 59,000 ----------------- ---------------- ------------------ $ 2,663,000 $ 2,321,000 $ 342,000 ================= ================ ==================
Total noninterest expense increased $342,000 or 14.74% in 2000. However, as a percentage of average assets, noninterest expense decreased .10% from 3.63% in 1999 to 3.53% in 2000. Salaries and employee benefits increased $206,000 or 16.47%. Salaries, including bonuses increased $175,000 or 16.97% to $1,211,000 in 2000 from $1,036,000 in 1999 due to an increase in the number of bank officers in 2000 and an overall increase in salaries for non-officer employees. Equipment and occupancy increased $64,000 or 22.94% in 2000, of which $37,000 was attributable to additional depreciation in 2000 and $21,000 represented an increase in repairs and maintenance expense. The increase of $24,000 in data processing expense is attributable to the increase in the size of the Bank and in the volume of transactions handled. The increase of $18,000 in legal and professional is attributable to additional fees incurred in transactions related to other real estate acquired and disposed of during 2000. The net increase in all other noninterest expense amounted to $31,000 or 5.64% over the comparable expenses in 1999. 17 Liquidity and Capital Resources Liquidity management involves the matching of the cash flow requirements of customers who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and the ability of the Company and the Bank to meet those needs. The Company and the Bank seek to meet liquidity requirements primarily through management of short-term investments (principally federal funds sold) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. The Bank is a member of the Federal Home Loan Bank of Atlanta and as such has the ability to obtain advances therefrom, although the cost of such advances exceed lower cost alternatives such as deposits from the local community. The Bank had outstanding advances from the Federal Home Loan Bank of Atlanta of $1,045,000 at December 31, 2000 at an average rate of 7.27%. The Bank also has the ability to borrow and purchase federal funds from other financial institutions on a short-term basis, if needed. 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, 2000 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 2000, the Company increased its capital by retaining earnings of $1,064,000. The Company also reduced capital by purchasing 1,250 shares of common stock at a cost of $23,000 for the treasury. After recording an increase in capital of $34,000 for unrealized losses on securities, net of taxes, total capital increased $1,075,000 to $5,927,000 from $4,852,000 at December 31, 1999. At December 31, 2000, there were no outstanding commitments for any major capital expenditures in the year 2001. In accordance with risk capital guidelines issued by the Federal Reserve Board, the Company 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 Company at December 31, 2000.
Actual Required Excess -------------------------- -------------------------- -------------------------- Amount Percent Amount Percent Amount Percent ------------ ------------- ------------ ------------ -------------------------- (Dollars in Thousands) ----------------------------------------------------------------------------------- Leverage capital ........... $ 5,942 7.88 % $ 3,017 4.00 % $ 2,925 3.88 % Risk-based capital: Core capital .............. 5,942 9.55 2,490 4.00 3,452 5.55 Total capital ............. 6,729 10.81 4,980 8.00 1,749 2.81
The Bank also met its individual regulatory capital requirements at December 31, 2000. 18 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.
Year Ended December 31, ---------------------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------------- -------------------------------- ------------------------------- (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 ----------- ---------- --------- ---------- ---------- --------- --------- --------- --------- ASSETS Interest-earning assets: Loans, net of unearned interest .......... $ 59,881 $ 6,155 10.28 % $ 49,216 $ 4,709 9.57 % $ 35,670 $ 3,615 10.13 % Investment securities: Taxable ........... 8,057 483 5.99 6,682 389 5.82 4,806 291 6.05 Nontaxable ........ 295 20 6.78 85 5 5.88 - - - Federal funds sold ... 2,116 134 6.33 4,632 231 4.99 3,942 206 5.23 ----------- ---------- ---------- ---------- --------- --------- Total interest- earning assets 70,349 6,792 9.65 60,615 5,334 8.80 44,418 4,112 9.26 ----------- ---------- ---------- ---------- --------- --------- Noninterest-earning assets Cash .............. 3,280 3,485 3,009 Allowance for loan losses ............ (1,509) (1,377) (1,244) Unrealized gain (loss) on available for sale securities ...... (82) (32) 19 Other assets ......... 3,396 1,263 2,525 ----------- ---------- --------- Total noninterest- earning assets 5,085 3,339 4,309 ----------- ---------- --------- Total assets $ 75,434 $ 63,954 $ 48,727 =========== ========== =========
19
Year Ended December 31, --------------------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------------- -------------------------------- -------------------------------- (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 ----------- ---------- ---------- ---------- --------- ----------- ---------- ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and interest-bearing demand deposits .... $ 15,962 $ 498 3.12% $ 13,736 $ 369 2.69% $ 9,732 $ 236 2.42% Time deposits ......... 40,445 2,497 6.17 32,686 1,831 5.6 24,948 1,478 5.92 Other borrowings ...... 1,680 125 7.44 569 41 7.21 881 59 6.70 ----------- ---------- ---------- --------- ---------- ----------- Total interest-bearing liabilities ...... 58,087 3,120 5.37 46,991 2,241 4.77 35,561 1,773 4.99 ----------- ---------- -------------------- ---------- ----------- Noninterest-bearing liabilities and stockholders' equity: Demand deposits .... 10,544 11,467 8,898 Other liabilities .. 1,405 1,122 615 Stockholders' equity 5,398 4,374 3,653 ----------- ----------- ---------- Total noninterest-bearing liabilities and stockholders'equity 17,347 16,963 13,166 ----------- ----------- ---------- Total liabilities and stockholders' equity ............... $ 75,434 $ 63,954 $ 48,727 =========== =========== ========== Interest rate spread 4.28% 4.03% 4.27% ========== =========== ========= Net interest income $ 3,672 $ 3,093 $ 2,339 ========== ========= =========== Net interest margin 5.22% 5.10% 5.27% ========== =========== =========
20 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.
Year Ended December 31, ---------------------------------------------------------------------------------- 2000 vs. 1999 1999 vs. 1998 ---------------------------------------- ---------------------------------------- (Dollars in Thousands) ---------------------------------------------------------------------------------- Increase Changes Due To Increase Changes Due To -------------------------- -------------------------- (Decrease) Rate Volume (Decrease) Rate Volume ------------- ------------- ------------ ------------ ------------ ------------ Increase (decrease) in: Income from earning assets: Interest and fees on loans .......... $ 1,446 $ 426 $ 1,020 $ 1,094 $ (279) $ 1,373 Interest on securities: ................ 94 14 80 Taxable ............................. 98 (16) 114 Nontaxable .......................... 15 3 12 5 - 5 Interest on Federal funds .............. (97) 28 (125) 25 (11) 36 ------------- ------------- ------------ ------------ ------------ ------------- Total interest income ............. 1,458 471 987 1,222 (306) 1,528 ------------- ------------- ------------ ------------ ------------ ------------- Expense from interest-bearing liabilities: Interest on savings and interest- bearing demand deposits ............. 129 69 60 133 36 97 Interest on time deposits .............. 666 231 435 353 (105) 458 Interest on other borrowings ........... 84 4 80 (18) 3 (21) ------------- ------------- ------------ ------------ ------------ ------------- Total interest expense ............ 879 304 575 468 (66) 534 ------------- ------------- ------------ ------------ ------------ ------------- Net interest income .......... $ 579 $ 167 $ 412 $ 754 $ (240) $ 994 ============= ============= ============ ============ ============ =============
21 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, 2000, the Company's cumulative one-year interest rate sensitivity gap ratio was 0.79%. 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. 22 The following table sets forth the distribution of the repricing of the Company's earning assets and interest-bearing liabilities as of December 31, 2000, 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.
