SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended December 31, 1998 OR
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________ to ____________
Commission file number 0-22543
Community First Banking Company
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2309605
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 Dixie Street
Carrollton, Georgia 30117
(Address of Principal Executive Offices) (Zip Code)
(770) 834-1071
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant : (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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-K or any amendment to this
Form 10-K. |X|
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of such common equity as of March 22, 1999: $38,307,989
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,560,656 shares of Common Stock at March 22,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1998 are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders, scheduled to be held on April 29, 1999, are incorporated by
reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS OF THE COMPANY
Community First Banking Company (the "Company") was incorporated in the
State of Georgia on March 12, 1997, for the purpose of becoming a holding
company to own 100% of the outstanding capital stock of Carrollton Federal Bank,
FSB (the "Savings Bank"). The Savings Bank was organized on August 1, 1994 as a
federal savings bank subsidiary of CF Mutual Holdings (the "Mutual Holding
Company"), a federally chartered mutual holding company. Prior to that date, the
predecessor of the Savings Bank had operated as a mutual savings bank since
1929.
On June 27, 1997, we completed a conversion and reorganization (the
"Conversion") whereby the Company became the unitary holding company for the
Savings Bank and the Mutual Holding Company was dissolved.
On December 29, 1997, the Savings Bank converted from a federal savings
bank regulated by the Office of Thrift Supervision (the "OTS") to a Georgia
chartered state commercial bank regulated by the Georgia Department of Banking
and Finance (the "Georgia Department") and concurrently changed its name to
Community First Bank (the "Bank").
The Company directs, plans and coordinates the activities of the Bank
and its subsidiaries. Accordingly, the information presented in this Annual
Report relates primarily to the Bank. The Bank is a community-oriented financial
institution operating from seven branch offices in western Georgia. These
branches provide customary banking services such as customer and commercial
checking accounts, NOW accounts, savings accounts, certificates of deposit,
lines of credit and MasterCard and VISA credit cards. Lending activities include
the origination of consumer and commercial business loans on a secured and
unsecured basis, residential mortgage and home equity loans, and commercial real
estate loans.
The Bank has three wholly-owned operating subsidiaries that broaden the
services the Bank offers to the community. The first, CFB Securities, Inc.,
offers traditional brokerage services and products such as mutual funds, stocks
and bonds through an NASD member firm. CFB Securities, Inc. began operations in
1996 and is located in space immediately adjacent to the Bank's main office
lobby in Carrollton, Georgia.
The second subsidiary of the Bank, CFB Financial Inc., began operations
in 1996 to service the loan needs of consumers traditionally associated with
consumer finance companies. CFB Financial, Inc. has seven full-time employees
operating in its offices in Villa Rica and Douglasville, Georgia, and at the
Bank's branch in Hiram, Georgia. This subsidiary offers a wide range of small
loans granted in conformity with the Georgia Industrial Loan Act.
The third subsidiary, CFB Insurance Agency, Inc., began operations in
1997. Based in Bowdon, Georgia, CFB Insurance Agency, Inc. offers a full line of
insurance products to existing Bank customers as well as the general public.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more detailed information about the business of the
Company and the Bank.
COMPETITION
The Bank has operated in its local community since 1929. Management
estimates that the Bank has a 30% market share in Carroll County, a 20% market
share in each of Haralson and Heard Counties, and a 1% market share in each of
Douglas and Paulding Counties.
The Bank faces significant competition both in making loans and in
attracting deposits principally from national, regional and local commercial
banks, savings banks, savings and loan associations, credit unions,
broker-dealers, mortgage banking companies (including FNMA) and insurance
companies. Its most direct competition for deposits has historically come from
commercial banks, savings banks, savings and loan associations and credit
unions. The Bank faces additional competition for deposits from short-term money
market funds, other corporate and government securities funds and from other
financial institutions such as brokerage firms and insurance companies. In
addition, the Bank faces additional competition from commercial banks
headquartered outside of the State of Georgia as a result of the enactment of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which
became fully effective on June 1, 1997. See "-Supervision and Regulation."
The Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. The Bank competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.
EMPLOYEES
The Company and the Bank had 154 full-time employees and 18 part-time
employees at December 31, 1998. None of these employees is represented by a
collective bargaining agreement, and management believes that it enjoys good
relations with its personnel.
SUPERVISION AND REGULATION
General. The Company is a bank holding company registered with the
Board of Governors of the Federal Reserve System (the "Federal Reserve") under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As such, the
Company and its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve.
The BHC Act requires every bank holding company to obtain the Federal
Reserve's prior approval before: (a) it may acquire direct or indirect ownership
or control of any voting shares of any bank if, after the acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
voting shares of the bank; (b) it or any of its subsidiaries, other than a bank,
may acquire all or substantially all of the assets of any bank; or (c) it may
merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve
any transaction that: (a) would result in a monopoly; (b) would be furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking anywhere in the United States; (c) could substantially
lessen competition or to tend to create a monopoly in any section of the
country; or (d) would otherwise be in restraint of trade. The Federal Reserve
could, however, approve a proposed transaction if its anticompetitive effects
were clearly outweighed by the public interest in meeting the convenience and
needs of the community to be served. The Federal Reserve is also required to
consider the financial and managerial resources and future prospects of the
participants in the transaction and convenience and needs of the community to be
served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), repealed the prior statutory restrictions on
interstate acquisitions of banks by bank holding companies. As a result, the
Company and any other 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 any Georgia-based bank, regardless of state law to
the contrary, in either case subject to certain restrictions. The Interstate
Banking Act also generally provides that national and state-chartered banks may
now branch interstate through acquisitions of banks in other states. By adopting
legislation prior to June 1, 1997, states could either "opt in" and accelerate
the date after which interstate branching is permissible or "opt out" and
prohibit interstate branching altogether.
In response to the Interstate Banking Act, the Georgia General Assembly
adopted the Georgia Interstate Banking Act, which was effective July 1, 1995.
The Georgia Interstate Banking Act provides that (i) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (ii) interstate acquisitions of
institutions located in Georgia will be permitted by institutions in states that
allow national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted
the Georgia Interstate Branching Act, which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge an acquired bank into an interstate branch network. The Georgia
Interstate Branching Act also allows banks to establish de novo branches on an
unlimited basis.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be incidental to banking or managing or controlling banks. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of the activity reasonably can be expected
to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices. For example, factoring
accounts receivable, acquiring or servicing loans, leasing personal property,
conducting discount securities brokerage activities, performing certain data
processing services, acting as agent or broker in selling credit life insurance
and certain other types of insurance in connection with credit transactions, and
performing certain insurance underwriting activities all have been determined by
the Federal Reserve to be permissible bank holding company activities. The BHC
Act does not place territorial limitations on permissible non-banking activities
of bank holding companies. Despite prior approval, the Federal Reserve may order
a holding company or its subsidiaries to terminate any activity or its ownership
or control of any subsidiary when it has reasonable cause to believe that
continuation of the activity, ownership or control constitutes a serious risk to
the financial safety, soundness, or stability of any bank subsidiary of that
bank holding company.
The Bank is a member of the Federal Deposit Insurance Corporation (the
"FDIC"), and as such, its deposits are insured by the FDIC to the maximum extend
provided by law. The Bank is also subject to numerous state and federal statutes
and regulations that affect its business, activities, and operations and is
supervised and examined by one or more state or federal bank regulatory
agencies.
The FDIC and the Georgia Department of Banking and Finance (the
"Georgia Department") regularly examine the operations of the Bank and are given
authority to approve or disapprove mergers, consolidations, the establishment of
branches, and similar corporate actions. The FDIC and the Georgia Department
also have the power to prevent the continuance or development of unsafe or
unsound banking practices or other violations of law.
Payment of Dividends. The Company is a legal entity separate and
distinct from its banking and other subsidiaries. The principal sources of cash
flow of the Company, including cash flow to pay dividends to its shareholders,
are dividends by the Bank. There are statutory and regulatory limitations on the
payment of dividends by the Bank to the Company as well as by the Company to its
shareholders.
If a federal banking regulator believes that a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the institution's financial condition,
could include the payment of dividends), it could require, after notice and
hearing, that the institution cease and desist from that practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), a depository institution may not pay any dividend if
payment would cause it to become undercapitalized or if it already is
undercapitalized. See "--Prompt Corrective Action." Moreover, the federal
agencies have issued policy statements that provide that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings.
Under dividend restrictions imposed under federal and state laws, the
Bank, without obtaining governmental approvals, could declare aggregate
dividends to the Company of up to $2.0 million (representing 50% of the previous
year's net income) in 1999.
The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Capital Adequacy. The Company and the Bank are required to comply with
the capital adequacy standards established by the Federal Reserve and the
appropriate federal banking regulator in the case of the Bank. There are two
basic measures of capital adequacy for bank holding companies that have been
promulgated by the Federal Reserve: a risk-based measure and a leverage measure.
All applicable capital standards must be satisfied for a bank holding company to
be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile 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 are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represented capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital
Ratio") of total capital ("Total Capital") to risk-weighted assets (including
certain off-balance-sheet items, such as standby letters of credit) is 8%. At
least half of Total Capital must consist of common stock, minority interests in
the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual stock, less
goodwill and certain other intangible assets. ("Tier 1 Capital"). The remainder
may consist of subordinated debt, other preferred stock and a limited amount of
loan loss reserves ("Tier 2 Capital"). At December 31, 1998, the Company's
consolidated Total Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital
Ratio (i.e., the ratio of Tier 1 Capital to risk-weighted assets) were 9.9% and
8.9%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies are generally required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at December 31, 1998 was 6.1%. 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. Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC, which are substantially similar to those adopted by the
Federal Reserve for bank holding companies.
The Bank was in compliance with applicable minimum capital requirements
as of December 31, 1998. The Company has not been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it or to
the Bank.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements. See "--Prompt
Corrective Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve and the FDIC have, pursuant to
FDICIA, adopted regulations requiring regulators to consider interest rate risk
(when the interest rate sensitivity of an institution's assets does not match
the sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. The bank regulatory agencies'
methodology for evaluating interest rate risk requires banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.
Support of Subsidiary Institutions. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength for, and to commit
resources to support, the Bank. This support may be required when, absent this
Federal Reserve policy, the Company may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any if its banking
subsidiaries are subordinate in right of payment to deposits and to certain
other indebtedness of such banks. In the event of bank holding company's
bankruptcy, the bankruptcy trustee will assume any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
banking subsidiary and will be entitled to a priority of payment.
Prompt Corrective Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, which became effective in December 1992, the federal banking
regulators are required to establish five capital categories (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized) and to take certain mandatory supervisory actions,
and are authorized to take other discretionary actions, with respect to
institutions in the three undercapitalized categories, the severity of which
will depend upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, FDICIA requires the banking regulator
to appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category.
<PAGE>
The capital levels established for each of the categories are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
========================== ==================== ========================= ====================== ===================
Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
========================== ==================== ========================= ====================== ===================
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
- -------------------------- -------------------- ------------------------- ---------------------- ------------------
Adequately Capitalized 4% or more 8% or more 4% or more --
- -------------------------- -------------------- ------------------------- ---------------------- ------------------
Undercapitalized less than 4% less than 8% less than 4% --
- -------------------------- -------------------- ------------------------- ---------------------- ------------------
Significantly less than 3% less than 6% less than 3% --
Undercapitalized
- -------------------------- -------------------- ------------------------- ---------------------- ------------------
Critically 2% or less -- -- --
Undercapitalized tangible equity
- -------------------------- -------------------- ------------------------- ---------------------- ------------------
</TABLE>
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 capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
At December 31, 1998, the Bank had the requisite capitals levels to
qualify as well capitalized.
FDIC Insurance Assessments. The FDIC has adopted a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. The system assigns an institution to one of three capital
categories: (a) well capitalized; (b) adequately capitalized; and (c)
undercapitalized. These three categories are substantially similar to the prompt
corrective action categories described above, with the "undercapitalized"
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three supervisory
subgroups within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information that the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. The FDIC then determines an
institution's insurance assessment rate based on the capital category and
supervisory category to which it is assigned. There are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied.
Since 1996, the deposit insurance premiums for 92% of all Bank
Insurance Fund (BIF") members in the highest capital and supervisory categories
have been set at $2,000 per year, regardless of deposit size. Effective as of
January 1, 1997, assessments to help pay off the $780 million in annual interest
payments on the $8 billion FICO bonds issued in the late 1980s as part of the
government rescue of the thrift industry were imposed on BIF-insured deposits in
annual amounts presently estimated at 1.29 basis points. Beginning in January
2000, these rates will increase to an estimated 2.43 basis points.
The FDIC may terminate its insurance of deposits upon a finding that an
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action. New regulations and
statutes are regularly proposed that contain wide-ranging proposals for altering
the structures, regulations and competitive relationships of the nation's
financial institutions. It cannot be predicted whether or what form any proposed
regulation or statute will be adopted or the extent to which our business may be
affected by such regulations or statutes.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the Company's
properties at December 31, 1998.
LEASED/
DESCRIPTION/ADDRESS OWNED
Main Office 110 Dixie St., Carrollton, GA Owned
640 W. Bankhead Hwy, Villa Rica, GA Owned
207 W. College St., Bowdon, GA Owned
501 Alabama Ave., Bremen, GA Leased
1119 South Park St., Carrollton, GA Owned
9060 Hwy. 27, Franklin, GA Owned
4166 Jimmy Lee Smith Parkway, Hiram, GA (Wal*Mart Branch) Leased
3218 Highway 5, Douglasville, GA Leased
664 W. Bankhead Hwy.,Villa Rica, GA Leased
3357 Jimmy Lee Smith Parkway, Hiram, GA Leased
119 South White Street, Carrollton, GA Owned
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or of which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing, is a
party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information regarding the quarterly high and low sales prices for the
Company's Common Stock, the number of record shareholders and the Company's
dividend policy is contained in the Company's Annual Report to Shareholders for
the year ended December 31, 1998 under the heading "Market for Common Stock and
Related Shareholder Matters" and is hereby incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's
Annual Report to Shareholders for the year ended December 31, 1998 under the
heading "Selected Consolidated Financial Data" and is hereby incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The responses to this item are included in the Company's Annual Report
to Shareholders for the year ended December 31, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and are hereby incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's net interest income and the fair value of its financial
instruments (interest earning assets and interest bearing liabilities) are
influenced by changes in market interests rates. The Company actively manages
its exposure to interest rate fluctuations through policies established by its
Asset/Liability Committee (the "ALCO"). The ALCO meets regularly and is
responsible for approving asset/liability management policies, developing and
implementing strategies to improve balance sheet positioning and net interest
income and assessing the interest rate sensitivity of the Bank.
The Company utilizes an interest rate simulation model to monitor and
evaluate the impact of changing interest rates on net interest income. The
estimated impact on the Company's net interest income sensitivity over a
one-year time horizon is indicated in the table below, which assumes an
immediate and sustained parallel shift in interest rates of 100 basis points and
no change in the composition of the Company's balance sheet.
The Company's ALCO policy requires that a 100 basis point shift in
interest rates should not result in a decrease of net interest income of more
than 5% of capital. The information presented in Table 13 of the Company's 1998
Annual Report is based on the same assumptions set forth in the ALCO policy.
<TABLE>
<CAPTION>
Net Interest Income Sensitivity
(in thousands)
Percent Increase(Decrease) in
Principal /Notional Interest Income/ExpenseGiven
Amounts of Earning Immediate and Sustained
Assets, Interest Bearing Parallel Interest Rate Shifts
Liabilities at Down 100 Up 100
December 31, 1998 Basis Points Basis Points
----------------- ------------ ------------
<S> <C> <C> <C>
Assets repricing in
One year or less $212,073
Over one year 151,976
Total $364,049 -2.87% 2.57%
========
Liabilities repricing in
One year or less $175,830
Over one year 145,341
Total $321,171 -4.94% 4.69%
========
Net interest sensitivity -0.23% -0.21%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Item 14 are
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1998 under the headings "Report of Independent Certified Public
Accountants" and "Selected Quarterly Financial Results" and are hereby
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29, 1999
under the headings "Section 16(a) Beneficial Ownership Reporting Compliance",
"Election of Directors" and "Executive Officers" and are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29, 1999
under the headings "Executive Compensation" and "Election of Directors- Director
Compensation" and "Compensation Committee Interlocks and Insider Participation"
and are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The responses to this item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29, 1999
under the heading "Stock Owned by Management" and are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this Item are included in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 29, 1999 under the heading
"Certain Transactions" and are incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Earnings for the Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
None
(c) Exhibits
Exhibit
Number Exhibit
3.1 Articles of Incorporation (1), as amended (2).
3.2 Bylaws (1).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's
Articles of Incorporation and Bylaws governing the rights of
holders of securities of the Company.