At December 31, 2000 --------------------------------------------------------------------- Maturing or Repricing Within --------------------------------------------------------------------- Zero to Three One to Over Three Months to Three Three Months One Year Years Years Total ------------- ------------- ------------- ------------- ------------- (Dollars in Thousands) --------------------------------------------------------------------- Earning assets: Interest-bearing deposits in banks ........... $ 22 $ - $ - $ - $ 22 Federal funds sold ........................... - - - - - Investment securities ........................ 314 1,499 5,954 550 8,317 Loans ........................................ 27,680 6,809 14,813 18,330 67,632 ------------- ------------- ------------- ------------- ------------- 28,016 8,308 20,767 18,880 75,971 ------------- ------------- ------------- ------------- ------------- Interest-bearing liabilities: Interest-bearing demand deposits (1) ......... - 6,546 9,038 - 15,584 Savings (1) .................................. - - 1,752 - 1,752 Certificates less than $100,000 .............. 9,119 15,318 4,482 141 29,060 Certificates, $100,000 and over .............. 4,608 7,948 2,929 200 15,685 Federal funds purchased ...................... 940 - - - 940 Notes payable ................................ 500 - - - 500 FHLB borrowings .............................. - 1,010 35 - 1,045 ------------- ------------- ------------- ------------- ------------- 15,167 30,822 18,236 341 64,566 ------------- ------------- ------------- ------------- ------------- Interest rate sensitivity gap ................... $ 12,849 $ (22,514) $ 2,531 $ 18,539 $ 11,405 ============= ============= ============= ============= ============= Cumulative interest rate sensitivity gap ........ $ 12,849 $ (9,665) $ (7,134) $ 11,405 ============= ============= ============= ============= Interest rate sensitivity gap ratio ............. 1.85 0.27 1.14 55.37 ============= ============= ============= ============= Cumulative interest rate sensitivity gap ratio .. 1.85 0.79 0.89 1.18 ============= ============= ============= =============
(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 Five Years" category. It has also found that the money-market checking deposits reprice between three months to one year, on the average. 23 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 51% 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. In contrast, 78% of the investment portfolio matures or reprices after one year. Types of Investments The amortized cost and fair value of securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- -------------- -------------- --------------- (Dollars in Thousands) ------------------------------------------------------------------- Securities Available for Sale December 31, 2000: U. S. Treasury and government agencies ........................... $ 3,243 $ - $ (23) $ 3,220 Restricted equity securities .......... 314 - - 314 --------------- -------------- -------------- --------------- $ 3,557 $ - $ (23) $ 3,534 =============== ============== ============== =============== December 31, 1999: U. S. Treasury and government agencies ........................... $ 3,239 $ - $ (74) $ 3,165 Restricted equity securities .......... 314 - - 314 --------------- -------------- -------------- --------------- $ 3,553 $ - $ (74) $ 3,479 =============== ============== ============== =============== Securities Held to Maturity December 31, 2000: U. S. Treasury and government agencies ........................... $ 4,488 $ 2 $ (9) $ 4,481 State, county and municipal securities ......................... 295 - (1) 294 --------------- -------------- -------------- --------------- $ 4,783 $ 2 $ (10) $ 4,775 =============== ============== ============== =============== December 31, 1999: U. S. Treasury and government agencies ........................... $ 4,483 $ - $ (46) $ 4,437 State, county and municipal securities ......................... 295 - (3) 292 --------------- -------------- -------------- --------------- $ 4,778 $ - $ (49) $ 4,729 =============== ============== ============== ===============
24 Maturities The amounts of investment securities in each category as of December 31, 2000 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.
U.S. Treasury and State, County and Government Agencies Municipal Securities Yield Yield Amount (1) Amount (1) (2) ------------ ------------ ------------ ------------ (Dollars in Thousands) ------------------------------------------------------------- Maturity: One year or less .......................................... $ 1,813 6.32 % $ - - % After one year through five years ......................... 6,209 5.90 245 6.68 After five years through ten years ........................ - - 50 6.14 After ten years ........................................... - - - - ------------ ------------ ------------ ------------ $ 8,022 6.00 % $ 295 6.59 % ============ ============ ============ ============
(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 state, county and municipal securities are stated on a taxable equivalent basis using a tax rate of 34%. 25 Loan Portfolio The amount of loans outstanding at the indicated dates is shown in the following table according to type of loans.
December 31, ---------------------------------- 2000 1999 --------------- --------------- (Dollars in Thousands) ---------------------------------- Commercial and financial ........................................................ $ 10,754 $ 8,015 Agricultural .................................................................... 1,579 1,431 Real estate - construction ...................................................... 3,552 2,545 Real estate - mortgage, farmland ................................................ 9,498 8,419 Real estate - mortgage, other ................................................... 36,970 27,848 Consumer installment ............................................................ 5,279 5,911 --------------- --------------- 67,632 54,169 Allowance for loan losses ....................................................... (1,476) (1,423) --------------- --------------- Loans, net ...................................................................... $ 66,156 $ 52,746 =============== ===============
Maturities and Sensitivity of Loans to Changes in Interest Rates The Company's loan portfolio, as of December 31, 2000 was made up primarily of short-term fixed rate loans or variable rate loans. The average contractual life on installment loans is approximately three years, while mortgages are generally variable over one-to five-year periods. Following is a summary of loans which presents separately the amount of loans outstanding as of December 31, 2000 in each category according to contractual maturity classifications: (i) one year or less, (ii) after one year through five years, and (iii) after five years.
Due in After One After One Through Five Year Five Years Years Total ------------- -------------- ------------- ------------ (Dollars in Thousands) ------------------------------------------------------- Commercial and financial ............................... $ 4,886 $ 4,596 $ 1,272 $ 10,754 Agricultural ........................................... 530 923 126 1,579 Real estate - construction ............................. 2,481 1,071 - 3,552 Real estate - mortgage, farmland ....................... 2,454 3,661 3,384 9,499 Real estate - mortgage, other .......................... 10,592 21,126 5,252 36,970 Consumer installment ................................... 1,432 2,852 994 5,278 ------------- -------------- ------------- ------------ Total .......................................... $ 22,375 $ 34,229 $ 11,028 $ 67,632 ============= ============== ============= ============
26 The following table summarizes loans at December 31, 2000 with the due dates after one year which (i) have predetermined interest rates and (ii) have floating or adjustable interest rates. December 31, 2000 (Dollars in Thousands) ---------------- Predetermined interest rates ............................ $ 30,303 Floating or adjustable interest rates ................... 14,954 ---------------- $ 45,257 ================ Nonperforming Loans The following table presents, at the dates indicated, the aggregate of nonperforming loans for the categories indicated.
December 31, ---------------------------------- 2000 1999 --------------- ---------------- (Dollars in Thousands) ---------------------------------- Loans accounted for on a nonaccrual basis ......................................... $ 716 $ 380 Instalment loans and term loans contractually past due ninety days or more as to interest or principal payments and still accruing ........... - 3 Loans, the term of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower ........................ - - Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms ................................................................ - -
In the opinion of management, any loans classified by regulatory authorities as substandard or special mention that have not been disclosed above do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, nor (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Any loans classified by regulatory authorities as loss have been charged off. 27 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 $1,476,000 at December 31, 2000, representing 2.18% of year-end total loans outstanding compared with approximately $1,423,000 at December 31, 1999, which represented 2.63% 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.
At December 31, --------------------------------------------------------------- 2000 1999 ------------------------------- ------------------------------- Percent of Percent of Loans in Loans in Category to Category to Amount Total Loans Amount Total Loans --------------- -------------- ---------------- ------------- (Dollars in Thousands) --------------------------------------------------------------- Commercial, financial, industrial and agricultural ....... $ 441 18 % $ 375 17 % Real estate .............................................. 418 74 333 72 Consumer ................................................. 396 8 503 11 Unallocated .............................................. 221 - 212 - --------------- -------------- ---------------- ------------- $ 1,476 100 % $ 1,423 100 % =============== ============== ================ =============
28 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:
Year Ended December 31, --------------------------------- 2000 1999 --------------- --------------- (Dollars in Thousands) --------------------------------- Average amount of loans outstanding ............................................... $ 59,881 $ 49,216 =============== =============== Balance of reserve for possible loan losses at beginning of period ................ 1,423 1,274 --------------- --------------- Charge-offs: Commercial, financial and agricultural ......................................... (16) (2) Real estate .................................................................... (81) - Consumer ....................................................................... (107) (61) Recoveries: Commercial, financial and agricultural ......................................... 55 25 Real estate .................................................................... 113 53 Consumer ....................................................................... 89 134 --------------- --------------- Net (charge-offs) recoveries .............................................. 53 149 --------------- --------------- Additions to reserve charged to operating expenses ................................ - - --------------- --------------- Balance of reserve for possible loan losses ....................................... $ 1,476 $ 1,423 =============== =============== Ratio of net loan (charge-offs) recoveries to average loans ....................... 0.09% .30% =============== ===============
29 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.
Year Ended December 31, ------------------------------------------------------------ 2000 1999 ----------------------------- ----------------------------- Amount Rate Amount Rate --------------- ------------ --------------- ------------ (Dollars in Thousands) ------------------------------------------------------------ Noninterest-bearing demand deposits .......................... $ 10,544 - % $ 11,467 - % Interest-bearing demand and savings deposits ................. 15,962 3.12 13,736 2.69 Time deposits ................................................ 40,445 6.17 32,686 5.60 --------------- --------------- Total deposits .................................... $ 66,951 $ 57,889 =============== ===============
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, 2000, are shown below by category, which is based on time remaining until maturity of (i) three months or less, (ii) over three through twelve months and (iii) over twelve months. December 31, 2000 ---------------- (Dollars in Thousands) ---------------- Three months or less $ 4,608 Over three through twelve months 7,948 Over twelve months 3,129 ----------------- Total $ 15,685 ================= 30 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.
Year Ended December 31, ------------------------------------ 2000 1999 ---------------- ---------------- Return on assets ......................................................................... 1.54 % 1.45 % Return on equity ......................................................................... 21.49 21.16 Dividends payout ......................................................................... 8.25 - Equity to assets ratio ................................................................... 7.16 6.84
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, 2000 and 1999.
December 31, ---------------------------------- 2000 1999 --------------- --------------- (Dollars in Thousands) ---------------------------------- Commitments to extend credit .................................................. $ 9,217 $ 7,164 Standby letters of credit ..................................................... 3,467 102 --------------- --------------- $ 12,684 $ 7,266 =============== ===============
31 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-25 of this Annual Report on Form 10-KSB: Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income - Years Ended December 31, 2000 and 1999 Consolidated Statements of Comprehensive Income - Years Ended December 31, 2000 and 1999 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2000 and 1999 Consolidated Statements of Cash Flows - Years Ended December 31, 2000 and 1999 Notes to Consolidated Financial Statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During 2000, 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. 32 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, 2000.
Director's Director Term Name Age Position Since Expires ----------------------------------- ---------- ------------------------------------------ -------------- -------------- Board Nominees: William C. Ellis, Jr. 56 Director 1990 2001 Ralph G. Evans 44 Director 1990 2001 Directors Continuing in Office: Robert L. Cation 56 Chairman of the Board of Director 1990 2003 Milton G. Clements 52 Director 1990 2003 Jeffrey W. Johnson 51 Director 1997 2003 Norman E. Fletcher 63 Director 1990 2002 A. Curtis Farrar, Jr. 56 Director 1990 2002
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.
Name Age Position with the Company and the Bank --------------------------- --------- ------------------------------------------------------------------------------------ Robert L. Cation 56 Chairman of the Board of FNC Bancorp, Inc. Chairman of the Board of First National Bank of Coffee County Jeffery W. Johnson 51 President and CEO of FNC Bancorp, Inc. President and CEO of First National Bank of Coffee County Leonard W. Thomas 40 Senior Vice President and CFO of First National Bank of Coffee County Assistant Secretary of FNC Bancorp, Inc. Ralph G. Evans 44 Secretary of FNC Bancorp, Inc.
33 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 15 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. 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. 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. 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. 34 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. There were no other executive officers of the Company and the Bank whose cash compensation exceeded $100,000 during 2000.
Long-Term Compensation ---------------------------------------------------- Annual Compensation Awards Payouts ------------------------------------------------- -------------------------- --------- Other Restricted Securities Name Annual Stock Underlying LTP All Other Principal Salary Bonus Compensation Award(S) Options Payouts Compensation Position Year ($) ($) ($) (1) ($) SARS (#) ($) ($) ------------------------ ------- ---------------------------------------- ------------ ------------- --------- -------------- Jeffery W. Johnson (2) 2000 $ 120,000 $ 64,500 $ - $ - - $ - $ - President and CEO 1999 $ 120,000 $ 49,250 $ - $ - 101 $ - $ - of FNC Bancorp, Inc. 1998 $ 96,000 $ 24,000 $ - $ - 10,259 $ - $ - and First National Bank of Coffee County
(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. 35 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 $90,000 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 was 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 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 to ten years after the date of issuance or vesting, as applicable. 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 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. 36 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. 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. In addition, the Board has awarded stock options to certain executive officers as an incentive to job performance. Director Compensation Currently, directors are reimbursed for expenses in connection with the performance of their duties but receive no directors' fees. However, for the year ending December 31, 2001, the Company has budgeted to pay the directors $36,000 in directors' fees for participation in Board meetings and various sub-committees of the Bank and Company. There were no grants of options to purchase the Company's common stock made during the 2000 fiscal year to the person named in the Summary Compensation Table. There were no exercise of stock options in the 2000 fiscal year by the person named in the Summary Compensation Table. 37 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Shareholders The following table presents as of December 31, 2000, 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.
Amount and Nature of Name and Address of Beneficial Percent of Title of Class Beneficial Owner Ownership Class -------------------- ---------------------------------- ------------------- ----------------- Common Carl C. Atkinson 25,000 1 6.03% Rt. 2, Box 777 Broxton, Georgia 31519 Common Robert L. Cation 26,917 6.49 1008 Golf Club Road Douglas, Georgia 31533 Common William C. Ellis, Jr. 27,167 6.55 Post Office Box 270 Douglas, Georgia 31534 Common Ralph G. Evans 31,717 2 7.64 Post Office Box 1264 Douglas, Georgia 31534 Common A. Curtis Farrar, Jr. 26,917 6.49 Post Office Box 770 Douglas, Georgia 31534 Common Norman E. Fletcher 26,566 3 6.40 401 Shirley Avenue Douglas, Georgia 31533
1 Includes 12,500 shares held in the name of Malklean B. Atkinson, wife of Carl C. Atkinson. 2 Includes 600 shares held in the name of Cady Suzanne Evans, daughter of Ralph G. Evans, 600 shares held in the name of Christy Elizabeth Evans, daughter of Ralph G. Evans and 600 shares held in the name of Ralph G. Evans, Jr., son of Ralph G. Evans. 3 Includes 200 shares held in the name of Marvelyne G. Fletcher (wife of Normal E. Fletcher). 38 Stock Ownership by Management The following table presents as of December 31, 2000, 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.