10.1* 1997 Stock Option Plan. (2)
10.2* Management Recognition Plan. (2)
10.3* Employee Stock Ownership Plan and Trust. (1)
10.4* Employee Stock Ownership Plan Trust Agreement. (1)
10.5(a) [Reserved]
10.5(b)* Employment Agreement between Gary D. Dorminey, the
Company and the Bank dated as of June 1, 1997 (1).
10.5(c)* Employment Agreement between D. Lane Poston, the Company
and the Bank dated as of June 1, 1997 (1).
10.5(d)* Employment Agreement between C. Lynn Gable, the Company
and the Bank dated as of June 1, 1997 (1).
10.5(e)* Employment Agreement between Anyce C. Fox, the Company
and the Bank dated as of June 1, 1997 (1).
10.6* Retirement Plan (1).
10.7* 401(k) Retirement Plan (1).
13.1 The following portions of the Company's 1998 Annual Report
to Shareholders have been incorporated by reference herein:
Market for Stock and Related Shareholder Matters
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Consolidated Financial Statements, the Notes thereto and the
Independent Auditors' Report thereon
Selected Quarterly Financial Results
23.1 Consent of Porter Keadle Moore, LLP.
27.1 Financial Data Schedule (SEC use only).
* Indicates a management compensation plan or agreement.
(1) Incorporated by reference to the exhibit of the same
number contained in the Registrant's Registration Statement
on Form S-1 (Regis. No. 333-23533).
(2) Incorporated by reference to the exhibit of the same
number contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 (File No.
0-22543).
(d) Financial Statements
The financial statement schedules or which provision is made in the
applicable accounting regulations of the Commission are either not
required under the related instructions or are inapplicable and have
therefore been omitted.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 25, 1999.
COMMUNITY FIRST BANKING COMPANY
By: /s/ Gary D. Dorminey
------------------------
Gary D. Dorminey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 25, 1999.
Signature Title
/S/ Gary D. Dorminey President, Chief Executive Officer
Gary D. Dorminey and Director*
/s/ T. Aubrey Silvey Chairman of the Board
T. Aubrey Silvey
/s/ Anna L. Berry Director
Anna L. Berry
/s/ Gary M. Bullock Vice Chairman of the Board
Gary M. Bullock
/s/ Jerry L. Clayton Director
Jerry L. Clayton
/s/ Thomas E. Reeve Director
Thomas E. Reeve
/s/ Michael P. Steed Director
Michael P. Steed
/s/ Dean B. Talley Director
Dean B. Talley
/s/ Thomas S. Upchurch Director
Thomas S. Upchurch
/s/ C. Lynn Gable Senior Vice President and Chief
C. Lynn Gable Financial Officer**
* Principal Executive Officer
** Principal Accounting and Financial Officer
EXHIBIT 13.1 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Letter to Shareholders ........................................... 1
Business of the Company .......................................... 2
Selected Consolidated Financial Data ............................. 3
Selected Quarterly Financial Results ............................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 5
Report of Independent Certified Public Accountants ............... 34
Market for Common Stock and Related Shareholder Matters .......... 60
Directors ........................................................ 60
Corporate Information ............................................ 61
Annual Meeting ................................................... 61
<PAGE>
Dear Shareholders:
On behalf of the Board of Directors and employees of Community First
Banking Company and its wholly owned subsidiary Community First Bank, we are
pleased to present to you our 1998 operating results. 1998 was CFB's full first
year of operation as a Georgia state chartered bank.
We reported to you in last year's annual report that a stock repurchase
plan was being undertaken during 1998. In fact, as of the date of this letter,
we have repurchased 1,005,863 pre-split shares or 41.7% of the original stock
offering. As a result of this aggressive repurchase and earnings growth, our
1998 basic earnings per share based on year-end shares outstanding were $1.16
per share.
CFBC, upon its initial stock offering, set aside 8% of its shares into an
Employee Stock Ownership Plan for its employees. The loan to fund the ESOP is
being amortized over 5 years. This short-lived operating expense will disappear
in 2002. Without this non-cash expense, our 1998 earnings per year-end share
would have been approximately $1.70 per share. This equates to an earnings
multiple of 11.8 on the current stock price of $20 per share.
1999 looks to be an excellent year for CFBC. Savings from the sale of three
Wal*Mart branches in December 1998 and increased net interest margins should be
reflected in the operating numbers during 1999.
Sincerely,
T. Aubrey Silvey Gary D. Dorminey
Chairman President and CEO
<PAGE>
BUSINESS OF THE COMPANY
Community First Banking Company (the "Company") was incorporated in the
State of Georgia on March 12, 1997, for the purpose of becoming a holding
company to own 100% of the outstanding capital stock of Carrollton Federal Bank,
FSB (the "Savings Bank"). The Savings Bank was organized on August 1, 1994 as a
federal savings bank subsidiary of CF Mutual Holdings (the "Mutual Holding
Company"), a federally chartered mutual holding company. Prior to that date, the
predecessor of the Savings Bank had operated as a mutual savings bank since
1929.
On June 27, 1997, we completed a conversion and reorganization (the
"Conversion") whereby the Company became the unitary holding company for the
Savings Bank and the Mutual Holding Company was dissolved.
On December 29, 1997, the Savings Bank converted from a federal savings
bank regulated by the Office of Thrift Supervision (the "OTS") to a Georgia
chartered state commercial bank regulated by the Georgia Department of Banking
and Finance (the "Georgia Department") and concurrently changed its name to
Community First Bank (the "Bank").
The Company directs, plans and coordinates the activities of the Bank and
its subsidiaries. Accordingly, the information presented in this Annual Report
relates primarily to the Bank. The Bank is a community-oriented financial
institution operating from seven branch offices in western Georgia. These
branches provide customary banking services such as customer and commercial
checking accounts, NOW accounts, savings accounts, certificates of deposit,
lines of credit and MasterCard and VISA credit cards. Lending activities include
the origination of consumer and commercial business loans on a secured and
unsecured basis, residential mortgage and home equity loans, and commercial real
estate loans.
The Bank has three wholly-owned operating subsidiaries that broaden the
services the Bank offers to the community. The first, CFB Securities, Inc.,
offers traditional brokerage services and products such as mutual funds, stocks
and bonds through an NASD member firm. CFB Securities, Inc. began operations in
1996 and is located in space immediately adjacent to the Bank's main office
lobby in Carrollton, Georgia.
The second subsidiary of the Bank, CFB Financial Inc., began operations in
1996 to service the loan needs of consumers traditionally associated with
consumer finance companies. CFB Financial, Inc. has seven full-time employees
operating in its offices in Villa Rica and Douglasville, Georgia, and at the
Bank's branch in Hiram, Georgia. This subsidiary offers a wide range of small
loans granted in conformity with the Georgia Industrial Loan Act.
The third subsidiary, CFB Insurance Agency, Inc., began operations in 1997.
Based in Bowdon, Georgia, CFB Insurance Agency, Inc. offers a full line of
insurance products to existing Bank customers as well as the general public.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain selected consolidated financial data
of Community First Banking Company and other data regarding the Mutual Holding
Company and the Savings Bank. The data at December 31, 1996, 1995, and 1994, and
for the years then ended, have been derived from audited consolidated financial
statements of CF Mutual Holdings and subsidiaries.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA (YEAR END) (in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Loans, gross ............................... 267,735 286,391 272,435 273,171 283,476
Earning assets ............................. 361,169 361,675 326,443 314,706 330,801
Assets ..................................... 391,986 393,881 352,532 334,477 353,351
Deposits ................................... 285,937 315,531 307,756 289,288 289,328
Stockholders' equity ....................... 26,124 69,038 25,258 25,030 22,083
Common shares outstanding .................. 2,578,074 4,479,570 N/A N/A N/A
STATEMENT OF EARNINGS DATA
Net interest income ........................ 15,574 16,132 13,409 13,217 13,224
Provision for loan losses .................. 782 2,067 1,143 250 99
Noninterest income ......................... 5,597 3,690 3,244 3,119 2,137
Noninterest expense (1) .................... 16,038 17,670 15,276 11,764 12,325
Income taxes (benefit) ..................... 1,348 (28) (14) 1,375 553
Net earnings ............................... 3,003 113 248 2,947 2,384
PER COMMON SHARE
Basic ....................................... 0.87 0.03 N/A N/A N/A
Diluted ..................................... 0.82 0.03 N/A N/A N/A
Cash dividends declared ..................... 0.35 0.15 N/A N/A N/A
Book value .................................. 10.14 15.41 N/A N/A N/A
KEY PERFORMANCE RATIOS
Return on average assets .................... 0.73% 0.03% 0.07% 0.86% 0.72%
Return on average equity .................... 6.31% 0.02% 0.99% 12.51% 11.41%
Net interest margin to average earning assets 4.11% 4.53% 4.21% 4.07% 4.15%
Average equity to average assets ............ 11.62% 12.61% 7.32% 6.85% 6.28%
Noninterest expense to average assets (1) ... 3.92% 4.61% 4.45% 3.42% 3.70%
Efficiency ratio (1)(2) ..................... 75.75% 89.14% 91.73% 72.01% 80.23%
Dividend payout ratio ....................... 40.23% 500.0% N/A N/A N/A
OTHER DATA
Number of full service offices .............. 7 12 12 7 8
</TABLE>
(1) Includes one-time SAIF assessment of $1,723 in 1996.
(2) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income plus noninterest income.
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL RESULTS
(in thousands except per share data)
4th 3rd 2nd 1st
Year Ended December 31, 1998 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income ........................................................ 7,839 8,171 8,222 7,988
Interest expense ....................................................... 4,220 4,357 4,251 3,818
Net interest income .................................................... 3,619 3,814 3,971 4,170
Provision for loan losses .............................................. 221 226 181 154
Net interest income after provision for loan losses .................... 3,398 3,588 3,790 4,016
Noninterest income ..................................................... 1,423 1,327 1,672 1,175
Noninterest expense .................................................... 3,684 3,834 4,371 4,149
Earnings before income taxes ........................................... 1,137 1,081 1,091 1,042
Income tax expense ..................................................... 320 338 355 335
Net earnings ........................................................... 817 743 736 707
Basic earnings per share (1) ........................................... .30 .23 .19 .17
Diluted earnings per share (1) ......................................... .28 .22 .18 .16
4th 3rd 2nd 1st
Year Ended December 31, 1997 ............................................ Quarter Quarter Quarter Quarter
Interest income ........................................................ 8,110 8,360 7,710 7,273
Interest expense ....................................................... 3,768 3,797 3,959 3,797
Net interest income .................................................... 4,342 4,563 3,751 3,476
Provision for loan losses .............................................. 1,443 320 209 95
Net interest income after provision for loan losses .................... 2,899 4,243 3,542 3,381
Noninterest income ..................................................... 873 1,079 958 780
Noninterest expense .................................................... 6,546 3,973 3,546 3,605
Earnings (loss) before income taxes .................................... (2,774) 1,349 954 556
Income tax expense (benefit) ........................................... (965) 432 317 188
Net earnings (loss) .................................................... (1,809) 917 637 368
Basic earnings per share (1) ........................................... (.40) .21 .14 .08
Diluted earnings per share (1) ......................................... (.40) .21 .14 .08
</TABLE>
(1) Earnings (loss) per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings (loss) per share does
not necessarily equal the total for the year.
In December 1997, the Company recorded certain adjustments resulting in
$3.7 million in year end charges. The charges included $1.1 million in
additional reserves for loan losses to reflect the continuing change from a
thrift to a commercial portfolio; $1.9 million in a non-recurring compensation
charge in connection with the approval of the Management Recognition Plan; $.6
million of a non-recurring charge related to the closing of two unprofitable
branches and the obsolescence of certain computer equipment associated with the
Year 2000 compliance; and $.1 million in charges associated with the conversion
to a state banking charter.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As a bank holding company, the Company's financial condition and results of
operations are primarily dependent upon its wholly owned subsidiary, the Bank.
Consequently, this section discusses principally the operations of the Bank,
which directly affect the Company's financial condition and results of
operations.
The Company's profitability depends primarily on net interest income, which
is the difference between interest and dividend income on interest-earning
assets, principally loans and investment securities, and interest expense on
interest-bearing deposits and other interest bearing liabilities. Net earnings
also are dependent, to a lesser extent, on the level of provision for loan
losses, non-interest income and non-interest expenses, such as salaries and
related benefits, occupancy and equipment, deposit insurance premiums, and
miscellaneous other expenses, as well as provisions for federal and state income
tax.
The Bank historically operated as a traditional savings and loan, raising
money by offering savings products of relatively short duration and lending this
money for the purpose of home financing. As regulations affecting the savings
and loan industry changed, the Bank began offering primarily adjustable rate
mortgages (ARM's) in 1981. Additional authority for checking accounts and
consumer and commercial loans also allowed the Bank to offer additional services
to its traditional customer base. On December 29, 1997, the Bank converted from
a federal savings bank to a Georgia chartered state bank and thereby gained
additional opportunities to diversify its products and services.
Simultaneous to the Bank's conversion, certain adjustments were made at
year-end 1997 in preparation for its first year of operation as a state
chartered commercial bank. Included in these adjustments were an additional
provision for loan losses to bring the allowance for loan losses to 1.0 % of
loans outstanding at December 31, 1997, and certain non-recurring charges
related to the Management Recognition Plan, closing of unprofitable branches and
computer equipment obsolescence associated with the Year 2000 compliance issue.
The declining interest rate environment during 1998 placed significant pressure
on the Bank's net interest margin. The slight decline in net interest income for
1998 was offset by the improvements realized in noninterest income and
noninterest expense. In keeping with management's focus on cost control and
profitability, the decision was made in late 1998 to sell three of our four
branches located in Wal*Mart Superstores in the south metro-Atlanta area. This
sale was completed in December, 1998.
Another facet of the conversion process during 1998 was management's
efforts to achieve optimal capital levels. Under common stock repurchase plans
approved by the Board of Directors, the Company purchased on the open market
997,154 shares of its common stock at an aggregate purchase price of $45.4
million during the year ended December 31, 1998. Of the 997,154 total shares
repurchased, 772,535 shares have been retired and 224,619 shares are held in
treasury for issuance under the Company's employee benefits plans.
FORWARD-LOOKING STATEMENTS
This annual report, both in the Management's Discussion and Analysis
section and elsewhere, contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although the Company believes that the assumptions underlying the
forward-looking statements contained in the discussion are reasonable, any of
the assumptions could be inaccurate, and therefore, no assurance can be made
that any of the forward-looking statements included in this discussion will be
accurate. Factors that could cause actual results to differ from results
discussed in forward-looking statements include, but are not limited to:
economic conditions (both generally and in the markets where the Company
operates); competition from other providers of financial services offered by the
Company; government regulation and legislation; changes in interest rates;
material unforeseen changes in the financial stability and liquidity of the
Company's credit customers; material unforeseen complications related to Year
2000 issues for the Company, its suppliers and customers and governmental
agencies; and other risks detailed in the Company's filings with the Securities
and Exchange Commission, all of which are difficult to predict and which may be
beyond the control of the Company. The Company undertakes no obligation to
revise forward-looking statements to reflect events or changes after the date of
this discussion or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Net earnings totaled approximately $3 million for 1998 as compared to
$113,000 for 1997 and $248,000 for 1996. Return on average assets and return on
average equity for the year ended December 31, 1998 were .73% and 6.31%
respectively as compared to .03% and .02% at December 31, 1997 and .07% and .99%
at December 31, 1996. The $2.9 million increase in net earnings during 1998 was
primarily attributable to a $1.9 million, or 51.7%, increase in noninterest
income; a $1.6 million, or 9.2%, decrease in noninterest expense; and a $1.3
million, or 62.2%, reduction in the provision for loan losses. The 1997 change
is attributable to $1.1 million in additional reserves for loan losses to
reflect the continuing change from a thrift to a commercial bank portfolio; $1.9
million in a non-recurring compensation charge in connection with the approval
of the Management Recognition Plan; $.6 million of a non-recurring charge
related to the closing of two unprofitable branches and the obsolescence of
certain computer equipment associated with the Year 2000 compliance; and $.1
million in charges associated with the conversion to a state banking charter.
The 1996 decrease in income is attributable to the $1.7 million increase in
deposit insurance premiums during 1996. The premium increase was primarily due
to the special one-time Savings Association Insurance Fund (SAIF) assessment of
65.7 cents per $100 of assessable SAIF deposits effective September 30, 1996. An
$893,000 increase in the provision for loan losses during 1996 also contributed
to the reduction in earnings in 1996, as well as additional expenses due to the
opening of four new branch locations during 1996.
NET INTEREST INCOME
Net interest income (the difference between interest earned on assets and
the interest paid on deposits and liabilities) is the single largest component
of operating income. Management actively manages this income source to provide
the largest possible amount of income while balancing interest rate, credit and
liquidity risks.
Net interest income, on a taxable equivalent basis, was $15.6 million in
1998, compared to $16.2 million in 1997, and $13.5 million in 1996. The decrease
of 3.1% in 1998 was primarily the result of the decrease in yields on investment
securities and increases in other borrowings. The 20% increase in 1997 was
primarily the result of an increase in interest income on investment securities
funded by proceeds from the stock offering and increased loan volume. The 1997
increase was also due to increased loan yields as the loan portfolio shifted
from residential mortgage loans to higher yielding commercial and consumer
loans.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar
amount of interest from average interest-earning assets and the resultant yield,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Dividends
received are included as interest income. Average balances for 1998 and 1997 are
average daily balances while average balances for 1996 are based on month-end
balances. Management believes that the use of average monthly balances is
representative of its operations.
<PAGE>
TABLE 1 CONSOLIDATED AVERAGE BALANCES, INTEREST AND RATES
<TABLE>
<CAPTION>
1998 1997
---------------------------- ------------------------------
Average Interest Yield Average Interest Yield
Balance /Rate Balance /Rate
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest earning deposits and fed funds sold $ 25, 533 1,436 5.62% $19,268 1,064 5.55%
Investment securities:
Taxable 80,128 4,764 5.94 51,584 3,653 7.08
Nontaxable 2,270 177 7.80 2,099 164 7.81
----- --- ----- ----- --- -----
Total investment securities 82,398 4,941 6.00 53,683 3,817 7.11
Loans (including loan fees) (1) 272,055 25,903 9.52 283,723 26,628 9.39
------- ------ ---- ------- ------ ----
Total interest-earning assets 379,986 32,280 8.50 356,674 31,509 8.83
Allowance for loan losses (2,895) (2,193)
Cash and due from banks 10,316 8,980
Premises and equipment 9,036 9,750
Other assets 13,038 9,763
------ -----
Total assets $ 409,481 $382,974
========= ========
Liabilities and equity:
Interest bearing liabilities:
Deposits:
Demand $ 56,842 1,463 2.57% $ 48,745 1,501 3.08%
Savings 37,902 1,069 2.82 39,223 1,157 2.95
Time 204,932 11,720 5.72 208,849 11,848 5.67
Other borrowings 41,197 2,394 5.81 13,465 815 6.05
------ ----- ---- ------ --- ----
Total interest bearing liabilities 340,873 16,646 4.88 310,282 15,321 4.94
Non-interest bearing demand deposits 15,942 21,588
Other liabilities 5,087 2,820
Equity 47,579 48,284
------ ------
Total liabilities and equity $ 409,481 $382,974
========= ========
Excess of interest-bearing assets over
interest-bearing liabilities 39,113 46,393
Ratio of interest-bearing assets to
interest-bearing liabilities 111.47% 114.95%
Net interest income 15,634 16,188
Net interest rate spread 3.62% 3.89%
===== ========
Net interest margin (2) 4.11% 4.53 %
===== ======
Tax equivalent adjustments
Investment securities (60) (56)
Net interest income 15,574 16,132
====== ======
</TABLE>
<PAGE>
TABLE 1 CONSOLIDATED AVERAGE BALANCES, INTEREST AND RATES (continued)
<TABLE>
<CAPTION>
1996
------------------------------
Average Interest Yield
Balance /Rate
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest earning deposits and fed funds sold $ 15,158 822 5.42
Investment securities:
Taxable 30,387 2,411 7.93
Nontaxable 1,236 127 10.28
----- --- -----
Total investment securities 31,623 2,538 8.03
Loans (including loan fees) (1) 272,786 24,874 9.12
------- ------ ----
Total interest-earning assets 319,567 28,234 8.84
Allowance for loan losses (2,446)
Cash and due from banks 9,005
Premises and equipment 8,327
Other assets 9,322
-----
Total assets $343,775
========
Liabilities and equity:
Interest bearing liabilities:
Deposits:
Demand $ 46,821 1,386 2.96
Savings 32,991 889 2.69
Time 202,641 11,338 5.60
Other borrowings 18,650 1,169 6.27
------ ----- ----
Total interest bearing liabilities 301,103 14,782 4.91
Non-interest bearing demand deposits 15,635
Other liabilities 1,893
Equity 25,144
------
Total liabilities and equity $343,775
========
Excess of interest-bearing assets over
interest-bearing liabilities 18,464
Ratio of interest-bearing assets to
interest-bearing liabilities 106.13%
Net interest income 13,452
Net interest rate spread 3.93%
====
Net interest margin (2) 4.21%
=====
Tax equivalent adjustments
Investment securities (43)
Net interest income 13,409
======
</TABLE>
(1) Average balances include nonaccrual loans and mortgage loans held for sale.
(2) Excludes provision for loan losses.
<PAGE>
RATE/VOLUME ANALYSIS
The banking industry often utilizes two key ratios to measure relative
profitability of net interest income. The net interest rate spread measures the
difference between the average yield on earning assets and the average rate paid
on interest bearing sources of funds. The interest rate spread eliminates the
impact of noninterest bearing deposits and gives a direct perspective on the
effect of market interest rate movements. The net interest margin is defined as
net interest income as a percent of average total earning assets and takes into
account the positive impact of investing noninterest bearing deposits.
The net interest spread was 3.62% in 1998, 3.89% in 1997 and 3.93% in 1996,
while the net interest margin was 4.11% in 1998, 4.53% in 1997 and 4.21% in
1996. The decrease in the spread during 1998 was primarily due to lower average
loan balances, higher average investment securities with lower yields and higher
average borrowings. The decrease in the spread during 1997 was primarily due to
a larger percentage of interest bearing assets being in investment securities
(funded by the stock conversion), which have a lower yield than loans. The
increase in the margin in 1997 resulted from the greater amount of interest
bearing assets funded primarily by the stock conversion proceeds. The table
below shows the change in net interest income for the past two years due to
changes in volume and rate, on a tax equivalent basis (assuming a 34% tax rate).
Variances resulting from a combination of changes in rate and volume are
allocated in proportion to the absolute dollar amounts of the change in each
category.
<PAGE>
TABLE 2 RATE/ VOLUME VARIANCE ANALYSIS
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
--------------------- ---------------------
Increase (decrease) Increase (decrease)
due to changes in due to changes in
-------------------------------------- ---------------------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest earning deposits and
federal funds sold $ 359 13 372 442 (200) 242
Investment securities:
Taxable 2,023 (912) 1,111 1,268 (26) 1,242
Nontaxable 13 0 13 72 (35) 37
Loans (including loan fees) (1,095) 370 (725) 1,074 680 1,754
------- --- ----- ----- --- -----
Total interest income 1,300 (529) 771 2,856 419 3,275
Interest expense on:
Deposits:
Demand 250 (288) (38) 155 (40) 115
Savings (39) (49) (88) 169 99 268
Time (229) 101 (128) 382 128 510
Other borrowings 1,679 (100) 1,579 (303) (51) (354)
----- ----- ----- ----- ---- -----
Total interest expense 1,661 (336) 1,325 403 136 539
----- ----- ----- --- --- ---
Net interest income (361) (193) (554) 2,453 283 2,736
===== ===== ===== ===== === =====
</TABLE>
NONINTEREST INCOME
Noninterest income consists primarily of revenues generated from service
charges and fees on deposit accounts and profits earned through sales of credit
life insurance. In addition, gains or losses realized from the sale of
investment portfolio securities are included in noninterest income. Total
noninterest income for 1998 increased 51.7% or $1.9 million as compared to 1997.
In addition to increases in all categories of fee based income, the largest
component of noninterest income growth during 1998 was the net gain on sale of
available for sale securities totaling $860,000 compared to a $20,000 loss in
1997. Management periodically liquidates securities available for sale to meet
loan demand and other liquidity needs.
Service charges on deposit accounts increased $331,000 or 12.1% due to
management's effort to increase fee based income. Fees on transaction accounts
were increased during 1998 as the result of an independent review of the Bank's
fee structure that was performed in the fourth quarter of 1997 and implemented
in 1998. The 1997 increase of $380,000 or 16.2% was primarily due to a 14%
increase in transaction accounts for the year ended December 31, 1997.
Miscellaneous income increased $610,000 or 233% for the year ended December
31, 1998 as compared to 1997. This increase resulted primarily from three items:
an insurance settlement of $250,000; net gain on sale of other assets, including
other real estate of $294,000 for 1998 compared to a net loss in 1997 of
$51,000; and the gain on the sale of three branches located in Wal*Mart
Superstores of $100,000 in 1998. Income from insurance sold increased by $86,000
or 16.4% in 1998. This increase is attributable to the sales and marketing
efforts of CFB Financial, Inc. and CFB Insurance, Inc., the finance and
insurance subsidiaries of the Bank.
NONINTEREST EXPENSE
Noninterest expense decreased $1.6 million or 9.2% for the year ended
December 31, 1998 as compared to 1997. Approximately half of these cost savings
relate to the closing of two unprofitable branches in February 1998. Expenses
associated with other real estate also decreased by $194,000 and losses related
to branch operations were reduced by $182,000. Management continues to emphasize
operating efficiencies and expense control to reduce the impact of noninterest
expense on net earnings.
Noninterest expense for 1997 increased $2.4 million or 15.7% as compared to
1996. Salaries and wages increased $61,000 in 1997 or 16% compared to 1996
primarily due to staffing needs at the Wal*Mart branches that were opened from
March through September 1996 and were open throughout the entire year of 1997.
One additional branch was opened in July 1997 on Maple Street in Carrollton,
Georgia. ESOP and MRP expense was $2.6 million in 1997. These benefit packages
were begun in 1997 in conjunction with and subsequent to the initial public
offering. The 1997 expense contains a one time $1.8 million bonus accrued to
reimburse recipients for the tax liability relating to preferred stock awards
granted to the directors and certain executive officers. Occupancy and equipment
expense increased $299,000 or 18.6% in 1997 compared to 1996 primarily because
of the opening of one additional branch and four Wal*Mart branches being opened
for the full year in 1997.
Deposit insurance premiums decreased $2.2 million in 1997 from 1996. This
decrease is attributed primarily to a one-time assessment to all SAIF
institutions which was $1.7 million for the Company for the year ended December
31,1996, and to a significant reduction in the rate of deposit insurance
assessment. The year ended December 31, 1997, had a one time charge of $505,000
for the loss on abandonment of premises and equipment relating to the closing of
two branches and the obsolescence of certain computer equipment associated with
Year 2000 compliance. Other operating expenses, including advertising, office
supplies, and data processing, increased 12% in 1997.
INCOME TAXES
Income tax expense of $1.3 million was recognized for the year ended
December 31, 1998 and an income tax benefit of $28,000 and $14,000 was
recognized for the years ended December 31, 1997 and 1996, respectively. The
effective tax rate differed from the expected 34% federal rate applied to
earnings before income taxes primarily due to tax exempt interest income.
Additional information regarding the Company's income taxes can be found in Note
(8) of the Notes to Consoldiated Financial Statements.
CHANGES IN FINANCIAL CONDITION
The Company's consolidated assets at December 31, 1998 totaled $392
million, compared to $394 million at December 31, 1997. This represents a .5%
decrease in total assets at year-end 1998. The average balance sheet (Table 1)
reflects a $26.5 million or 6.9% increase in average total assets from 1997 to
1998. Average investment securities for 1998 increased $28.7 million resulting
from an arbitrage transaction where the bank borrowed $40 million of FHLB 7
yr./2 yr. callable advances and purchased $40 million in bonds. Average loans
decreased $11.7 million or 4.1% from 1997 to 1998. Average stockholders' equity
decreased $705,000 or 1.5% from 1997 to 1998 primarily as the result of the
Company's stock repurchase program.
On December 29, 1997 the Board of Directors of the Company authorized a
stock repurchase program whereby the Company was authorized to purchase up to
600,000 shares of its common stock through open market purchases. On August 20,
1998 the Company completed cumulative common stock repurchases of 600,000
shares. On August 20, 1998, the Company's Board of Directors also authorized
negotiations for the repurchase of 172,535 shares from a single shareholder. The
purchase of the 172,535 shares was concluded on August 21, 1998. A total of
772,535 shares were retired during the first nine months of 1998 at an average
cost of $47.13 per share. On August 25, 1998, the Board of Directors of the
Company authorized another stock repurchase program for treasury to fund future
requirements for common stock under the Management Recognition Plan and 1997
Stock Option Plan. The Company intends to repurchase an aggregate number of
shares of common stock not to exceed 337,898 shares. In accordance with this
plan, 224,619 shares had been purchased as of December 31, 1998 at an average
price of $40.16 per share. As a result of the stock repurchases outstanding
common shares were reduced by 1.9 million shares or 42.4% in 1998.
On December 31, 1998, the Bank sold substantially all the assets and
liabilities of three of its four Wal*Mart branch locations (Stockbridge,
Fayetteville and Newnan) to The First Citizens Bank of Newnan ("FCBN").
Management determined that operating these branches (which were primarily
outside of the Bank's core market area) without traditional branches in the same
area would not contribute to the Bank's profitability. The disposition resulted
in a cash payment to FCBN of approximately $27.5 million consisting of deposit
liabilities of approximately $28.9 million, net of certain other assets.
INVESTMENT SECURITIES
The Company classifies its securities in one of three categories: trading,
available for sale or held to maturity. There were no trading securities at
December 31, 1998 and 1997. Securities held to maturity are those securities for
which the Company has the ability and intent to hold to maturity. All other
securities are classified as available for sale. Securities available for sale
are recorded at fair value. Securities held to maturity are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses, net of the related tax effect, on securities available
for sale are excluded from earnings and are reported as a separate component of
stockholders' equity until realized.
At December 31, 1998, approximately 61.7% of the Company's investment
securities and other investments were comprised of mortgage-backed securities
that are insured or guaranteed by the Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA), or Government National
Mortgage Association (GNMA). Collateralized Mortgage Obligations (CMOs) not
insured or guaranteed by FHLMC, FNMA or GNMA comprised 8.0% of the investment
portfolio, U.S. government agency obligations comprised 1.4%, U.S. government
treasury obligations comprised 4.1%, preferred stock of FNMA, FHLMC and Student
Loan Mortgage Association (SLMA) comprised 13.2%, FHLB stock comprised 3.0%,
municipal securities comprised 3.1% and common stock comprised 5.5% of such
portfolio at December 31, 1998.
The Company's securities portfolio is managed in accordance with the
Company's Investment Policy adopted by the Board of Directors and administered
by the Asset/Liability Committee, which consists of an outside director, the
President and Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer, and Senior Vice President. The policy lists specific areas of
permissible investments consistent with the Company's investment strategy. Under
the Company's policy, at the time of purchase of an investment security,
management designates the security as either held for maturity or available for
sale based on the Company's investment objectives, operational needs and intent.
The Company does not maintain a trading account portfolio. Investment activities
are monitored to ensure that they are consistent with established guidelines and
objectives.
During the first quarter of 1998, management initiated a leverage program
designed to make optimal utilization of the Bank's assets and capital. This
program utilizes borrowed funds, principally FHLB advances, secured by mortgage
loans to purchase additional securities. The revenue contribution from the
leverage program (the net spread between the leverage borrowing cost and
earnings on new securities purchased) is not expected to add any material
operating expense to the Bank. The securities purchased in conjunction with the
leverage program are primarily treasuries and other government agency issues. As
of December 31, 1998, the leverage program at the bank had added $40 million in
total borrowings and earning assets.
<PAGE>
The following table sets forth certain information regarding the
classifications of the Company's investment securities at December 31, 1998,
1997 and 1996. Securities classified as available for sale are carried at their
estimated fair value at December 31, 1998. Securities held to maturity are
carried at amortized cost at all respective dates. There were no trading
securities at December 31, 1998, 1997 or 1996.