Amount and Nature of Name and Address of Beneficial Percent of Title of Class Beneficial Owner Ownership Class -------------------- ------------------------------------------ -------------------- ----------------- Common Robert L. Cation 26,917 6.49% 1008 Golf Club Road Douglas, Georgia 31533 Common Milton G. Clements 13,600 4 3.28 1512 Golf Club Ext. Douglas, Georgia 31533 Common William C. Ellis, Jr. 27,167 6.55 Post Office Box 270 Douglas, Georgia 31534 Common Ralph G. Evans 31,717 5 7.64 Post Office Box 1264 Douglas, Georgia 31534 Common A. Curtis Farrar, Jr. 26,917 6.49 Post Office Box 770 Douglas, Georgia 31534 Common Norman E. Fletcher 26,566 6 6.40 401 Shirley Avenue Douglas, Georgia 31533 Common Jeffery W. Johnson 16,925 4.08 Common Leonard W. Thomas 467 0.11 ---------------- ----------------- All directors and executive officers as a group (8 persons) 170,276 41.04% ================ =================
4 Includes 1,000 shares held in the name of Laura B. Clements, wife of Milton G. Clements and 2,000 shares held in the name of Steven Griffin Clements, son of Milton G. Clements. 5 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. 6 Includes 200 shares held in the name of Marvalyne G. Fletcher (wife of Norman E. Fletcher) IRA. 39 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.
Number of % Owned Number of Shares and (Including Name of Shares Number of Number of Options/ Options/ Beneficial Owner Issued 7 Warrants 8 Options Warrants 9 Warrants) 10 ----------------------------------------- -------------- -------------- --------------- ----------------- -------------- Robert L. Cation 26,917 25,000 - 51,917 11.80% Milton G. Clements 13,600 12,500 - 26,100 6.11 William C. Ellis, Jr. 27,167 25,000 - 52,167 11.86 Ralph G. Evans 31,717 25,000 - 56,717 12.89 A. Curtis Farrar, Jr. 26,917 25,000 - 51,917 11.80 Norman E. Fletcher 26,566 25,000 - 51,566 11.72 Jeffery W. Johnson 16,925 - 50,000 66,925 14.40 Leonard W. Thomas 467 - 2,047 2,514 0.60 -------------- -------------- --------------- ----------------- -------------- All directors and executive officers as a group (8 persons) 170,276 137,500 52,047 359,823 60.01% ============== ============== =============== ================= ==============
Under Mr. Jeffery W. Johnson's 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 66,925 shares of the Company's stock which would represent 14.36% 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. 7 Taken from the previous table except as noted. 8 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. 9 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. 10 Based upon 416,136 shares outstanding as of the record date and as adjusted for warrants or stock options exercisable within sixty (60) days of the record date. 40 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. 41 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-B.
Exhibit No. Description 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.) 10.31997 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
(b) The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this Report. 42 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 29, 2001 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 29, 2001 /s/ Jeffrey W. Johnson ------------------------- -------------------------------------- Jeffery W. Johnson, President Chief Executive Officer and Director Date: March 29, 2001 /s/ Robert L. Cation ------------------------- -------------------------------------- Robert L. Cation, Director Date: March 29, 2001 /s/ Milton G. Clements ------------------------- -------------------------------------- Milton G. Clements, Director Date: March 29, 2001 /s/ William C. Ellis, Jr. ------------------------- -------------------------------------- William C. Ellis, Jr., Director Date: March 29, 2001 /s/ Ralph G. Evans ------------------------- -------------------------------------- Ralph G. Evans, Director Date: March 29, 2001 /s/ A. Curtis Farrar, Jr. ------------------------- -------------------------------------- A. Curtis Farrar, Jr., Director Date: March 29, 2001 /s/ Norman E. Fletcher ------------------------- -------------------------------------- Norman E. Fletcher, Director 43 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-B.
Exhibit No. Description 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.) 10.31997 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
(b) The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this Report. 44 FNC BANCCORP, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Consolidated financial statements: Independent Auditor's Report .......................................................... F-2 Consolidated Balance Sheets - December 31, 2000 and 1999 ........................ F-3 Consolidated Statements of Income - Years ended December 31, 2000 and 1999 ........... F-4 Consolidated Statements of Comprehensive Income - Years ended December 31, 2000 and 1999 ........................................................................ F-5 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000 and 1999 ........................................................................ F-6 Consolidated Statements of Cash Flows - Years ended December 31, 2000 and 1999 ................................................................................. F-7 Notes to Consolidated Financial Statements ............................................ F-9
All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. F- 1 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, 2000 and 1999 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, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. Albany, Georgia January 11, 2001 /s/ MAULDIN & JENKINS, LLC F- 2 FNC BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
Assets 2000 1999 ------ ----------------- ----------------- Cash and due from banks .......................................................... $ 4,516,549 $ 3,394,212 Federal funds sold ............................................................... - 1,528,000 Securities available for sale, at fair value ..................................... 3,533,481 3,479,190 Securities held to maturity, at cost (fair value $4,775,877 and $4,728,603) ...................................... 4,783,313 4,777,413 Loans ............................................................................ 67,632,127 54,168,453 Less allowance for loan losses ................................................... 1,475,525 1,422,689 ----------------- ------------------ Loans, net ............................................................. 66,156,602 52,745,764 ----------------- ------------------ Premises and equipment, net ...................................................... 2,141,221 1,849,122 Other assets ..................................................................... 1,358,004 1,079,603 ----------------- ------------------ $ 82,489,170 $ 68,853,304 ================= ================== Liabilities and Stockholders' Equity Deposits Noninterest-bearing .......................................................... $ 10,466,444 $ 11,090,409 Interest-bearing ............................................................. 62,081,297 49,784,012 ----------------- ------------------ Total deposits ..................................................... 72,547,741 60,874,421 Federal funds purchased ...................................................... 940,000 1,250,000 Notes payable, directors ..................................................... 500,000 500,000 Federal Home Loan Bank borrowings ............................................ 1,045,000 55,000 Other liabilities ............................................................ 1,529,005 1,322,291 ----------------- ------------------ Total liabilities ...................................................... 76,561,746 64,001,712 ----------------- ------------------ 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 416,636 shares ........................................ 416,636 416,636 Additional paid-in capital ................................................... 3,708,875 3,708,875 Retained earnings ............................................................ 1,848,413 784,081 Accumulated other comprehensive loss ......................................... (15,000) (49,000) Treasury stock ............................................................... (31,500) (9,000) ----------------- ------------------ 5,927,424 4,851,592 ----------------- ------------------ $ 82,489,170 $ 68,853,304 ================= ==================