TABLE 3 CARRYING VALUE OF INVESTMENTS
<TABLE>
<CAPTION>
Securities available for sale: 1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
U.S. Treasuries $ 3,049 $ 3,013 $ --
U.S. Government agencies 1,005 23,248 18,830
State, county and municipal 2,184 2,159 2,231
Mortgage-backed securities 51,646 11,552 12,866
Equity securities 13,818 9,520 --
------- ------- --------
$71,702 $49,492 $ 33,927
------- ------- --------
Securities held to maturity:
U.S. Treasuries $ -- -- 500
U.S. Government agencies -- 5,669 6,216
State, county and municipals 115 115 115
Mortgage-backed securities 117 222 933
--- --- ---
232 $6,006 $7,764
--- ------ ------
Total investment securities $71,934 $55,498 $41,691
======= ======= =======
</TABLE>
The following table presents the expected maturity of the total investment
securities portfolio by maturity date and average yields based upon amortized
cost (for all obligations on a fully taxable basis assuming a 34% tax rate) at
December 31, 1998. It should be noted that the composition and
maturity/repricing distribution of the investment portfolio is subject to change
depending upon rate sensitivity, capital needs and liquidity needs.
<PAGE>
TABLE 4 EXPECTED MATURITY OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
After one but After five but
Within one year within five years within ten years After ten years
Amount Yield Amount Yield Amount Yield Amount Yield Totals
------ ----- ------ ----- ------ ----- ------ ----- ------
( in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
State, county and municipals $ - - 115 4.55% - - - - 115
Mortgage-backed securities 33 8.52% 84 7.25% - - - - 117
-- ----- -- ----- - - - - ---
33 8.52% 199 5.69% - - - - 232
== ===== === ===== = = = = ===
Securities available for sale:
U.S. Treasury Securities 999 5.95% 1,997 6.03% - - - - 2,996
U.S. Government Agencies - - 1,000 7.35% - - - - 1,000
State, county and municipals 51 6.94% 103 7.26% 888 8.12% 1,039 8.51% 2,081
Mortgage-backed securities - - 1,912 6.86% 5,880 6.98% 44,156 6.36% 51,948
Equity securities:
FNMA Preferred Stock 2,018 - - - - - - - 2,018
SLMA Preferred Stock 5,732 - - - - - - - 5,732
FHLMC Preferred Stock 2,009 - - - - - - - 2,009
Common Stock (Banks) 5,184 - - - - - - - 5,184
----- ----- ----- ----- ------ ----- ------ ----- -----
$ 15,993 6.00% 5,012 6.64% 6,768 7.13% 45,195 6.41% 72,968
======== ===== ===== ===== ===== ===== ====== ===== ======
</TABLE>
LENDING ACTIVITIES
The Bank has general authority to originate and purchase loans secured by
real estate, secured or unsecured loans for commercial, corporate, business, or
agricultural purposes and loans for personal, family, or household purposes, and
may issue credit cards and extend credit in connection therewith. While not
restricted by law, the Bank limits its lending activities mainly to the counties
in which it has offices.
At December 31, 1998, the Bank's loans-to-one borrower limit was $7.4
million for amply secured loans (25% of statutory capital base) and $4.4 million
for unsecured loans (15% of statutory capital) and its five largest loans or
groups of loans-to-one borrower, including related entities, were $4.6 million,
$4.4 million, $3.6 million, $3.0 million and $2.9 million. The $4.6 million loan
is a development loan secured by a 228 lot residential subdivision and an 18
hole golf course. The $4.4 million loan is a commercial installment note secured
by a restaurant, motel and adjacent real estate. The $3.6 million loan is a
construction and permanent financing on a 240 unit apartment complex in
Chattanooga, Tennessee, which represents a participation with other lenders. The
$3.0 million loan was to fund the purchase of a clothing manufacturing business
secured by real estate and equipment, inventory, furniture, fixtures, and
accounts receivable. The $2.9 million loan was to facilitate the purchase of an
architectural firm.
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated.
TABLE 5 LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
Amount % Amount % Amount % Amount % Amount %
------------- -------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans(1) $197,182 74% $209,836 73% $203,799 75% $225,481 83% $240,990 85%
Real estate construction loans 18,853 7 18,016 6 10,760 4 5,052 2 1,828 1
Commercial loans 20,905 8 16,507 6 10,293 4 8,643 3 8,351 3
Consumer and other installment loans 30,795 11 42,032 15 47,583 17 33,995 12 32,307 11
------ ------ ------ ------ ------
loans
Total loans 267,735 100% 286,391 100% 272,435 100% 273,171 100% 283,476 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Less: Allowance for loan losses 2,880 2,789 2,601 2,291 2,392
----- ----- ----- ----- -----
Loans, net $264,855 $283,602 $269,834 $270,880 $281,084
======== ======== ======== ======== ========
(1)Real estate mortgage loans contain commercial loans secured by real estate in
the following amounts:
1998 1997 1996 1995 1994
$ 74,237 $ 78,675 $ 47,493 $ 35,301 $ 30,404
</TABLE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table sets
forth certain information at December 31, 1998 regarding the dollar amount of
loans maturing or repricing in the Bank's portfolio based on the contractual
terms to maturity, before giving effect to net items. Demand loans, loans having
no stated schedule of repayments and no stated maturity or repricing and
overdrafts are reported as due in one year.
TABLE 6 LOAN PORTFOLIO MATURITIES
<TABLE>
<CAPTION>
1 year
Less Than through Over
Loan Type 1 year 5 years 5 years Total
- --------- ------ ------- ------- -----
(in thousands)
<S> <C> <C> <C> <C>
Commercial $12,127 $7,942 $ 836 $20,905
Construction 12,172 2,220 4,461 18,853
------ ----- ----- ------
Total $24,299 $10,162 $5,297 $39,758
======= ======= ====== =======
</TABLE>
<PAGE>
The following table sets forth, as of December 31, 1998, the dollar amount
of all loans, before net items, maturing or repricing after one year from
December 31, 1998 that have fixed interest rates or that have adjustable
interest rates.
TABLE 7 RATE STRUCTURE FOR LOANS MATURING OVER ONE YEAR
<TABLE>
<CAPTION>
Adjustable
Loan Type Fixed Rates Rates Total
- --------- ----------- ----- -----
(in thousands)
<S> <C> <C> <C>
Commercial $7,751 $1,027 $8,778
Construction 4,638 2,043 6,681
----- ----- -----
Total $12,389 $3,070 $15,459
======= ====== =======
</TABLE>
Scheduled contractual amortization of loans does not reflect the actual
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Bank manages asset quality and controls risk through diversification of
the loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices. The Bank's Asset Review Committee is
charged with monitoring asset quality, establishing credit policies and
procedures, and enforcing the consistent application of these policies and
procedures across the Bank. Loan review specialists are charged with credit
reviews and reporting deviation from policy, or any change in the quality of a
credit, to the Asset Review Committee and the Executive Committee of the Board
of Directors.
The provision for loan losses is the annual cost of providing an adequate
allowance for anticipated potential future losses on loans. The amount each year
is dependent upon many factors including loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral, and economic factors and
trends.
Reviews of non-performing and past due loans and larger credits, designed
to identify potential charges to the allowance for loan losses, as well as
determine the adequacy of the allowance, are made on a regular basis during the
year.
These reviews are made by the responsible lending officers, as well as a
separate credit review department, and consider such factors as the financial
strength of borrowers, the value of the applicable collateral, past loan loss
experience, anticipated loan losses, growth in the loan portfolio, and other
factors, including prevailing and anticipated economic conditions.
Whenever a loan, or portion thereof, is considered by management to be
uncollectible, it is charged against the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such agencies may
require the Banks to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
The provision for loan losses decreased by $1,285,000 in 1998 compared to
1997. The allowance for loan losses as a percentage of total loans increased to
1.08% in 1998 from .97% at year end 1997. The net loan loss provision was lower
for 1998 than 1997 and higher than 1996 because the Company chose to charge-off
certain loans in 1997 in preparation for conversion to a state chartered
commercial bank. These charge offs were the result of higher deficiency balances
associated with consumer loans and credit card loans as well as charge-offs
taken upon the foreclosure of real estate. The Bank does not currently allocate
the allowance for loan losses to the various loan categories.
<PAGE>
TABLE 8 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
( in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $2,789 $2,601 $ 2,291 $ 2,392 $ 2,687
Provisions 782 2,067 1,143 250 99
Charge-offs
Mortgage loans 199 351 32 82 277
Commercial loans 33 95 117 59 0
Consumer loans 962 1,768 776 307 181
--------- ----------- ------------ ----------- -----------
Total charge-offs 1,194 2,214 925 448 458
Recoveries
Mortgage loans - 42 25 7 40
Commercial loans - - - - -
Consumer loans 503 293 67 90 24
--------- ----------- ------------ ----------- -----------
Total Recoveries 503 335 92 97 64
Net charge-offs 691 1,879 833 351 394
Allowance at end of period $2,880 $2,789 $2,601 $2,291 $2,392
======== =========== ============ ====== ======
Allowance for loan losses to total non-performing
loans at end of period 260.87% 254.00% 41.66% 99.61% 76.64%
Allowance for loan losses to average loans at end
of period 1.04% 1.00% 0.95% 0.82% 0.88%
Net charge-offs to average loans outstanding
during the period 0.25% 0.67% 0.31% 0.13% 0.14%
Average gross loans(1) $277,063 $279,412 $272,803 $278,323 $272,815
</TABLE>
(1) Beginning and ending annual period balances were used to calculate average
gross loans.
ASSET QUALITY AND RISK ELEMENTS
At December 31, 1998, non-performing assets, comprised of nonaccrual loans,
other real estate owned and loans for which payments are more than 90 days past
due, totaled $6.6 million compared to $7.7 million at year end 1997.
It is the general policy of the Bank to stop accruing interest income and
place the recognition of interest on a cash basis when a loan is placed on
nonaccrual status and any interest previously accrued but not collected is
reversed against current income. Loans made by the Bank to facilitate the sale
of other real estate are made on terms comparable to loans of similar risk.
There were no commitments to lend additional funds on nonaccrual loans at
December 31, 1998. Table 9 summarizes the Bank's non-performing assets for each
of the last five years.
<PAGE>
TABLE 9 RISK ELEMENTS
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
( in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Mortgage 1,014 752 4,843 1,785 1,656
Construction - 199 - - -
Commercial - - - - -
Consumer 90 147 1,400 515 1,465
Accruing loans greater than 90 days delinquent:
Mortgage - - - - -
Construction - - - - -
Commercial - - - - -
Consumer - - - - -
------- ------- ------- ------- -------
Total non-performing loans 1,104 1,098 6,243 2,300 3,121
Real estate owned(1) 5,479 6,628 180 253 968
------- ------- ------- ------- -------
Total non-performing assets 6,583 7,726 6,423 2,553 4,089
Total non-performing loans as a
percentage of total net loans 0.42% 0.39% 2.31% 0.85% 1.11%
Total non-performing assets as
a percentage of total assets 1.68% 1.96% 1.82% 0.76% 1.16%
</TABLE>
(1) Consists of real estate acquired by foreclosure.
There may be additional loans within the Bank's portfolio that may
become classified as conditions dictate; however, management was not aware of
any such loans that are material in amount at December 31, 1998.
SOURCE OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, principal, interest and dividend payments on
investments and other sources. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Bank's deposits are attracted principally from within the
Bank's primary market area through the offering of a wide selection of deposit
instruments, including NOW accounts, money market accounts, regular savings
accounts, and term certificate accounts. Included among these deposit products
are individual retirement account certificates of approximately $47.1 million at
December 31, 1998. Deposit account terms vary, with the principal references
being the minimum balance required, the time periods the funds must remain on
deposit and the interest rate. As of December 31, 1998, the certificates of
deposit with principal amounts of $100,000 or more totaled $41.4 million.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals and federal regulations.
The Bank does not advertise for deposits outside its local market area or
utilize the services of deposit brokers. A listing on the Internet has been
established primarily for people relocating to the Bank's primary market area.
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Bank at the dates indicated.
TABLE 10 DEPOSITS
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Amount Interest Rate Amount Interest Rate Amount Interest Rate
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposits $188,052 5.6% $207,326 5.7% $210,488 5.6 %
Savings accounts 31,630 2.3 38,273 3.2 34,077 3.0
Transaction accounts
NOW and money
market accounts 52,644 2.2 51,198 2.1 47,288 2.6
Non-interest
bearing accounts 13,611 - 18,734 - 15,903 -
------ ------ ---------
Total transaction
accounts 66,255 69,932 63,191
------ ------ ---------
Total deposits $285,937 $315,531 $307,756
======== ======== ========
</TABLE>
The following table sets forth the maturities of the Bank's certificates of
deposit having principal amounts of $100,000 or more at December 31, 1998.
TABLE 11 MATURITIES OF CERTIFICATES OF DEPOSIT OVER $100,000
<TABLE>
<CAPTION>
Certificates of deposit
maturing in: (in thousands)
<S> <C>
Less than three months $ 6,725
Three to six months 5,833
Six to 12 months 13,924
Over 12 months 14,967
------
Total certificates of deposit with
balances of $100,000 or more $41,449
=======
</TABLE>
<PAGE>
BORROWINGS. The Bank may obtain advances from the FHLB of Atlanta upon the
security of its FHLB of Atlanta stock and certain of the Bank's residential
mortgage loans, provided certain standards related to creditworthiness have been
met. Such advances are made pursuant to several credit programs, each of which
has its own interest rate and range of deposit accounts, and to permit increased
lending.
The Bank had $42.9 million FHLB advances outstanding at December 31, 1998.
All were fixed rate advances and had a weighted average rate of 5.37%.
The following table sets forth the maximum month-end balance and average
balance of the Bank's FHLB advances during the periods indicated. See also Note
(6) to the Consolidated Financial Statements.
TABLE 12 FHLB ADVANCES
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Maximum balance $45,055 $16,295 $20,236
Average balance 37,564 12,071 16,514
Weighted average interest rate
during year 5.45 % 5.70 % 5.56 %
Balance outstanding at year-end $42,945 $5,495 $16,295
Weighted average interest rate
at year-end 5.37 % 5.73 % 5.90 %
</TABLE>
The Company also borrowed $5 million on June 2, 1998 from another financial
institution and pledged all the issued and outstanding shares of capital stock
owned of the Bank. The note payable bears interest at prime less one percent
with the entire outstanding balance due December 2, 1999. This loan was obtained
to help fund the repurchase of 238,700 shares of the Company's common stock on
June 2, 1998 in accordance with the Company's stock repurchase plan.
INTEREST RATE SENSITIVITY MANAGEMENT
The absolute level and volatility of interest rates can have a significant
impact on the Company's profitability. The objective of interest rate risk
management is to identify and manage the sensitivity of net interest income to
changing interest rates in order to achieve the Company's overall financial
goals. Based on economic conditions, asset quality and various other
considerations, management establishes tolerance ranges for interest rate
sensitivity and manages within these ranges.
On February 27, 1998 the Bank purchased an interest rate cap. This interest
rate cap was purchased as part of an arbitrage transaction where the Bank
borrowed $40 million of FHLB 7 yr./2 yr. callable advances, and purchased $40
million in bonds. The Company anticipates continued limited use of derivative
interest rate contracts when appropriate in its asset-liability rate management.
The Company uses income simulation modeling as the primary tool in
measuring interest rate risk and managing interest rate sensitivity. Simulation
modeling considers not only the impact of changing market rates of interest on
future net interest income, but also such other potential causes of variability
as earning asset volume, mix, yield curve relationships, customer preferences
and general market conditions.
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable timeframe, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons:
immediate through three months, four to twelve months, one to five years, over
five years, and on a cumulative basis. The differences are known as interest
sensitivity gaps. Table 13 shows interest sensitivity gaps for these different
intervals as of December 31, 1998.