See Notes to Consolidated Financial Statements. F- 3 FNC BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ---------------- ---------------- Interest income Interest and fees on loans ........................................................ $ 6,155,275 $ 4,708,709 Interest and dividends on taxable securities ...................................... 483,203 389,393 Interest on nontaxable securities ................................................. 12,773 3,586 Interest on federal funds sold .................................................... 133,994 230,641 ---------------- ---------------- 6,785,245 5,332,329 ---------------- ---------------- Interest expense Interest on deposits .............................................................. 2,995,425 2,200,033 Interest on other borrowings ...................................................... 124,883 40,984 ---------------- ---------------- 3,120,308 2,241,017 ---------------- ---------------- Net interest income ......................................................... 3,664,937 3,091,312 Provision for loan losses ............................................................. - - ---------------- ---------------- Net interest income after provision for loan losses ......................... 3,664,937 3,091,312 ---------------- ---------------- Other income Service charges on deposit accounts ............................................... 609,393 524,040 Other commissions and fees ........................................................ 35,645 36,507 Origination fees on mortgage loans ................................................ 19,544 34,308 Other ............................................................................. 87,036 75,364 ---------------- ---------------- 751,618 670,219 ---------------- ---------------- Other expenses Salaries and employee benefits .................................................... 1,456,698 1,250,855 Equipment and occupancy ........................................................... 342,815 279,188 Data processing ................................................................... 112,818 89,226 Printing and office supplies ...................................................... 71,297 71,512 Legal and professional ............................................................ 98,343 80,454 Advertising and business development .............................................. 55,676 67,501 Training and travel ............................................................... 131,508 148,226 Other operating expenses .......................................................... 392,869 334,177 ---------------- ---------------- 2,662,024 2,321,139 ---------------- ---------------- Income before income taxes .................................................. 1,754,531 1,440,392 Income tax expense .................................................................... 594,488 514,970 ---------------- ---------------- Net income .................................................................. $ 1,160,043 $ 925,422 ================ ================ Basic earnings per common share ....................................................... $ 2.79 $ 2.23 ================ ================ Diluted earnings per common share ..................................................... $ 2.41 $ 2.07 ================ ================
See Notes to Consolidated Financial Statements. F- 4 FNC BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ---------------- --------------- Net income ............................................................................ $ 1,160,043 $ 925,422 Other comprehensive income (loss): Net unrealized holding gains (losses) arising during period, net of tax (benefit) of $17,000 and ($32,000) ......................... 34,000 (63,000) ---------------- -------------- Comprehensive income .................................................................. $ 1,194,043 $ 862,422 ================ ==============
See Notes to Consolidated Financial Statements. F- 5 FNC BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated Common Stock Additional Retained Other Treasury Stock Total --------------------- Paid-in Earnings Comprehensive ------------------ Stockholders' Shares Par Value Capital (Deficit) Income(Loss) Shares Par Value Equity ------- ----------- ---------- ----------- ------------ ------- --------- ---------- Balance, December 31, 1998 ......... 411,173 $ 411,173 $3,659,708 $ (141,341) $ 14,000 - $ - $3,943,540 Exercise of options by officer . 5,463 5,463 49,167 - - - - 54,630 Net income ..................... - - - 925,422 - - - 925,422 Purchase of treasury stock ..... - - - - - 500 (9,000) (9,000) Other comprehensive loss ....... - - - - (63,000) - - (63,000) ------- ----------- ---------- ---------- ------------- ------- --------- ---------- Balance, December 31, 1999 ......... 416,636 416,636 3,708,875 784,081 (49,000) 500 (9,000) 4,851,592 Net income ..................... - - - 1,160,043 - - - 1,160,043 Dividends declared, $.23 per share ......................... - - - (95,711) - - - (95,711) Purchase of treasury stock ..... - - - - - 1,250 (22,500) (22,500) Other comprehensive income ..... - - - - 34,000 - - 34,000 ------- ----------- ---------- ---------- ------------- ------- --------- ---------- Balance, December 31, 2000 ......... 416,636 $ 416,636 $3,708,875 $1,848,413 $ (15,000) 1,750 $ (31,500) $5,927,424 ======= =========== ========== ========== ============= ======= ========= ==========
See Notes to Consolidated Financial Statements. F- 6 FNC BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 -------------------- -------------------- OPERATING ACTIVITIES Net income ............................................................... $ 1,160,043 $ 925,422 -------------------- -------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ......................................................... 178,347 141,167 Net accretion of securities .......................................... (9,191) - Provision for deferred income taxes .................................. (15,188) 10,691 Loss on disposal of property and equipment ........................... 1,524 14,790 Increase in interest receivable ...................................... (212,130) (150,434) Increase in interest payable ......................................... 352,015 149,382 Increase (decrease) in taxes payable ................................. (304,856) 315,629 Other prepaids, deferrals and accruals, net .......................... 91,472 92,302 -------------------- -------------------- Total adjustments .............................................. 81,993 573,527 -------------------- -------------------- Net cash provided by operating activities ...................... 1,242,036 1,498,949 -------------------- -------------------- INVESTING ACTIVITIES Decrease in federal funds sold ........................................... 1,528,000 4,438,000 Purchases of securities available for sale ............................... - (2,979,928) Proceeds from sales of securities available for sale ..................... - 1,000,000 Proceeds from maturities of securities available for sale ................ - 3,000,000 Purchases of securities held to maturity ................................. - (4,777,413) Proceeds from redemption of Federal Home Loan Bank stock ......................................... - 159,700 Increase in loans, net ................................................... (13,410,838) (12,030,099) Purchase of premises and equipment ....................................... (471,970) (392,054) -------------------- -------------------- Net cash used in investing activities .......................... (12,354,808) (11,581,794) -------------------- -------------------- FINANCING ACTIVITIES Increase in deposits ..................................................... 11,673,320 6,574,068 Increase (decrease) in federal funds purchased ........................... (310,000) 1,250,000 Proceeds from Federal Home Loan Bank borrowings .......................... 2,000,000 - Repayments of Federal Home Loan Bank borrowings .......................... (1,010,000) (10,000) Proceeds from issuance of common stock ................................... - 54,630 Dividends paid ........................................................... (95,711) - Purchase of treasury stock ............................................... (22,500) (9,000) -------------------- -------------------- Net cash provided by financing activities ...................... 12,235,109 7,859,698 -------------------- -------------------- Net increase (decrease) in cash and due from banks ........................... 1,122,337 (2,223,147) Cash and due from banks at beginning of year ................................. 3,394,212 5,617,359 -------------------- -------------------- Cash and due from banks at end of year ....................................... $ 4,516,549 $ 3,394,212 ==================== ====================
F- 7 FNC BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 -------------------- -------------------- SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest ............................................................. $ 2,768,293 $ 2,091,635 Income taxes ......................................................... $ 914,532 $ 188,650 See Notes to Consolidated Financial Statements.