<PAGE>
TABLE 13 INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
Immediate Four Through One Through
Through Three Twelve Five Over
Months Months Years Five Years Totals
------ ------ ----- ---------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits and federal funds sold 21,853 - - - 21,853
Investment securities 17,274 7,454 18,570 28,636 71,934
Other investments 2,328 - - - 2,328
Loans (including mortgage loans held for sale) 80,848 82,316 72,703 32,067 267,934
------- ------- ------- ------- -------
Total interest-earning assets 122,303 89,770 91,273 60,703 364,049
Interest-bearing demand and savings deposits 12,983 36,629 34,662 - 84,274
Time deposits 35,887 83,831 68,334 - 188,052
Note payable & other borrowings 65 5,535 2,345 40,000 47,945
Subordinated debt - 900 - - 900
------- ------- ------- ------- -------
Total interest-bearing liabilities 48,935 126,895 105,341 40,000 321,171
Interest sensitivity gap per period 73,368 (37,125) (14,068) 20,703
Cumulative interest sensitivity gap 73,368 36,243 22,175 42,878
Cumulative gap as a percentage of total
interest-earning assets 20.15% 9.96% 6.09% 11.78%
Cumulative interest-earning assets as a percentage
of cumulative interest-bearing liabilities 249.93% 120.61% 107.89% 113.35%
</TABLE>
As seen in the preceding table, for the first 365 days, 54.8% of earning
asset funding sources will reprice compared to 58.3% of all interest earning
assets. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remains the same, thus impacting net interest
income. This characteristic is referred to as basis risk and generally relates
to the possibility that the repricing characteristics of short-term assets tied
to the Company's prime lending rate are different from those of short-term
funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest rate sensitivity analysis report. These prepayments may have
significant effects on the Company's net interest margin. Because of these
factors an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
Table 13 indicates the Company is in an asset sensitive or positive gap
position at twelve months. This asset sensitive position would generally
indicate that the Company's net interest income would increase should interest
rates rise and would decrease should interest rates fall. Due to the factors
cited previously, current simulation results indicate only minimal sensitivity
to parallel shifts in interest rates. Management also evaluates the condition of
the economy, the pattern of market interest rates and other economic data to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce an optimal net interest margin.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure that sufficient funding
is available, at reasonable cost, to meet the ongoing operational cash needs of
the Company and to take advantage of income producing opportunities as they
arise. While the desired level of liquidity will vary depending upon a variety
of factors, it is the primary goal of the bank to maintain a high level of
liquidity in all economic environments. Liquidity is defined as the ability of a
company to convert assets into cash or cash equivalents without significant loss
and to raise additional funds by increasing liabilities. Liquidity management
involves maintaining the Company's ability to meet the day to day cash flow
requirements of the Company's customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs. Without
proper liquidity management, the Company would not be able to perform the
primary functions of a financial intermediary and would, therefore, not be able
to meet the needs of the communities it serves.
The primary function of asset and liability management is not only to
assure adequate liquidity in order for the Company to meet the needs of its
customer base, but to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that the Company can also meet the
investment returns anticipated by its shareholders. Daily monitoring of the
sources and use of funds is necessary to maintain an acceptable cash position
that meets both requirements. In a banking environment, both assets and
liabilities are considered sources of liquidity funding and both are, therefore,
monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a lesser
extent, sales of securities. Installment loan payments are becoming an
increasingly important source of liquidity for the Company as this portfolio
continues to grow. Loans that mature or reprice in one year or less amounted to
$163 million at December 31, 1998. Investment securities maturing in the same
time frame totaled $27.1 million. Other short-term investments such as federal
funds sold and maturing interest bearing deposits with other banks are
additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and non-interest bearing deposit accounts.
These sources of liquidity are short-term in nature and are used as necessary to
fund asset growth and meet short-term liquidity needs. Liquidity is also
provided by advances from the FHLB of Atlanta.
As disclosed in the Company's Consolidated Statements of Cash Flows
included in the Consolidated Financial Statements, net cash provided by
operating activities increased $5.3 million from December 31, 1997 to December
31, 1998. Net cash provided by investing activities of $1.5 million in 1998
resulted primarily from a net decrease in loans of $17.2 million, a net increase
in funds used for investments of $17.7 million and $2.3 million provided from
the sale of real estate and repossessions. Cash used in financing activities
totaled $4.5 million for 1998. A net increase in notes payable providing $42.5
million was offset by purchases of the Company's stock of $45.4 million during
1998.
Management considers the Company's liquidity position at the end of 1998 to
be sufficient to meet its foreseeable cash flow requirements for the next 12
months. Reference should be made to the Consolidated Statements of Cash Flows
appearing in the Consolidated Financial Statements for a three-year analysis of
the changes in cash and cash equivalents resulting from operating, investing and
financing activities.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
YEAR 2000 ISSUES
The "Year 2000" issue refers to potential problems that may result from the
improper processing of dates and date-dependent calculations by computers and
other microchip-embedded technology (like an alarm or telephone system). In
simple terms, problems with year 2000 can result from a computer's inability to
recognize a two-digit date field (00) as representing the year 2000 and its
incorrect recognition of the year as 1900. Failure to identify and correct this
problem could result in system processing errors that would disrupt the
Company's normal business operations. In recognition of the seriousness of this
issue, and in accordance with directives on Year 2000 issued by banking
regulatory agencies, the Company established a Year 2000 Committee in January,
1998. This committee is chaired by a member of senior management and reports
directly to the Company's Board of Directors on a quarterly basis.
State of Readiness
The Company has adopted the seven phase action plan outlined by the FDIC to
address Year 2000 issues and expects to address all aspects of the action plan
in a timely manner and to be prepared for the impact Year 2000 will have on the
Company, its systems, vendors and customers. The seven phases are:
1. Awareness - The Year 2000 committee and committee chairperson were
appointed and authorized to develop an overall strategy for addressing
the Year 2000 issue. An ongoing awareness program has been developed
to keep directors, employees and customers informed about the Year
2000 issue and apprised of the Company's progress in addressing it.
2. Inventory - This entails completion of a specific, detailed inventory
of all hardware, software and other microchip-embedded products used
by the Company. Procedures are established to ensure that any new
purchases are properly analyzed for Year 2000 compliance and then
inventoried. Vendors and suppliers are contacted to ascertain Year
2000 compliance status and efforts to remediate potential problems.
3. Assessment - Mission critical areas are identified and tested to
address potential problem areas. Budgets are developed for expected
expenses and other resources needed to adequately address potential
problems. The potential risk exposure posed by borrowers and large
depositors is also evaluated.
4. Renovation/Analysis - Vendors that supply system applications are
requested to provide certification that their product used by the
Company is Year 2000 compliant. Non-compliant systems are renovated or
replaced.
5. Testing - All replaced or upgraded systems are tested to ensure full
correction of any Year 2000 issues and then reviewed by a third party
for validation of corrective action. Contingency plans are tested for
effectiveness.
6. Implementation - A final review of all systems after the renovation of
problematic areas is completed. Management and system users will
carefully assess the status of corrective action.
7. Post-Implementation - Utilizing the contingency plans, the Year 2000
committee will continue to refine backup processes and procedures to
be used in a worst-case scenario.
This seven-phase program applies to both information technology ("IT") and
non-information technology ("non-IT") systems affected by Year 2000 that have
been designated by the Year 2000 Committee as "mission critical." For purposes
of the Year 2000 project, mission critical systems are defined as any technology
element that, if not able to function properly, could result in financial
liability, loss of revenue, significant customer service/support problems and
damage to the Company's reputation.
The following table identifies our primary IT and non-IT mission critical
systems and elements:
IT Non-IT
-- ------
Mainframe hardware Security systems
Mainframe software HVAC systems
ATMs Vault doors
PC network hardware Printed forms
PC network software Phone systems
As of September 30, 1998, the awareness and inventory phases of the Year
2000 project were completed for our mission critical IT and non-IT systems.
The Federal Financial Institutions Examination Council (FFIEC) issued a
statement entitled "Year 2000 Project Management Awareness" in May, 1997. This
statement established key milestones that banks and other financial institutions
must meet with regard to Year 2000 testing and remediation. The following table
sets forth each deadline contained in this statement and where the Company
stands with respect to meeting each deadline.
<PAGE>
<TABLE>
<CAPTION>
Date Task The Company's Status
- ---- ---- --------------------
<S> <C> <C>
June 30, 1998 Complete development of all Completed
written testing strategies, plans
and policies; due diligence to
determine Year 2000 risk posed by
customers implemented.
September 1, 1998 Commence testing of internal Completed
mission-critical systems; assessment
of customers' Year 2000 preparedness
and potential impact of the
institution in progress.
December 31, 1998 Testing of internal mission-critical Completed
systems substantially complete.
Continued assessement of customer
Y2K preparedness.
March 31, 1999 External testing with material third Scheduled for completion by June 30,
parties begins. 1999.
June 30, 1999 Testing of all mission-critical Scheduled for completion by June 30,
systems completed and corrective 1999.
actions substantively completed.
</TABLE>
The FFIEC has, under its bank supervisory authority, developed a
multi-phase examination process to determine if banks are complying with the
provisions of the awareness statement described above. The Company intends to
comply with all regulatory requirements established by banking regulatory
agencies.
As is the case with many financial institutions, the Company is dependent
upon third parties to provide systems used in daily operations. Examples
include, but are not limited to, firms that provided both mainframe and desktop
computer hardware, bank processing software that tracks loans and deposits,
telecommunications services, check clearing and electrical utilities. Even
though many providers of these products have advised that they are Year 2000
compliant, the Company is performing independent testing and validation that
will confirm that this is the case for each product as it is installed and used
in the Company's operations. Generally speaking, the Company utilizes hardware
and software providers that are registered under the Securities and Exchange Act
of 1934; the SEC filings for each provider are being reviewed by management to
determine if any significant disclosures with regard to the Year 2000 are made.
In addition, the Company has requested all providers of hardware, software,
processing services and other systems that are date-sensitive to provide written
certification of the Year 2000 status for their product or service. The
following table sets forth the Company's significant material relationships with
third parties that, in the opinion of management, could potentially result in
business interruption if the product or service provided is not Year 2000
compliant. This table is not intended to itemize all relationships with
third-party service providers.
Product/Service Year 2000 Assessment Status
--------------- ---------------------------
Software Certified by proxy
Service Bureau Certified by proxy
Telecommunications services Completed
Wire transfers Testing completed with FedLine
Check clearing Certified compliant by proxy
In accordance with recently issued accounting guidelines on how Year 2000
costs should be recognized for financial statement purposes (EITF 96-14), the
Company intends to recognize as current period expense all costs associated with
the consulting, inventory, testing and resources components of the Year 2000
budget. The costs associated with remediation, which comprise approximately 90%
of the Year 2000 budget, are primarily related to the installation of a new
wide-area desktop computer network (WAN) that will replace the majority of the
desktop computers, file servers and peripheral equipment currently in use. In
addition to being Year 2000 compliant, the upgrades will provide the Company
with a uniform standard desktop computer configuration, and internal e-mail
capability. The Company intends to leverage this new WAN technology to increase
the levels of employee productivity and improve operating efficiency. The costs
of the WAN component of the Year 2000 remediation budget will be recognized over
a useful life of five years starting at the first quarter of 1999.
The Company expects to fund the costs associated with preparing for Year
2000 out of its normal operating cash flows. No major information technology
initiatives have been postponed as a result of Year 2000 preparation that would
have a material impact on the Company's financial condition of results of
operations.
Credit Risk - The Company, in the conduct of its ordinary operations,
extends credit to individuals, partnerships and corporations. The extension of
credit to businesses is based upon an evaluation of the borrower's ability to
generate cash flows from operations sufficient to repay principal and interest,
in addition to meeting the operating needs of the business. Failure of one of
the Company's business borrowers to adequately prepare for the impact of a Year
2000 failure could potentially impair its ability to repay the loan. An example
of this would be a loan to a building supply store that has computer accounting
systems that fail to recognize Year 2000 and, consequently, are unable to
calculate and bill accounts receivable in January 2000. This failure would most
likely have an negative impact on the customer's cash flow and, consequently,
their ability to repay the loan in accordance with its original terms.
In order to assess the Year 2000 risk within the loan portfolio, the Bank's
Commercial Loan department developed a risk assessment process to determine if
any borrower with total debt of $150,000 or more is dependent upon computer
technology. After these borrowers were identified, the loan officer responsible
for each account completed a survey that includes questions that examine four
key components of Year 2000 preparedness: Project Planning; Staffing and
Resources Budget; and Contingency Planning. Based on the results of the survey
questions, the account officer rated each borrower as a "low," "medium" or
"high" risk for Year 2000. The completed surveys and ratings were then
independently reviewed by the Company's Asset Review Committee, which had
authority to request additional information from the borrower and, if necessary,
change the Year 2000 risk rating. As of December 31, 1998, the survey, rating
and review process was substantially completed. The survey results indicated
that the total aggregate credit exposure for surveyed borrowers was rated low
for Year 2000 risk.
Management believes that the allowance for loan losses at December 31, 1998
is sufficient to absorb losses inherent in the loan portfolio, including losses
related to failure of borrowers to adequately prepare for the direct and
indirect impact a Year 2000 computer failure may have on their business.
However, additional charges to the provision for loan loss will be made if, in
the estimation of management, the increased risk of loan loss related to Year
2000 is not adequately provided for in the allowance for loan losses as of any
balance sheet date.
Liquidity risk is the risk to the Bank's earnings and capital arising from
an inability to raise sufficient cash to meet obligations as they come due. This
risk is a very significant one for the Company since its primary business is
banking, which involves taking deposits, which are generally due upon demand.
Since the Company uses these deposits to fund loans and purchase investment
securities, a dramatic increase in deposit withdrawals because of the Year 2000
problems specific to the Company or of a more general nature could have an
adverse impact on the Company. Specifically, the Company could be forced to
liquidate investments under adverse market conditions (that is, to sell at a
loss) in order to fund a significantly higher level of deposit withdrawal
activity. The Company is assessing its liquidity risk by running various
scenarios of deposit withdrawals coincident with the turn of the century,
ranging from normal activity to what could be reasonably expected in a panic
situation. As of December 31, 1998, the Company (or the Bank) has federal funds
lines of credit totaling approximately $5 million, unpledged investment
securities available for repurchase agreements of approximately $50 million,
secured borrowing availability at the Federal Home Loan Bank of approximately
$40 million, all of which can provide additional liquidity if the lending
institutions (in the case of borrowings) have funds available to lend at that
point in time. In addition, the Company will secure borrowing facilities for the
Bank with the Federal Reserve that will allow access to additional borrowed
funds. The Federal Reserve has indicated in widely published reports that it
will provide additional cash to the banking system through the discount window
and other credit facilities in order to alleviate liquidity pressures on
financial institutions resulting from the desire of individuals to hold cash
from late 1999 through the first quarter of 2000.
Transaction risk is the risk to the Company's earnings and capital
resulting from failure to deliver one of its products or services in an
acceptable manner. An example of transaction risk related to Year 2000 is the
inability of the Bank's service bureau to properly bill customers for loan
payments due and account for the payments when received or the inability of a
customer to perform a deposit or withdrawal from an ATM. In both of these
examples, the individual customer is directly affected and the Company is
impacted by the collective impact of all incorrectly processed customer
transactions. Since all of the Company's products and services are processed in
some manner by computer systems, all aspects of product design, delivery and
support are being carefully evaluated in order to determine potential
transaction risks.
The Company's Year 2000 policy also addresses other risks related to the
Year 2000 issue which include, but are not limited to, strategic risk (adverse
impact on business decisions or the implementation of business decisions, such
as acquisitions); reputational risk (impact of bad publicity on customers and
the Company's value); and legal risk (risk of litigation related to adverse
impact of Year 2000 issues on the Company).
Contingency Planning For Year 2000
The Company's Year 2000 committee has drafted a written Business
Remediation and Business Resumption Contingency Plan. The purpose of this plan
is to ensure that the Company is prepared to address any crisis situation(s)
that could result from failure of any of the Company's systems of third-party
vendors and suppliers to recognize Year 2000 critical dates. The Company's Year
2000 contingency plan is modeled after the FFIEC Interagency Statement on the
Contingency Planning in Connection with Year 2000 issued in May, 1997 and is
comprised of four key phases:
1. Organizational Planning - identification of core business processes
and establishment of a timeline for a Year 2000 contingency plan.
2. Business Impact Analysis - determination of Year 2000 failure risks
for all core business processes and identification of failure
scenarios. The minimal level of acceptable service in the event of
failure is also determined.
3. Development of Contingency Plan - identification and selection of the
most reasonable and cost-effective contingency strategy for each core
business process in the event of failure.
4. Contingency Plan Validation - validation of each plan by a qualified
independent party and final approval by senior management and the
board of directors.