F- 8 FNC BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business FNC Bancorp, Inc. (the Company) is a bank holding company whose business is conducted by its wholly-owned subsidiary, First National Bank of Coffee County (the Bank). The Bank is a commercial bank located in Douglas, Coffee County, Georgia. The Bank provides a full range of banking services in its primary market area of Coffee County and the surrounding counties. Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, and deferred taxes. The Company's consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions and accounts have been eliminated in consolidation. Cash, Due From Banks and Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold and deposits 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. Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Equity securities, including restricted stock, without a readily determinable fair value are classified as available-for-sale and recorded at cost. Interest and dividends, including amortization of premiums and accretion of discounts, are recognized in interest income. Gains and losses on the sale of securities are determined using the specific identification method. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. F- 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Loans Loans are reported at their outstanding unpaid principal balances less unearned income, deferred fees or costs on originated loans, and the allowance for loan losses. Interest income is accrued on the unpaid balance. Loan origination fees, net of certain direct origination costs of consumer and instalment loans are recognized at the time the loan is placed on the books. Because these loan fees are not significant and the majority of loans have maturities of one year or less, 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. Loan origination fees net of certain direct loan origination costs for all other loans are deferred and recognized as an adjustment of the yield over the life of the loan. The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations. A loan is considered impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over the estimated useful lives of the assets. F- 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other Real Estate Owned Other real estate owned represents properties acquired through foreclosure. Other real estate owned is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. The carrying amount of other real estate owned at December 31, 2000 was $81,520. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Income Taxes Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Stock Compensation Plans Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Bank's stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Bank has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. Earnings Per Common Share Basic earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net income after adjustments for the after-tax income effect of the issuance of potential common shares that are dilutive by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. The weighted-average number of shares outstanding for the years ended December 31, 2000 and 1999 was 416,074 and 415,104, respectively. F- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Recent Developments In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 2000. This Statement establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative as follows: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale security, a foreign currency denominated forecasted transaction, or a net investment in a foreign corporation. The Statement generally provides for matching the timing of the recognition of the gain or loss on derivatives designated as hedging instruments with the recognition of the changes in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be in either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will be recognized in net income in the period of change. Management is currently evaluating the impact of adopting this Statement on the financial statements, but does not anticipate that it will have a material impact. NOTE 2. INVESTMENT SECURITIES The amortized cost and approximate fair values of securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- ------------- --------------- --------------- Securities Available for Sale December 31, 2000: U. S. Treasury and government agencies ... $ 3,242,581 $ - $ (23,000) $ 3,219,581 Restricted equity securities ............. 313,900 - - 313,900 --------------- ------------- --------------- --------------- $ 3,556,481 $ - $ (23,000) $ 3,533,481 =============== ============= =============== =============== December 31, 1999: U. S. Treasury and government agencies ... $ 3,239,290 $ - $ (74,000) $ 3,165,290 Restricted equity securities ............. 313,900 - - 313,900 --------------- ------------- -------------- --------------- $ 3,553,190 $ - $ (74,000) $ 3,479,190 =============== ============= ============== =============== Securities Held to Maturity December 31, 2000: U. S. Treasury and government agencies .... $ 4,488,469 $ 1,863 $ (8,613) $ 4,481,719 State, county and municipal securities .... 294,844 - (686) 294,158 --------------- ------------- -------------- --------------- $ 4,783,313 $ 1,863 $ (9,299) $ 4,775,877 =============== ============= ============== ===============
F- 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. INVESTMENT SECURITIES (Continued)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- ------------- -------------- --------------- U. S. Treasury and government agencies .... $ 4,482,594 $ - $ (46,188) $ 4,436,406 State, county and municipal securities .... 294,819 - (2,622) 292,197 --------------- ------------- -------------- --------------- $ 4,777,413 $ - $ (48,810) $ 4,728,603 =============== ============= ============== ===============
Securities with a carrying value of $6,020,731 and $4,722,586 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The amortized cost and fair value of debt securities as of December 31, 2000 by contractual maturity are shown below.
Securities Available for Sale Securities Held to Maturity ---------------------------------- ---------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------------- ----------------- ---------------- ---------------- Due less than one year ............ $ - $ - $ 1,499,395 $ 1,496,250 Due from one to three years ....... 3,242,581 3,219,581 2,734,070 2,735,784 Due from three to five years ...... - - 500,000 494,531 Due from five to ten years ........ - - 49,848 49,312 --------------- ----------------- ---------------- ---------------- $ 3,242,581 $ 3,219,581 $ 4,783,313 $ 4,775,877 =============== ================= ================ ================
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of loans is summarized as follows:
December 31, --------------------------------------- 2000 1999 ------------------ ------------------ Commercial and financial ......................................... $ 10,753,635 $ 8,015,067 Agricultural ..................................................... 1,578,653 1,431,012 Real estate - construction ....................................... 3,552,219 2,545,021 Real estate - mortgage, farmland ................................. 9,497,911 8,419,070 Real estate - mortgage, other .................................... 36,969,870 27,847,233 Consumer installment ............................................. 5,279,839 5,911,050 ------------------ ------------------ 67,632,127 54,168,453 Allowance for loan losses ........................................ (1,475,525) (1,422,689) ------------------ ------------------ Loans, net ..................................... $ 66,156,602 $ 52,745,764 ================== ================== Changes in the allowance for loan losses are as follows: Years Ended December 31, ------------------------------------------- 2000 1999 ------------------- ------------------- Balance, beginning of year ................................... $ 1,422,689 $ 1,274,285 Loans charged off ......................................... (204,609) (63,359) Recoveries of loans previously charged off ................ 257,445 211,763 ------------------- ------------------- Balance, end of year ......................................... $ 1,475,525 $ 1,422,689 =================== ===================
F- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The Bank had no loans which it considered to be impaired other than the loans on which the accrual of interest had been discontinued. The total recorded investment in impaired loans was $689,000 and $380,425 at December 31, 2000 and 1999, respectively. These loans had related allowance for loan losses of approximately $79,000 and $67,000 at December 31, 2000 and 1999, respectively. The average recorded investment in impaired loans for 2000 and 1999 was approximately $734,000 and $403,000, respectively. There was no significant amount of interest income recognized on impaired loans in 2000 or 1999. The Bank has granted loans to certain related parties, including directors, executive officers and their affiliates. 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. Changes in related party loans for the year ended December 31, 2000 are as follows: Balance, beginning of year ......................................................... $ 595,879 Advances ........................................................................ 953,771 Repayments ...................................................................... (606,050) ---------------- Balance, end of year ............................................................... $ 943,600 ================
NOTE 4. PREMISES AND EQUIPMENT, NET Premises and equipment are summarized as follows:
December 31, -------------------------------------- 2000 1999 ----------------- ----------------- Land ........................................................... $ 372,676 $ 372,676 Buildings and improvements ..................................... 1,561,741 1,064,078 Equipment ...................................................... 1,078,889 1,006,375 Construction in process ........................................ - 240,386 ----------------- ----------------- 3,013,306 2,683,515 Accumulated depreciation ....................................... (872,085) (834,393) ----------------- ----------------- $ 2,141,221 $ 1,849,122 ================= =================
Note 5. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2000 and 1999 was $15,685,112 and $10,724,505, respectively. The scheduled maturities of time deposits at December 31, 2000 are as follows: For the year ending December 31, 2001 ............................................................................ $ 37,000,375 2002 ............................................................................ 5,402,500 2003 ............................................................................ 2,001,224 2004 ............................................................................ 232,876 2005 ............................................................................ 108,237 ----------------- $ 44,745,212 =================
F- 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. NOTES PAYABLE TO DIRECTORS Notes payable to certain directors totaling $500,000 consist of notes which were executed on December 27, 1996, and subsequently modified on July 10, 1999. Each of the notes accrues interest at the Bank's prime rate less 1%. With the exception of one note in the amount of $36,750 to one director where interest payments are due quarterly, all payments of principal and accrued interest have been deferred until maturity on December 29, 2001. At maturity, the Company has the option to pay all or a part of unpaid principal and interest by issuing to the director any stock subject to unexercised warrants or options held by the directors. The directors have the option at any time to pay for any warrant or option then exercisable through forgiveness of interest and principal accrued and outstanding. NOTE 7. FEDERAL HOME LOAN BANK BORROWINGS The Bank can obtain additional funding as needed for mortgage loans from the Federal Home Loan Bank of Atlanta ("FHLB"). At December 31, 2000, the Bank had two advances outstanding that totaled $1,045,000. These advances are collateralized by a blanket floating lien on qualifying first mortgage loans and pledging of the Bank's stock in the FHLB. A summary of the Bank's borrowings from the FHLB as of December 31, 2000 and 1999 follows:
2000 1999 ----------------- ----------------- Advances from Federal Home Loan Bank with interest ................ $ 45,000 $ 55,000 at fixed rate of 6.99% due in annual semi-annual instalments of $5,000 through May 16, 2005. Advances from Federal Home Loan Bank with interest at a fixed rate of 7.28% due at October 28, 2001 ............... 1,000,000 - ----------------- ----------------- $ 1,045,000 $ 55,000 ================= ================= Balance, beginning of year ........................................ $ 55,000 $ 65,000 Advances ....................................................... 2,000,000 - Repayments ..................................................... (1,010,000) (10,000) ----------------- ----------------- Balance, end of year .............................................. $ 1,045,000 $ 55,000 ================= ================= At December 31, 2000, scheduled maturities of FHLB borrowings are as follows: For the year ending December 31, 2001 ............................................................................. $ 1,010,000 2002 ............................................................................. 10,000 2003 ............................................................................. 10,000 2004 ............................................................................. 10,000 2005 ............................................................................. 5,000 ---------------- $ 1,045,000 ================
F- 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $25,124and $16,154 in 2000 and 1999, respectively. NOTE 9. INCOME TAXES Income tax expense consists of the following:
Years Ended December 31, -------------------------------------- 2000 1999 ----------------- ----------------- Current ....................................................... $ 609,676 $ 504,279 Deferred ...................................................... (15,188) 10,691 ----------------- ----------------- $ 594,488 $ 514,970 ================= =================
The Company's income tax expense 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:
Years Ended December 31, ------------------------------------------------------- 2000 1999 ------------------------- -------------------------- Amount Percent Amount Percent ------------ ---------- ------------- ---------- Tax provision at statutory rate .............. $ 596,541 34 % $ 489,733 34 % Increase (decrease) resulting from: Other items, net .......................... (2,053) - 25,237 2 ------------ ---------- ------------- ---------- Income tax expense ........................... $ 594,488 34 % $ 514,970 36 % ============ ========== ============= ==========
The components of deferred income taxes are as follows:
December 31, --------------------------------------- 2000 1999 ----------------- ----------------- Deferred tax assets: Allowance for loan losses ................................... $ 254,232 $ 256,143 Non accrual loan interest receivable ........................ 39,503 27,752 Securities available for sale ............................... 8,000 25,000 ----------------- ----------------- 301,735 308,895 ----------------- ----------------- Deferred tax liabilities: Premises and equipment ...................................... 60,808 73,172 Other ....................................................... 28,398 21,382 ----------------- ----------------- 89,206 94,554 ----------------- ----------------- Net deferred tax assets ........................................ $ 212,529 $ 214,341 ================= =================
F- 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. EARNINGS PER COMMON SHARE The following is a reconciliation of net income (the numerator and the weighted average shares outstanding (the denominator) used in determining basic and diluted earnings per share.
Year Ended December 31, 2000 ----------------------------------------------------------- Income Shares Per Share Amount (Numerator) (Denominator) ----------------- ------------------ ----------------- Basic earnings per share Net income ........................... $ 1,160,043 416,074 $ 2.79 ================= Effect of Dilutive Securities Stock options and warrants ........... - 66,199 ----------------- ------------------ Dilutive earnings per share Net income ........................... $ 1,160,043 482,273 $ 2.41 ================= ================== ================= Year Ended December 31, 1999 ----------------------------------------------------------- Income Shares Per Share Amount (Numerator) (Denominator) ----------------- ------------------ ----------------- Basic earnings per share Net income ........................... $ 925,422 415,104 $ 2.23 ================= Effect of Dilutive Securities Stock options and warrants ........... - 32,620 ----------------- ------------------ Dilutive earnings per share Net income ........................... $ 925,422 447,724 $ 2.07 ================= ================== =================
NOTE 11. 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. At December 31, 2000 and 1999, there were 137,500 warrants outstanding. F- 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. STOCK WARRANTS AND STOCK OPTION PLAN (Continued) Stock Option Plan The Company has options outstanding under the stockholder-approved 1997 Stock Option Plan (the "1997 Plan"). Options granted under the 1997 Plan are one of two types: (i) those which qualify for treatment as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options") or (ii) those which do not so qualify ("Nonqualified Stock Options"). The 1997 Plan provides that not more than 125,000 shares in the aggregate be issued for Incentive Stock Options and Nonqualified Stock Options. The exercise price of an Incentive Stock Option shall not be less than the fair value at the date of grant. The exercise price of a Nonqualified Stock Option shall be determined by the Board on the date granted. In addition to the options available under the 1997 Plan, in April 1997 the Board granted options for 10,926 shares of common stock with a $10 exercise price to the President and CEO of the Bank provided that he exercises one-half of the options within twelve months and the remainder within twenty-four months. The officer exercised 5,463 options during each year ended December 31, 2000 and 1999. At December 31, 2000, there were no options outstanding outside of the 1997 Plan. A summary of the status of the 1997 Plan at December 31, 2000 and 1999, and changes during the years ended on those dates is as follows:
2000 1999 -------------------------------- ------------------------------- Weighted- Weighted- Average Average Exercise Exercise Number Price Number Price -------------- -------------- ------------- -------------- Under option, beginning of year ......... 63,018 $ 10.33 58,117 $ 10.00 Granted .............................. - - 4,901 11.96 Forfeited ............................ - - - - ------------- ------------- Under option, end of year ............... 63,018 10.33 63,018 10.33 ============= ============= Exercisable at end of year .............. 55,007 44,070 ============= ============= Available for grant at end of year ...... 61,982 61,982 ============= ============= Weighted-average fair value per option of options granted during the year ... $ - $ 5.55 ============= =============
Additional information about options outstanding at December 31, 2000 is as follows:
Options Options Outstanding Exercisable --------------------------------- --------------- Weighted- Average Exercise Number Contractual Number Price Outstanding Life in Years Outstanding -------------- ---------------- -------------- --------------- $ 10.00 58,218 5.7 54,047 12.00 4,800 9.0 960 ---------------- --------------- 63,018 5.9 55,007 ================ ===============
F- 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. STOCK WARRANTS AND STOCK OPTION PLAN (Continued) As permitted by generally accepted accounting principles, grants under the 1997 Plan are accounted for under the provisions of APB Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for grants made to date. Had compensation cost been determined based on the fair value method prescribed in FASB Statement No. 123, reported net income and earnings per share would have been reduced to the pro forma amounts shown below:
Year Ended December 31, --------------------------------- 2000 1999 ---------------- ---------------- Net income: As reported ................................................ $ 1,160,043 $ 925,422 Pro forma .................................................. $ 1,127,953 $ 895,594 Primary earnings per share: As reported ................................................ $ 2.79 $ 2.23 Pro forma .................................................. $ 2.71 $ 2.16 Fully diluted earnings per share: As reported ................................................ $ 2.41 $ 2.07 Pro forma .................................................. $ 2.34 $ 2.00
NOTE 12. COMMITMENTS AND CONTINGENCIES The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. 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 policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Bank's commitments is as follows:
December 31, -------------------------------------- 2000 1999 ----------------- ----------------- Commitments to extend credit .................................. $ 9,217,480 $ 7,164,000 Standby letters of credit ..................................... 3,466,400 102,500 ----------------- ----------------- $ 12,683,880 $ 7,266,500 ================= =================
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. 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 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. 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 to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary. F- 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued) In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements. NOTE 13. 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. Approximately seventy-two percent (72%) of the Company's loan portfolio is concentrated in real estate loans. A substantial portion of these loans are secured by real estate in the Bank's primary market area. Accordingly, the ultimate collectibility of the loan portfolio is 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. The Bank is subject to certain statutory requirements which generally provide that the Bank may not extend credit to any single borrower or group of related borrowers in excess of 15% of the Bank's unimpaired capital and surplus (as defined by the Bank's regulatory authorities), or approximately $1,196,000. The Bank has a concentration of funds on deposit at its primary correspondent bank at December 31, 2000 as follows: Correspondent commercial checking account $3,574,715 ========== NOTE 14. REGULATORY MATTERS The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2000, approximately $2,003,600 of retained earnings were available for dividend declaration 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 capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. 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, 2000, the Bank met all capital adequacy requirements to which it is subject. F- 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. REGULATORY MATTERS (Continued) As of December 31, 2000, the most recent notification from The Office of the Comptroller of the Currency 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. The Bank's actual capital amounts and ratios are presented in the following table.