A core business process is, for the purposes of the Company's Year 2000
contingency planning, defined as a group of interrelated tasks performed as a
basic and integral part of the Company's daily operation. Examples of core
business processes include posting of payments on loans and processing of
checks, both which require a complex infrastructure of hardware, software,
communications and power. Core business processes are further defined by
potential impact on the Company and its operations. "Mission Critical" core
business processes are those which if not functioning properly because of
failure to recognize Year 2000, will most likely cause an immediate loss of
revenue and crisis-level customer service problems that could damage the
Company's reputation. These specific contingency plans detail precisely how the
"most likely worst-case scenarios" resulting from system failure will be
handled. The objective of the contingency planning is not to duplicate the
complete functionality of failed systems, but, rather to identify the most
economical means of resuming a minimally acceptable level of service in as short
a time as possible.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Community First Banking Company
We have audited the accompanying consolidated balance sheets of Community First
Banking Company and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Community First
Banking Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Atlanta, Georgia
January 22, 1999
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash and due from banks, including reserve requirements
of $2,624,000 and $1,949,000 $ 10,883 10,767
Interest-bearing deposits in financial institutions 3,553 1,862
Federal funds sold 18,300 17,655
-------- ---------
Cash and cash equivalents 32,736 30,284
Securities available for sale 71,702 49,492
Securities held to maturity 232 6,006
Other investments 2,328 2,269
Mortgage loans held for sale 199 789
Loans, net 264,855 283,602
Premises and equipment, net 8,160 9,095
Accrued interest receivable 2,558 3,169
Other real estate and repossessions 5,479 6,722
Other assets 3,737 2,453
--------- ---------
$ 391,986 393,881
======= =======
Liabilities and Stockholders' Equity
Deposits:
Demand $ 13,611 18,734
Interest-bearing demand 52,644 51,198
Savings 31,630 38,273
Time 146,603 161,431
Time, over $100,000 41,449 45,895
--------- --------
Total deposits 285,937 315,531
Note payable and other borrowings 47,945 5,495
Subordinated debentures 900 900
Payable for branch sales 27,461 -
Accrued interest payable and other liabilities 3,619 2,917
--------- ---------
Total liabilities 365,862 324,843
------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, par value $.01, authorized 96,542
shares, 96,542 shares issued and outstanding 1 -
Common stock, par value $.01, authorized 10,000,000 shares,
issued 3,282,054 and 4,827,124 shares, outstanding 2,578,074 and 4,479,570 shares 33 24
Additional paid-in capital 13,481 47,040
Unearned ESOP and MRP shares (4,196) (3,476)
Retained earnings 26,611 24,725
Accumulated other comprehensive income (loss), net of tax (785) 725
--------- ---------
35,145 69,038
Less treasury stock at cost, 224,619 shares (9,021) -
-------- ---------
Total stockholders' equity 26,124 69,038
-------- -------
$ 391,986 393,881
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 25,903 26,628 24,874
Interest-bearing deposits and federal funds sold 1,436 1,064 822
Interest and dividends on investment securities:
U.S. Treasury 180 107 44
U.S. Government agencies and mortgage-backed 4,249 3,375 2,133
State, county and municipals 117 108 83
Other 335 171 234
-------- ------- --------
Total interest income 32,220 31,453 28,190
------ ------ ------
Interest expense:
Interest on deposits:
Demand 1,463 1,501 1,386
Savings 1,069 1,157 889
Time 11,720 11,848 11,338
------ ------ ------
14,252 14,506 13,613
Interest on note payable and other borrowings 2,394 815 1,168
------- -------- -------
Total interest expense 16,646 15,321 14,781
------ ------ ------
Net interest income 15,574 16,132 13,409
Provision for loan losses 782 2,067 1,143
-------- -------- -------
Net interest income after provision for loan losses 14,792 14,065 12,266
------ ------ ------
Noninterest income:
Service charges on deposits 3,061 2,730 2,350
Gain (loss) on sales of securities available for sale 860 (20) 178
Insurance commissions 609 523 426
Miscellaneous 1,067 457 290
------- ------- -------
Total noninterest income 5,597 3,690 3,244
------- ------ ------
Noninterest expense:
Salaries and employee benefits 6,820 7,063 6,453
ESOP and MRP expense 2,502 2,580 -
Occupancy and equipment 2,031 1,907 1,608
Deposit insurance premiums 179 160 2,340
Loss on abandonment of premises and equipment - 505 -
Other operating 4,506 5,455 4,875
------- ------ -------
Total noninterest expense 16,038 17,670 15,276
------ ------ ------
Earnings before income taxes 4,351 85 234
Income tax (benefit) expense 1,348 (28) (14)
------- ---------- ---------
Net earnings $ 3,003 113 248
======= ========== ========
Basic earnings per share $ 0.87 0.03 N/A
======== ========== =======
Diluted earnings per share $ 0.82 0.03 N/A
======== ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net earnings $ 3,003 113 248
----- ------ ---
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale (3,295) 1,221 (210)
Less income tax effect of gains (losses) (1,252) 464 (80)
----- ------ ----
Unrealized gains (losses) arising during the year, net of tax (2,043) 757 (130)
----- ------ ---
Reclassification adjustment for gains (losses) included in net earnings 860 (20) 178
Less income tax effect of reclassification adjustments 327 (8) 68
------ ------- ----
Reclassification adjustment for gains (losses) included in
net earnings, net of tax 533 (12) 110
------ ------- ---
Other comprehensive income (loss) (1,510) 745 (20)
----- ------ ---
Comprehensive income $ 1,493 858 228
===== ====== ===
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other
Additional Unearned Comprehensive
Preferred Common Paid-in ESOP and Retained Income (Loss), Treasury
Stock Stock Capital MRP Shares Earnings Net of Tax Stock Total
----- ----- ------- ---------- -------- ---------- ----- -----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - - - - 25,030 - - 25,030
Net earnings - - - - 248 - - 248
Change in accumulated other comprehensive
income (loss), net of tax - - - - - (20) - (20)
-------- ------- ---------- ------------ ----------- --------- ------------- -----------
Balance, December 31, 1996 - - - - 25,278 (20) - 25,258
Net Proceeds from issuance of
common stock - 24 46,794 - - - - 46,818
Common stock acquired by ESOP - - - (3,862) - - - (3,862)
Cash dividends declared ($.15 per share) - - - - (666) - - (666)
Release of ESOP shares - - 246 386 - - - 632
Change in accumulated other comprehensive
income (loss), net of tax - - - - - 745 - 745
Net earnings - - - - 113 - - 113
-------- ------- ---------- ------------ ----------- --------- ------------- -----------
Balance, December 31, 1997 - 24 47,040 (3,476) 24,725 725 - 69,038
Purchase of treasury stock - - - - - - (45,435) (45,435)
Retirement of treasury stock - (8) (36,406) - - - 36,414 -
Cash dividends declared ($.35 per share) - - - - (1,100) - - (1,100)
Issuance of preferred stock and grant
of MRP shares 1 - 2,063 (2,064) - - - -
Release of ESOP and MRP shares,
net of tax of $440 - - 784 1,344 - - - 2,128
Change in accumulated other
comprehensive income (loss), net of tax - - - - - (1,510) - (1,510)
Net earnings - - - - 3,003 - - 3,003
Retroactive restatement for 100% stock
dividend declared on January 21, 1999 - 17 - - (17) - - -
-------- ------- ---------- ------------ ----------- --------- ------------- -----------
Balance, December 31, 1998 $ 1 33 13,481 (4,196) 26,611 (785) (9,021) 26,124
======== ======= ========== ============ =========== ========= ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,003 113 248
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation, amortization and accretion 954 1,296 1,117
Provision for loan losses 782 2,067 1,143
ESOP and MRP compensation expense 2,502 2,580 -
Deferred income tax expense (benefit) 1,213 (1,406) (947)
Loss (gain) on sales of securities available for sale (860) 20 (178)
Loss on abandonment of premises and equipment - 505 -
Loss (gain) on sales of premises, equipment and other assets, net (294) 51 (67)
Gain on sale of branches (100) - -
Change in (net of effect of sale of branches):
Mortgage loans held for sale 590 (507) 2,809
Accrued interest receivable 611 (481) (290)
Other assets (2,569) (43) (88)
Accrued interest payable 1,293 635 (241)
Other liabilities (1,730) 473 (143)
--------- --------- ---------
Net cash provided by operating activities 5,395 5,303 3,363
--------- -------- --------
Cash flows from investing activities (net of effect of sale of branches):
Proceeds from sales of securities available for sale 51,953 3,843 4,918
Proceeds from sales of other investments - 219 760
Proceeds from maturities of securities available for sale 25,780 9,220 240
Proceeds from maturities of securities held to maturity 5,805 1,785 2,664
Purchases of other investments (59) - (112)
Purchases of securities available for sale (101,208) (27,277) (38,903)
Net change in loans 17,226 (22,437) (79)
Proceeds from sales of real estate and repossessions 2,299 139 80
Improvements to other real estate and repossessions (167) - -
Proceeds from sales of premises and equipment 958 35 302
Purchases of premises and equipment (1,047) (1,778) (3,362)
Organization costs - (30) -
--------- --------- ---------
Net cash provided by (used in) investing activities 1,540 (36,281) (33,492)
--------- --------- ---------
Cash flows from financing activities (net of effect of sale of branches):
Net change in deposits (711) 7,775 18,469
Proceeds from note payable and other borrowings 45,000 - 10,000
Payments of note payable and other borrowings (2,550) (10,800) (9,300)
Cash dividends paid (787) (666) -
Purchase of ESOP shares - (3,862) -
Net proceeds from issuance of common stock - 46,818 -
Payments of subordinated debentures - (1,100) -
Purchases of treasury stock (45,435) - -
--------- --------- ---------
Net cash provided by (used in) financing activities (4,483) 38,165 19,169
--------- --------- ---------
Net change in cash and cash equivalents 2,452 7,187 (10,960)
Cash and cash equivalents at beginning of year 30,284 23,097 34,057
-------- ------ ------
Cash and cash equivalents at end of year $ 32,736 30,284 23,097
======= ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 15,353 14,686 15,022
Income taxes $ 1,250 935 935
Noncash investing and financing activities:
Real estate acquired through foreclosure $ 1,254 7,602 402
Loans to facilitate sales of real estate $ 531 1,000 420
Issuance of preferred stock and simultaneous grant of MRP shares $ 2,064 - -
Retirement of treasury stock $ 36,414 - -
Payable for sale of branches $ 27,461 - -
Change in accumulated other comprehensive income (loss), net of tax $ (1,510) 745 (20)
Change in dividend payable $ 313 - -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
------------
Community First Banking Company (the "Company") was organized in March
1997 to become the holding company for Carrollton Federal Bank pursuant
to a Plan of Conversion and Reorganization (the "Conversion"). As part
of the Conversion, CF Mutual Holdings ("Mutual") was converted from a
federally chartered mutual holding company to an interim federal savings
bank and simultaneously merged with and into Carrollton Federal Bank,
pursuant to which Mutual ceased to exist and Carrollton Federal Bank
became a wholly owned subsidiary of the Company. The Conversion was
accounted for at historical cost in a manner similar to a pooling of
interests.
On June 27, 1997, the Conversion to a stock holding company organized
under the laws of the State of Georgia, the issuance of common stock,
and the dissolution of Mutual were completed. In connection therewith,
the Company sold 4,827,124 shares of common stock, par value $.01 per
share, at an initial price of $10 per share (after giving effect to 100%
stock dividend described in note 17) in a subscription offering. Costs
associated with the Conversion were approximately $1,453,000, including
underwriting fees.
On December 28, 1997, Carrollton Federal Bank, a federally chartered
stock savings bank, converted its charter to the Georgia Department of
Banking and Finance and concurrently changed its name to Community First
Bank (the "Bank"). The Bank will subsequently be regulated by the
Georgia Department of Banking and Finance and is insured and subject to
the regulation of the Federal Deposit Insurance Corporation. As part of
the charter conversion, the Company became a member of the Federal
Reserve System and, accordingly, is subject to the regulation by the
Federal Reserve under the Bank Holding Company Act.
The Bank continues to provide a full range of customary banking services
throughout Carroll, Douglas, Heard, Haralson and Paulding counties in
Georgia.
Basis of Presentation and Reclassification
------------------------------------------
The consolidated financial statements include the accounts of the
Company, the Bank, CFB Insurance Agency, Inc., CFB Financial, Inc. and
CFB Securities, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year
amounts have been reclassified to conform to the current year
presentation.
The accounting principles followed by the Company and its subsidiaries,
and the methods of applying these principles, conform with generally
accepted accounting principles ("GAAP") and with general practices
within the banking industry. In preparing financial statements in
conformity with GAAP, management is required to make estimates and
assumptions that affect the reported amounts in the financial
statements. Actual results could differ significantly from those
estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include,
but are not limited to, the determination of the allowance for loan
losses, the valuation of real estate acquired in connection with or in
lieu of foreclosure on loans, the valuation allowance for mortgage
servicing rights and valuation allowances associated with the
realization of deferred tax assets which are based on future taxable
income.
Cash and Cash Equivalents
-------------------------
Cash equivalents include amounts due from banks, interest-bearing
deposits in financial institutions and federal funds sold. Generally,
federal funds are sold for one-day periods.
Investment Securities
---------------------
The Company classifies its securities in one of three categories:
trading, available for sale, or held to maturity. There were no trading
securities at December 31, 1998 and 1997. Securities held to maturity
are those securities for which the Bank has the ability and intent to
hold to maturity. All other securities are classified as available for
sale.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Investment Securities, continued
----------------------
Securities available for sale are recorded at fair value. Securities
held to maturity are recorded at cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized holding gains and losses,
net of the related tax effect, on securities available for sale are
excluded from earnings and are reported as a separate component of
stockholders' equity until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer.
Unrealized holding gains or losses associated with transfers of
securities from held to maturity to available for sale are recorded as a
separate component of stockholders' equity.
A decline in the market value of any available for sale or held to
maturity investment below cost that is deemed other than temporary is
charged to earnings and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and
losses are included in earnings and the cost of securities sold are
derived using the specific identification method.
Other Investments
-----------------
Other investments include Federal Home Loan Bank ("FHLB") stock and
other equity securities with no readily determinable fair value. These
investment securities are carried at cost and include stock dividends.
Interest Rate Cap Agreement
---------------------------
Interest rate cap agreements ("Caps"), which are used by the Company in
the management of interest rate exposure on certain interest-bearing
liabilities, are accounted for on an accrual basis. Premiums paid for
Caps are being amortized to interest expense over the terms of the Caps.
Unamortized premiums are included in other assets in the consolidated
balance sheet. Amounts to be received under the Caps are accounted for
on an accrual basis, and are recognized as a reduction of interest
expense.
Mortgage Loans Held for Sale
----------------------------
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or market value. The amount
by which cost exceeds market value is accounted for as a valuation
allowance. Changes, if any, in the valuation allowance are included in
the determination of net earnings in the period in which the change
occurs. Gains and losses from the sale of loans are determined using the
specific identification method.
Loans, Loan Fees and Interest Income
------------------------------------
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their outstanding
unpaid principal balances, net of the allowance for loan losses,
deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans.
Loan fees and certain direct loan origination costs are deferred, and
the net fee or cost is recognized in interest income using the
level-yield method over the contractual lives of the loans, adjusted for
estimated prepayments based on the Bank's historical prepayment
experience. Commitment fees and costs relating to commitments whose
likelihood of exercise is remote are recognized over the commitment
period on a straight-line basis. If the commitment is subsequently
exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise is recognized over the life of
the loan as an adjustment to the yield. Premiums and discounts on
purchased loans are amortized over the remaining lives of the loans
using the level-yield method. Fees arising from servicing loans for
others are recognized as earned.
A loan is considered impaired when, based on current information and
events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. Impaired loans are
measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or at the loan's
observable market price, or the fair value of the collateral of the loan
if the loan is collateral dependent. Interest income from impaired loans
is recognized using the cash basis method of accounting.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through provisions for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collection of the
principal is unlikely. The allowance is an amount which, in management's
judgment, will be adequate to absorb losses on existing loans that may
become uncollectible. The allowance is established through consideration
of such factors as changes in the nature and volume of the portfolio,
adequacy of collateral, delinquency trends, loan concentrations,
specific problem and individually significant loans, and economic
conditions that may affect the borrower's ability to pay.
Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Major additions and improvements are charged to the asset accounts while
maintenance and repairs that do not improve or extend the useful lives
of the assets are expensed currently. When assets are retired or
otherwise disposed, the cost and related accumulated depreciation are
removed from the accounts, and any gain or loss is reflected in earnings
for the period.
Depreciation expense is computed using the straight-line method over
the following estimated useful lives:
Land improvements 15-40 years
Buildings and improvements 15-40 years
Furniture and equipment 3-10 years
Other Real Estate and Repossessions
-----------------------------------
Other real estate and repossessions are carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated
costs to dispose. Generally accepted accounting principles define fair
value as the amount that is expected to be received in a current sale
between a willing buyer and seller other than in a forced or liquidation
sale. Fair values at foreclosure are based on appraisals. Losses arising
from the acquisition of other real estate and repossessions are charged
against the allowance for loan losses. Subsequent writedowns are
provided by a charge to earnings through a valuation allowance in the
period in which the need arises.
Mortgage Servicing Rights
-------------------------
The Bank accounts for mortgage servicing rights in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." The Bank recognizes the rights to service mortgage loans
as an asset regardless of whether the servicing rights are acquired
through either purchase or origination. Additionally, the Bank performs
an impairment analysis of mortgage servicing rights, regardless of
whether purchased or originated.
The Bank's mortgage servicing rights represent the unamortized cost of
purchased and originated contractual rights to service mortgages for
others in exchange for a servicing fee and ancillary loan administration
income. Mortgage servicing rights are amortized over the period of
estimated net servicing income and are periodically adjusted for actual
and anticipated prepayments of the underlying mortgage loans. An
impairment analysis is performed after stratifying the rights by
interest rate. Impairment, defined as the excess of the asset's carrying
value over its current fair value, is recognized through a valuation
allowance. At December 31, 1998 and 1997, no valuation allowances were
required for the mortgage servicing rights.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Core Deposit Intangible
-----------------------
The core deposit intangible is amortized using the straight-line method
over the estimated life of the deposit base acquired (fifteen years) and
is included as a component of other assets. Amortization expense
approximated $74,000 for each of the three years in the period ended
December 31, 1998. On an ongoing basis, management reviews the valuation
and amortization periods to determine if events and circumstances
require the current carrying amount or remaining life to be reduced.
Income Taxes
------------
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which the assets and liabilities are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income tax expense in the period that
includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities results in deferred tax assets, the Company performs an
evaluation of the probability of being able to realize the future
benefits indicated by such assets. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred
tax asset will not be realized. In assessing the realizability of the
deferred tax assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income and tax
planning strategies.
A deferred tax liability is not recognized for portions of the allowance
for loan losses for income tax purposes in excess of the financial
statement balance, as described in note 8. Such a deferred tax liability
will only be recognized when it becomes apparent that those temporary
differences will reverse in the foreseeable future.
Treasury Stock
--------------
Treasury stock is accounted for by the cost method. Subsequent
reissuances are on a first-in, first-out basis.
Net Earnings Per Common Share
-----------------------------
Basic earnings per common share is based on the weighted average number
of common shares outstanding during the period while the effects of
potential common shares outstanding during the period are included in
diluted earnings per share. Net earnings per common share is based on
the weighted average number of shares outstanding (assuming the Company
was a public company since January 1, 1997) including consideration of
allocated shares of the Company's Employee Stock Ownership Plan
("ESOP"). Unearned ESOP shares are not considered outstanding for
purposes of calculating earnings per share. Earnings per share is not
presented in periods prior to the Conversion due to the mutual form of
ownership. The reconciliation of the amounts used in the computation of
basic earnings per share and diluted earnings per share for the years
ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
Net Common Per Share
Earnings Shares Amount
-------- ------ ------
<S> <C> <C> <C>
Basic earnings per share $ 3,002,988 3,448,006 $ 0.87
====
Effect of dilutive securities:
Stock options - 38,371
MRP shares - 193,084
--------- ---------
Diluted earnings per share $ 3,002,988 3,679,461 $ 0.82
========= ========= ====
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Net Earnings Per Common Share, continued
------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
Net Common Per Share
Earnings Shares Amount
-------- ------ ------
<S> <C> <C> <C>
Basic earnings per share $ 112,608 4,445,821 $ 0.03
====
Effect of dilutive securities:
Stock options - -
--------- ----------
Diluted earnings per share $ 112,608 4,445,821 $ 0.03
======= ========= ====
</TABLE>
The effect of stock options on net earnings per common share was
antidilutive in 1997.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income" became effective for the
Company as of January 1, 1998. This new standard establishes the
reporting and display of comprehensive income and its components in the
financial statements.
Recent Accounting Pronouncements
--------------------------------
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for hedging
derivatives and for derivative instruments including derivative
instruments embedded in other contracts. It requires the fair value
recognition of derivatives as assets or liabilities in the financial
statements. The accounting for the changes in the fair value of a
derivative depends on the intended use of the derivative instrument at
inception. Changes in fair value for instruments used as fair value
hedges are recorded in earnings of the period simultaneous with
accounting for the fair value change of the item being hedged. Changes in
fair value for cash flow hedges are recorded in comprehensive income
rather than earnings. Changes in fair value for derivative instruments
that are not intended as a hedge are recorded in earnings of the period
of the change. SFAS No. 133 is effective for all fiscal quarters
beginning after June 15, 1999, but initial application of the statement
must be made as of the beginning of the quarter. At the date of initial
application, an entity may transfer any held to maturity security into
the available for sale or trading categories without calling into
question the entity's intent to hold other securities to maturity in the
future. The Company believes the adoption of SFAS No. 133 will not have a
material impact on its financial position, results of operations or
liquidity.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Investment Securities
Investment securities at December 31, 1998 and 1997 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available for Sale: Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,996 53 - 3,049
U.S. Government agencies 1,000 5 - 1,005
State, county and municipals 2,081 103 - 2,184
Equity securities 14,943 80 1,205 13,818
Mortgage-backed securities 51,948 111 413 51,646
------ ----- ------ ------
$ 72,968 352 1,618 71,702
====== === ===== ======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held to Maturity: Cost Gains Losses Value
---- ----- ------ -----
State, county and municipals $ 115 3 - 118
Mortgage-backed securities 117 1 - 118
--- - ----- ---
$ 232 4 - 236
==== = ===== ===
December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available for Sale: Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury securities $ 2,995 18 - 3,013
U.S. Government agencies 23,121 127 - 23,248
State, county and municipals 2,084 75 - 2,159
Equity securities 8,733 787 - 9,520
Mortgage-backed securities 11,390 173 11 11,552
------ ------ -- ------
$ 48,323 1,180 11 49,492
====== ===== == ======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held to Maturity: Cost Gains Losses Value
---- ----- ------ -----
U.S. Government agencies $ 5,669 18 25 5,662
State, county and municipals 115 2 - 117
Mortgage-backed securities 222 2 1 223
-------- --- --- ------
$ 6,006 22 26 6,002
====== == == =====
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Investment Securities, continued
The amortized cost and estimated fair value of securities available for
sale and securities held to maturity at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available Securities Held
For Sale to Maturity
----------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(in thousands)
<S> <C> <C> <C> <C>
Within one year $ 1,050 1,061 - -
One to five years 2,100 2,145 115 118
Five to ten years 1,190 1,202 - -
More than ten years 1,737 1,830 - -
Equity securities 14,943 13,818 - -
Mortgage-backed securities 51,948 51,646 117 118
------ ------ --- ---
$ 72,968 71,702 232 236
====== ====== === ===
</TABLE>
There were no sales of securities held to maturity during 1998, 1997 and
1996. Proceeds from sales of securities available for sale during 1998,
1997 and 1996 totalled approximately $51,953,000, $3,843,000 and
$4,918,000, respectively. Gross gains of $1,126,000, $8,000 and $178,000
were realized on those sales. Gross losses of $266,000 and $28,000 were
realized on 1998 and 1997 sales, respectively.
Securities and interest-bearing deposits with a carrying value of
approximately $2,039,000 and $2,974,000 at December 31, 1998 and 1997,
respectively, were pledged to secure U.S. government and other public
deposits.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(3) Loans
Major classifications of loans at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Real estate mortgage loans $ 197,182 209,836
Real estate construction loans 18,853 18,016
Commercial loans 20,905 16,507
Consumer and other installment loans 30,795 42,032
-------- --------
Total loans 267,735 286,391
Less allowance for loan losses 2,880 2,789
--------- ---------
Loans, net $ 264,855 283,602
======= =======
</TABLE>
The Bank concentrates its lending activities in the origination of
permanent residential mortgage loans, commercial mortgage loans,
commercial business loans and consumer installment loans. The majority
of the Bank's real estate loans are collateralized by real property
located in Carroll County, Georgia and surrounding counties.
Activity in the allowance for loan losses is summarized as follows for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,789 2,601 2,291
Provision 782 2,067 1,143
Loans charged off (1,194) (2,214) (925)
Recoveries of loans previously charged off 503 335 92
----- ------ ------
Balance at end of year $ 2,880 2,789 2,601
===== ===== =====
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. Unpaid principal balances of these
loans at December 31, 1998, 1997 and 1996 approximate $45,448,000,
$54,560,000 and $53,061,000, respectively.
(4) Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Land and land improvements $ 1,595 1,595
Buildings and improvements 6,450 5,967
Furniture and equipment 5,512 8,650
Construction in progress 214 49
-------- ---------
13,771 16,261
Less: Accumulated depreciation 5,611 6,661
Reserve for abandoned property and equipment - 505
-------- --------
$ 8,160 9,095
====== =======
</TABLE>
Depreciation expense approximated $1,191,000, $1,381,000 and $1,203,000
at December 31, 1998, 1997 and 1996, respectively.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Premises and Equipment, continued
In December 1997, the Company announced a plan to close two branch
locations and replace certain obsolete computer equipment. In connection
with this plan, the Company determined that the carrying value of such
assets exceeded their fair values. Accordingly, an unrealized loss of
$504,500 was charged to expense as a separate component of noninterest
expense.
(5) Time Deposits
At December 31, 1998, contractual maturities of time deposits are
summarized as follows (in thousands):
Year ending December 31,
1999 $ 119,467
2000 50,988
2001 5,464
2002 6,620
2003 and thereafter 5,513
---------
$ 188,052
(6) Note Payable and Other Borrowings
In June 1998, the Company obtained a $5,000,000 line of credit with
another financial institution. The debt is collateralized by 100% of the
stock of the Bank and calls for interest to be paid at the prime rate
less 100 basis points. Principal and interest are due at maturity on
December 2, 1999. The loan agreement contains covenants relating to
regulatory capital adequacy and limits on other debt. The Company was in
compliance with all loan covenants at December 31, 1998.
The interest rates for FHLB advances at December 31, 1998 ranged from
4.50% to 5.63%. FHLB advances are collateralized by FHLB stock and first
mortgage loans. Advances from FHLB outstanding at December 31, 1998
mature as follows (in thousands):
Year Ending December 31,
1999 $ 600
2000 600
2001 386
2002 386
2003 973
Thereafter 40,000
------
$ 42,945
(7) Subordinated Debentures
The Company originally issued Series A fixed rate subordinated
debentures to various executive officers and members of the Board of
Directors in an aggregate principal amount of $2,000,000. The
subordinated debentures bear interest at a simple interest rate per
annum of 7.25%, which is payable quarterly, and mature on September 30,
1999. The payment of the principal is subordinate and junior in right of
payment to the claims of creditors of the Company. The entire proceeds
of the offering were used to increase the capitalization of the Bank.
During 1997, $1,100,000 of the debentures were paid off.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) Income Taxes
The following is an analysis of the components of income tax expense
(benefit) for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current $ 575 1,378 933
Current benefit credited to equity (440) - -
Deferred 1,213 (1,406) (947)
----- ----- ----
Income tax expense (benefit) $ 1,348 (28) (14)
===== ======= =====
</TABLE>
The differences between income tax expense (benefit) and the amount
computed by applying the statutory federal income tax rate to earnings
before taxes for the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Pretax income at statutory rate $ 1,479 29 80
Add (deduct):
Tax-exempt interest income (94) (67) (91)
Other, net (37) 10 (3)
------ ------ ------
Income tax expense (benefit) $ 1,348 (28) (14)
===== ====== ======
</TABLE>
The following summarizes the net deferred tax asset which is included as
a component of other assets at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 729 671
Allowance for real estate held for development and sale 70 162
Deferred compensation 241 795
State tax credits 297 256
Unrealized loss on securities available for sale 481 -
Other 144 102
------ -----
Total gross deferred tax assets 1,962 1,986
----- -----
Deferred tax liabilities:
FHLB stock 357 144
Premises and equipment 138 358
ESOP and MRP awards 720 -
Unrealized gain on securities available for sale - 412
Other - 5
----- -----
Total gross deferred tax liabilities 1,215 919
----- ------
Net deferred tax asset $ 747 1,067
====== =====
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) Income Taxes, continued
Effective January 1, 1996, the Bank computes its tax bad debt reserves
under the rules which apply to commercial banks. In years prior to 1996,
the Bank obtained tax bad debt deductions approximating $5.8 million in
excess of its financial statement allowance for loan losses for which no
provision for federal income tax was made. These amounts were then
subject to federal income tax in future years if used for purposes other
than to absorb bad debt losses. Effective January 1, 1996, approximately
$1.0 million of the excess reserve is no longer subject to recapture
under any circumstances and approximately $4.8 million of the excess
reserve is subject to recapture only if the Bank ceases to qualify as a
bank as defined in the Internal Revenue Code.
(9) Stockholders' Equity
On December 29, 1997, the Board of the Directors of the Company
authorized the issuance of 96,542 shares of $.01 par value convertible
preferred stock to be used as part of the Company's Management
Recognition Plan ("MRP") to provide a means of rewarding its key
personnel. Those shares were granted on January 8, 1998 at a value of
$10.69 based upon an independent valuation. The preferred shares vest at
the rate of 5% as of the last day of each calendar quarter of service
commencing with the first calendar quarter after the grant date. The
estimated grant-date fair value of the shares granted was $9.92 per
share. The preferred stock is automatically convertible into two shares
of common stock on the five-year anniversary date on which such shares
are issued. The preferred shares are not entitled to receive dividends,
have no liquidation preference, no voting rights, no right to transfer
and no right of redemption.
The Company purchased on the open market 997,154 shares of its common
stock at an aggregate purchase price of $45,434,662 during the year
ended December 31, 1998. Of the 997,154 total shares repurchased,
772,535 shares have been retired and 224,619 shares are held in treasury
for issuance under the Company's employee benefit plans.
(10) Employee and Director Benefit Plans
All qualifying employees of the Bank are included in a qualified
multiemployer noncontributory defined benefit pension plan sponsored by
the Financial Institutions Retirement Fund. The Bank's policy is to fund
pension costs accrued. No pension expense was incurred during 1998, 1997
or 1996. At June 30, 1998, the date of the latest actuarial valuation,
the market value of the plan's net assets exceeded the actuarially
computed value of accumulated plan benefits.
Effective January 1, 1993, the Bank established a retirement plan
qualified pursuant to Internal Revenue Code section 401(k) (the "Plan").
The Plan allows eligible employees to defer a portion of their income by
making contributions into the Plan on a pretax basis. The Bank's
matching contribution vests based on length of service. The Bank matches
50% of employee contributions up to 6% of the employees' compensation.
On August 1, 1997, the Plan was amended to discontinue matching of
employee contributions. During the years ended December 31, 1997 and
1996, the Bank recognized $53,000 and $94,000 in expense related to its
obligations under the Plan. No expense was incurred during 1998.
The Bank has a defined contribution postretirement benefit plan to
provide retirement benefits to its Board of Directors and to provide
death benefits for their designated beneficiaries. Under the plan, the
Bank purchased split-dollar whole life insurance contracts on the lives
of each Director. The increase in cash surrender value of the contracts,
less the Bank's cost of funds, constitutes the Bank's contribution to
the plan each year. In the event the insurance contracts fail to produce
positive returns, the Bank has no obligation to contribute to the Plan.
At December 31, 1998 and 1997, the cash surrender value of the insurance
contracts was approximately $1,179,000 and $1,071,000, respectively, and
is included as a component of other assets. Expenses incurred for
benefits were approximately $70,000, $77,000 and $14,000 during 1998,
1997 and 1996, respectively.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) Employee and Director Benefit Plans, continued
As part of the Conversion, the Company adopted an ESOP and purchased
386,170 shares via a loan from the Company. The plan covers substantially
all employees subject to certain minimum age and service requirements.
The Company makes contributions to the ESOP as determined annually by the
Board of Directors. Contributions to the ESOP will, at a minimum, be
applied to meet the ESOP's debt service requirements. As the ESOP debt is
repaid, shares are released and allocated to active employees, based on
the proportion of debt service paid during the year. Accordingly, the
debt incurred by the ESOP is recorded as a note payable and the shares
purchased with the debt proceeds are reported as unearned ESOP shares in
the consolidated balance sheet. As the debt is repaid, the Company
records compensation expense equal to the current market price of the
shares released, and the shares become outstanding for purposes of
earnings per share computations. Compensation expense related to the ESOP
of $2,010,000 and $727,000 was recognized during 1998 and 1997,
respectively. ESOP shares are summarized as follows at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allocated shares 131,427 38,616
Unearned shares 254,743 347,554
--------- ----------
Total ESOP shares 386,170 386,170
========= ==========
Fair value of unreleased shares $ 5,079,000 6,886,000
========= =========
</TABLE>
On December 29, 1997, the Board of Directors of the Company approved the
1997 Stock Option Plan whereby 482,712 shares of common stock have been
reserved for employees and directors. These options will allow employees
and directors to purchase shares of common stock at a price not less than
fair market value at the date of grant and are exercisable no later than
ten years from the date of grant. All options vest at the rate of 5% of
the number of shares subject to the option as of the last day of each
calendar quarter of service commencing with the first calendar quarter
ending after the grant date.