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective -------------------------- Actual Purposes Action Provisions --------------------------- ------------------------ -------------------------- As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio ---------------- --------- --------------- ------- --------------- --------- Total Capital to Risk Weighted Assets Consolidated $ 6,729,200 10.8% $ 4,980,300 8.0% - - - N/A - - - Bank $ 7,290,400 11.7% $ 4,980,300 8.0% $ 6,225,400 10.0% Tier I Capital to Risk Weighted Assets Consolidated $ 5,942,400 9.6% $ 2,490,100 4.0% - - - N/A - - - Bank $ 6,503,600 10.4% $ 2,490,100 4.0% $ 3,735,200 6.0% Tier I Capital to Average Assets Consolidated $ 5,942,400 7.9% $ 3,017,300 4.0% - - - N/A - - - Bank $ 6,503,600 8.6% $ 3,017,300 4.0% $ 3,771,600 5.0% To Be Well For Capital Capitalized Under Adequacy Prompt Corrective --------------------------- Actual Purposes Action Provisions ---------------------------- ------------------------- --------------------------- As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio ---------------- ---------- --------------- -------- ---------------- --------- Total Capital to Risk Weighted Assets Consolidated $ 5,524,300 11.3% $ 3,928,000 8.0% - - - N/A - - - Bank $ 5,941,100 12.1% $ 3,928,000 8.0% $ 4,909,900 10.0% Tier I Capital to Risk Weighted Assets Consolidated $ 4,900,600 10.0% $ 1,964,000 4.0% - - - N/A - - - Bank $ 5,317,400 10.8% $ 1,964,000 4.0% $ 2,946,000 6.0% Tier I Capital to Average Assets Consolidated $ 4,900,600 7.7% $ 2,558,200 4.0% - - - N/A - - - Bank $ 5,317,400 8.3% $ 2,558,200 4.0% $ 3,197,700 5.0%
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Bank. F- 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Cash and Due From Banks and Federal Funds Sold The carrying amounts of cash and due from banks and federal funds sold approximate fair values. Securities Fair values for securities classified as available for sale and held to maturity are based on available quoted market prices. The carrying values of other investments 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 analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses 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 a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Funds Purchased The carrying amounts of federal funds purchased approximate their fair values. Notes Payable For variable-rate notes payable that reprice frequently, the carrying amounts approximate fair values. Federal Home Loan Bank Borrowings The fair values of the Company's borrowings from the FHLB are estimated using discounted cash flow models, using current market interest rates offered on similar types of borrowing arrangements. F- 22 NOTE TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) 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 estimated fair values and related carrying values of the Company's financial instruments were as follows:
December 31, 2000 December 31, 1999 --------------------------------- ---------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------- --------------- ----------------- --------------- Financial assets: Cash and due from banks and Federal funds sold ........... $ 4,516,549 $ 4,516,549 $ 4,922,212 $ 4,922,212 ================ =============== ================= =============== Investments in securities ....... $ 8,316,794 $ 8,309,358 $ 8,256,603 $ 8,207,793 ================ =============== ================= =============== Loans ........................... $ 67,632,127 $ 67,261,000 $ 54,168,453 $ 54,219,600 Allowance for loan losses ....... 1,475,525 - 1,422,689 - ---------------- --------------- ----------------- --------------- Loans, net ........... $ 66,156,602 $ 67,261,000 $ 52,745,764 $ 54,219,600 ================ =============== ================= =============== Financial liabilities: Noninterest-bearing demand ...... $ 10,466,444 $ 10,466,444 $ 11,090,409 $ 11,090,409 Interest-bearing demand ......... 15,668,613 15,668,613 13,136,785 13,136,785 Savings ......................... 1,751,922 1,751,922 1,999,607 1,999,607 Time deposits ................... 44,745,212 47,133,000 34,647,620 34,810,000 ---------------- --------------- ----------------- --------------- Total deposits ....... $ 72,632,191 $ 75,019,979 $ 60,874,421 $ 61,036,801 ================ =============== ================= =============== Federal funds purchased ............ $ 940,000 $ 940,000 $ 1,250,000 $ 1,250,000 ================ =============== ================= =============== Notes payable, director ............ $ 500,000 $ 500,000 $ 500,000 $ 500,000 ================ =============== ================= =============== Other borrowings ................... $ 1,045,000 $ 1,045,000 $ 55,000 $ 53,700 ================ =============== ================= ===============
F- 23 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, 2000 and 1999.
CONDENSED BALANCE SHEETS 2000 1999 ----------------- ----------------- Assets Cash ........................................................... $ 84,450 $ 169,709 Investment in subsidiary ....................................... 6,488,650 5,268,408 Other assets, due from subsidiary .............................. - 336,909 ------------------ ----------------- Total assets ........................................... $ 6,573,100 $ 5,775,026 ================== ================= Liabilities Notes payable, directors ....................................... $ 500,000 $ 500,000 Other liabilities .............................................. 145,676 423,434 ------------------ ----------------- Total liabilities ...................................... 645,676 923,434 ------------------ ----------------- Stockholders' equity .............................................. 5,927,424 4,851,592 ------------------ ----------------- Total liabilities and stockholders' equity ............. $ 6,573,100 $ 5,775,026 ================== ================= CONDENSED STATEMENTS OF INCOME 2000 1999 ----------------- ---------------- Income, interest ................................................. $ 7,625 $ 6,481 ----------------- ---------------- Expense Interest ...................................................... 41,736 35,455 Other expense ................................................. 5,600 6,495 ----------------- ---------------- 47,336 41,950 ----------------- ---------------- Loss before income tax benefits and equity in undistributed earnings of subsidiary ..................................... (39,711) (35,469) Income tax benefits .............................................. (13,512) (12,000) ----------------- ---------------- Loss before equity in undistributed earnings of subsidiary ........................... (26,199) (23,469) Equity in undistributed earnings of subsidiary .................. 1,186,242 948,891 ----------------- ---------------- Net income ............................................ $ 1,160,043 $ 925,422 ================= ================
F- 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued) CONDENSED STATEMENTS OF CASH FLOWS
2000 1999 ------------------- ------------------- OPERATING ACTIVITIES Net income $ 1,160,043 $ 925,422 ------------------- ------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Undistributed earnings of subsidiary ..................... (1,186,242) (948,891) (Increase) decrease in due from subsidiary ............... 336,909 (336,909) Increase in interest payable ............................ 38,774 27,999 Increase (decrease) in taxes payable ..................... (316,532) 320,019 ------------------- ------------------- Total adjustments ...................................... (1,127,091) (937,782) ------------------- ------------------- Net cash provided by (used in) operating activities .... 32,952 (12,360) ------------------- ------------------- FINANCING ACTIVITIES Purchase of treasury stock .................................. (22,500) (9,000) Dividends paid .............................................. (95,711) - Proceeds from issuance of common stock ...................... - 54,630 ------------------- ------------------- Net cash provided by (used in) financing activities .... (118,211) 45,630 ------------------- ------------------- Net increase (decrease) in cash ................................ (85,259) 33,270 Cash at beginning of year ...................................... 169,709 136,439 ------------------- ------------------- Cash at end of year ............................................ $ 84,450 $ 169,709 =================== ===================
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