In December 1997, the Company granted options to purchase 473,160 shares
at an exercise price of $19.8125 per share. Options to purchase 118,290
and 23,658 shares were exercisable at December 31, 1998 and 1997,
respectively, and no options have been exercised. The estimated grant-date
fair value of the options granted in 1997 was $6.90 per share. No options
were granted in 1998. The weighted-average remaining contractual life of
the options is approximately nine years at December 31, 1998.
The MRP and Stock Option Plan are accounted for under Accounting
Principles Board Opinion No. 25 and related Interpretations. Compensation
expense totaling $492,000 and $1,853,000 for 1998 and 1997, respectively,
was recognized related to the MRP. No compensation cost has been
recognized under the Stock Option Plan. Had compensation cost been
determined based upon the fair value of the MRP shares and options at the
grant dates and in accordance with the vesting schedule consistent with
the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net earnings and net earnings per share as of December 31, 1998
and 1997 would have been reduced to the proforma amounts indicated below
(in thousands, except per share data).
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net earnings As reported $ 3,003 113
Proforma $ 2,361 12
Basic earnings per share As reported $ 0.87 0.03
Proforma $ 0.68 -
Diluted earnings per share As reported $ 0.82 0.03
Proforma $ 0.64 -
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) Employee and Director Benefit Plans, continued
The fair value of each option and MRP share is estimated on the date of
grant using the Black-Scholes options-pricing model with the following
weighted average assumptions used for grants in 1998 and 1997:
volatility of 0.18, 1.5% dividend yield, a risk free interest rate of
5.90%, and an expected life of five and ten years, respectively.
(11) Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk- weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets (all as defined). Management believes,
as of December 31, 1998 and 1997, the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation 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 1 risk-based and Tier 1 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 Company's and the Bank's actual capital amounts and ratios are
presented below.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998: (dollars in thousands)
Total Capital (to Risk-Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 27,674 9.9% 22,415 8.0% N/A N/A
Bank $ 32,918 11.8% 22,340 8.0% 27,924 10.0%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $ 24,795 8.9% 11,207 4.0% N/A N/A
Bank $ 30,039 10.7% 11,170 4.0% 16,755 6.0%
Tier 1 Capital (to Average Assets)
Consolidated $ 24,795 6.1% 16,203 4.0% N/A N/A
Bank $ 30,039 7.6% 15,782 4.0% 19,728 5.0%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
Consolidated $ 73,616 25.0% 23,592 8.0% N/A N/A
Bank $ 50,021 17.5% 22,850 8.0% 28,563 10.0%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $ 70,825 24.0% 11,796 4.0% N/A N/A
Bank $ 47,231 16.6% 11,425 4.0% 17,138 6.0%
Tier 1 Capital (to Average Assets)
Consolidated $ 70,825 17.7% 16,051 4.0% N/A N/A
Bank $ 47,231 12.3% 15,332 4.0% 19,165 5.0%
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(11) Regulatory Matters, continued
Banking regulations limit the amount of dividends that may be paid
without prior approval of the regulatory authorities. These restrictions
are based on the level of regulatory classified assets, the prior year's
net earnings, and the ratio of equity capital to total assets. At
December 31, 1998, the Bank could declare dividends up to approximately
$1,965,000 without prior regulatory consent.
(12) Commitments
The Bank leases certain banking facilities under operating lease
arrangements expiring through 2012. Future minimum payments required for
all operating leases with remaining terms in excess of one year are
presented below (in thousands):
Year Ending December 31,
1999 $ 160
2000 157
2001 121
2002 114
2003 83
Thereafter 587
-----
$ 1,222
=======
Total rent expense was approximately $327,000, $341,000 and $229,000 for
the years ended December 31, 1998, 1997 and 1996.
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to manage its cost of funds. These financial instruments
include commitments to originate first mortgage loans and to extend
credit, standby letters of credit and an interest rate cap agreement.
These instruments involve, to varying degrees, elements of credit risk
in excess of the amounts recognized in the consolidated balance sheet.
The contract or notional amounts of these instruments reflect the extent
of involvement the Bank has in particular classes of financial
instruments.
Commitments to originate first mortgage loans and to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of
a fee. 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 counterparty. Collateral
typically includes residential and other real properties, automobiles,
savings deposits, accounts receivable, inventory and equipment.
Standby letters of credit are written 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. Most letters of credit extend for less than one
year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. A majority of the standby letters of credit are
collateralized by real estate, deposits or other personal assets at
December 31, 1998 and 1997.
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.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(12) Commitments, continued
On February 27, 1998, the Company entered into a Cap to reduce the
potential impact of increases in interest rates on its interest-bearing
liabilities. The agreement entitles the Company to receive from a
counterparty, on a quarterly basis, the amounts, if any, by which the
3-month LIBOR rate exceeds the Cap rate of 6.5% on a notional amount of
$40,000,000 beginning on March 6, 2000. Notional amounts are used to
express the volume of these transactions, and they do not represent cash
flows. The primary risk of the Cap is nonperformance by the
counterparty; however, management believes this risk is minimal. No
amounts have been received by the Company through December 31, 1998. The
Cap agreement expires on March 4, 2003.
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
Financial instruments whose contract amounts represent credit risk:
<S> <C> <C>
Commitments to originate first mortgage loans $ - 181
Commitments to extend credit $ 41,585 33,937
Standby letters of credit $ 319 404
</TABLE>
(13) Other Operating Expenses
Components of other operating expenses in excess of 1% of interest and
other income for the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Advertising $ 261 313 470
Data processing expense $ 1,153 1,024 918
Office supplies $ 194 225 329
</TABLE>
(14) Branch Sales
On December 31, 1998, the Bank sold substantially all the assets and
liabilities of three of its four Walmart branch locations (Stockbridge,
Fayetteville and Newnan) to The First Citizens Bank of Newnan ("FCBN").
The disposition resulted in a cash payment to FCBN of approximately
$27,461,000 consisting of deposit liabilities of approximately
$28,884,000, net of certain other assets. The sale was effective
December 31, 1998. The gain on the sale of the branches of $100,000 is
included in miscellaneous noninterest income.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(15) Community First Banking Company (Parent Company Only) Financial
Information Parent company only information for 1998 and 1997 is
presented for the Company since its inception in March 1997. Information
for the year ended December 31, 1996 is presented for Mutual prior to
the conversion.
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1998 and 1997
(in thousands)
Assets
------
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 263 1,149
Securities available for sale 4,008 9,019
Investment in subsidiaries 30,854 48,432
Due from subsidiaries - 11,901
Other assets 64 38
------ ------
$ 35,189 70,539
====== ======
Liabilities and Stockholders' Equity
------------------------------------
Due to subsidiaries $ 4,011 -
Accounts payable and accrued expenses 54 1,501
Note payable 5,000 -
Stockholders' equity 26,124 69,038
------ ------
$ 35,189 70,539
====== ======
</TABLE>
<TABLE>
<CAPTION>
Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income:
Dividend income from the Bank $ 21,190 - 814
Interest income 368 544 30
Gain on sale of securities available for sale 141 - -
Other - - 2
------- ------ -----
Total income 21,699 544 846
------- ------ -----
Operating expenses:
Interest expense 351 - 145
ESOP and MRP expense 1,556 2,156 -
Other 53 90 55
------- ------ -----
Total operating expenses 1,960 2,246 200
------- ------ -----
Earnings (loss) before income tax benefit and equity in
undistributed earnings of subsidiaries 19,739 (1,702) 646
Income tax benefit 492 576 59
------- ------ -----
Earnings (loss) before equity in undistributed earnings of
subsidiaries or dividends received in excess of earnings
of subsidiaries 20,231 (1,126) 705
Dividends received in excess of earnings of subsidiaries (17,228) - (457)
Equity in undistributed earnings of subsidiaries - 1,239 -
------- ------ -----
Net earnings $ 3,003 113 248
======= ====== =====
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(15) Community First Banking Company (Parent Company Only) Financial
Information, continued
<TABLE>
<CAPTION>
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,003 113 248
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Amortization 6 3 42
ESOP and MRP expense 1,556 2,156 --
Gain on sale of securities available for sale (141) -- --
Deferred income tax expense 1,239 -- --
Dividends received in excess of earnings of
subsidiaries 17,228 -- 457
Equity in undistributed earnings of subsidiaries -- (1,239) --
Change in other assets and liabilities (1,756) (233) (172)
-------- -------- --------
Net cash provided by operating activities 21,135 800 575
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 11,937 -- --
Purchase of securities available for sale (8,648) (6,603) --
Due to (from) subsidiaries 15,912 (11,901) --
Contributions of capital to the Bank -- (23,634) --
Organization costs -- (30) --
-------- -------- --------
Net cash provided by (used in) investing activities 19,201 (42,168) --
-------- -------- --------
Cash flows from financing activities:
Proceeds from note payable 5,000 -- --
Payments of subordinated debentures -- (1,100) --
Net proceeds from issuance of common stock -- 46,818 --
Cash dividends paid (787) (666) --
Purchase of ESOP shares -- (3,862) --
Purchase of treasury stock (45,435) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (41,222) 41,190 --
-------- -------- --------
Net change in cash (886) (178) 575
Cash at beginning of year 1,149 1,327 752
-------- -------- --------
Cash at end of year $ 263 1,149 1,327
======== ======== ========
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(16) Fair Value of Financial Instruments
The assumptions used in the estimation of the fair value of the
Company's financial instruments are detailed below. Where quoted prices
are not available, fair values are based on estimates using discounted
cash flows and other valuation techniques. The use of discounted cash
flows can be significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. The following
disclosures should not be considered a surrogate of the liquidation
value of the Company or its subsidiaries, but rather a good-faith
estimate of the increase or decrease in value of financial instruments
held by the Company since purchase, origination or issuance.
Cash and Cash Equivalents
-------------------------
For cash, due from banks, federal funds sold and interest-bearing
deposits with other banks, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
---------------------
Fair values for securities held to maturity and securities available
for sale are based on quoted market prices.
Other Investments
-----------------
The carrying value of other investments approximates fair value.
Loans and Mortgage Loans Held for Sale
--------------------------------------
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings. For variable rate
loans, the carrying amount is a reasonable estimate of fair value.
Deposits
--------
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of maturity certificates of deposit is
estimated by discounting the future cash flows using the rates
currently offered for deposits of similar remaining maturities.
Note Payable and Other Borrowings
---------------------------------
The fair value of fixed rate borrowings are estimated using discounted
cash flows, based on the current incremental borrowing rates for
similar types of borrowing arrangements. For variable rate borrowings,
the carrying amount is a reasonable estimate of fair value.
Subordinated Debentures
-----------------------
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt.
Commitments to Originate First Mortgage Loans, Commitments to Extend
----------------------------------------------------------------------
Credit and Standby Letters of Credit Because commitments to originate
first mortgage loans, commitments to extend credit and standby letters
of credit are made using variable rates and/or are issued for short
commitment periods, the contract value is a reasonable estimate of
fair value.
Interest Rate Cap
------------------
The fair value of the interest rate cap is determined by the
counterparty using the mid-market valuation method.
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(16) Fair Value of Financial Instruments, continued
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on many judgments. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
deferred tax asset, premises and equipment, real estate owned and the
purchased core deposit intangible. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in the estimates.
The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 32,736 32,736 30,284 30,284
Securities available for sale $ 71,702 71,702 49,492 49,492
Securities held to maturity $ 232 236 6,006 6,002
Other investments $ 2,328 2,328 2,269 2,269
Loans, net $ 264,855 269,580 283,602 285,461
Mortgage loans held for sale $ 199 199 789 789
Interest rate cap $ 407 290 - -
Liabilities:
Deposits $ 285,937 284,046 315,531 316,364
Note payable and other borrowings $ 47,945 47,432 5,495 5,246
Subordinated debentures $ 900 900 900 885
Unrecognized financial instruments:
Commitments to originate first
mortgage loans - - 181 181
Commitments to extend credit $ 41,585 41,585 33,937 33,937
Standby letters of credit $ 319 319 404 404
</TABLE>
(17) Subsequent Event
On January 21, 1999, the Company's Board of Directors declared a
two-for-one common stock split to be effected in the form of a 100%
stock dividend to be distributed on or about February 16, 1999 to
holders of record on February 1, 1999. Accordingly, all references to
common shares outstanding and per share data throughout the consolidated
financial statements (except data related to treasury shares) have been
restated to reflect the stock split. The par value of the additional
shares of common stock to be issued in connection with the stock split
was credited to common stock and a like amount charged to retained
earnings in the 1998 consolidated financial statements.
<PAGE>
MARKET FOR COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The common stock of Community First Banking Company is traded on The Nasdaq
Stock Market ("Nasdaq") under the symbol CFBC. At December 31, 1998, CFBC had
900 shareholders of record. The following table sets forth on a per share basis
the high and low sales prices of the Company's common stock and the cash
dividends paid by the Company on a quarterly basis. Since July 1,1997, the date
on which the common stock was first traded on Nasdaq.
Quarter Ended High Low Dividend
------------- ---- --- --------
June 30, 1997 N/A N/A N/A
September 30, 1997 $18.875 $15.00 $.075
December 31,1997 $22.25 $17.75 $.075
March 31, 1998 $23.50 $20.72 $.075
June 30, 1998 $25.313 $22.25 $.075
September 30, 1998 $23.375 $19.375 $.09
December 31, 1998 $21.00 $18.625 $.11
DIRECTORS
The following individuals serve as directors of Community First Banking
Company and Community First Bank:
Name Principal Occupation
- ------------------------------------------- -------------------------------
T. Aubrey Silvey, Chairman of the Board Chairman and CEO of Aubrey
Silvey Enterprises
Gary D. Dorminey President and Chief Executive
Officer of the Company and Bank
Anna L. Berry Treasurer of Southwire Company,
a major manufacturer of wire
products
Gary M. Bullock, Vice Chairman of the Board President and CEO of Carroll
Electric Membership Corporation
Jerry L. Clayton Owner of Clayton Pharmacy
Thomas E. Reeve, Jr Retired Physician
Michael P. Steed President and Owner of Steed
Company, a manufacturer of fabric
labels
Dean B. Talley Physician
Thomas S. Upchurch President of the Georgia
Partnership for Excellence in
Education
CORPORATE HEADQUARTERS
Community First Banking Company
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-1071
NOTICE OF ANNUAL MEETING
The Annual Meeting of
Shareholders will be
held on Thursday,
April 29, 1999, at
2:00 p.m. at
Community First Bank,
110 Dixie Street,
Carrollton, Georgia
30117.
SHAREHOLDER SERVICE
Shareholders desiring to change the name, address, or
ownership of stock, to report lost certificates, or to consolidate
accounts, should contact the Transfer Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
1-800-368-5948
STOCK TRADING
Community First
Banking Company
common stock is
traded on The Nasdaq
Stock Market under
the symbol CFBC.
PRIMARY MARKET MAKERS
Trident Securities, Inc.
Sandler O'Neill & Partners
Friedman Billings Ramsey & Co.
Robinson Salomon Smith Barney
Interstate/Johnson Lane Corporation
SHAREHOLDERS OF RECORD
Community First
Banking Company had
900 shareholders of
record as of December
31, 1998.
ANNUAL REPORT ON FORM 10-K The Company will furnish
without charge a copy of its
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December
31,1998, including financial statements and schedules, to any record
or beneficial owner of its common stock as of
March 11, 1999, who requests a copy of such report. Requests
should be in writing addressed to:
C. Lynn Gable
Chief Financial Officer
Community First Banking Company
110 Dixie Street
Carrollton, GA 30117
FINANCIAL INFORMATION
Analysts, investors, news media and others seeking
financial information should contact:
C. Lynn Gable
Chief Financial Officer
Community First Banking Company
110 Dixie Street
Carrollton, Georgia 30117
(770) 838-7271)
INDEPENDENT PUBLIC ACCOUNTANTS
Porter Keadle Moore LLP
Atlanta, Georgia
Community First
Banking Company and
its subsidiaries are
equal opportunity
employers. Community
First Banking is a
member of the Federal
Deposit Insurance
Corporation.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1999, accompanying the consolidated
financial statements incorporated by reference in the Annual Report of Community
First Banking Company on Form 10-K for the year ended December 31, 1998. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Community First Banking Company on Form S-8 (File No.
333-46987, effective February 27, 1998).
/s/PORTER KEADLE MOORE, LLP
Atlanta, Gorgia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001035903
<NAME> COMMUNITY FIRST BANKING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
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<SHORT-TERM> 6,500
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0
1
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</TABLE>
